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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission File Number 0-15686
ENSTAR INCOME PROGRAM IV-3, L.P.
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1648320
- ------------------------------------ --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
<TABLE>
<S> <C>
Name of each exchange
Title of each Class on which registered
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held by
non-affiliates of the registrant - all of the registrant's 39,900 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.
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program IV-3, 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 November 4,
1985. The general partners of the Partnership are Enstar Communications
Corporation, a Georgia corporation (the "Corporate General Partner"), and
Robert T. Graff, Jr. (the "Individual General Partner" and, together with the
Corporate General Partner, the "General Partners"). On September 30, 1988,
ownership of the Corporate General Partner was acquired by Falcon Cablevision,
a California limited partnership that has been engaged in the ownership and
operation of cable television systems since 1984 ("Falcon Cablevision"). Until
March 1993, the general partner of the general partner of Falcon Cablevision
was Falcon Holding Group, Inc., a California corporation ("FHGI"), which
provided certain management services to the Partnership. On March 29, 1993, a
new entity, Falcon Holding Group, L.P. ("FHGLP"), was organized to effect the
consolidation of the ownership of various cable television businesses
(including that of Falcon Cablevision) that were previously under the common
management of FHGI. The management of FHGLP is substantially the same as that
of FHGI. See Item 13., "Certain Relationships and Related Transactions." The
Corporate General Partner, FHGLP and affiliated companies are responsible for
the day to day management of the Partnership and its operations. See
"Employees" below.
A cable television system receives television, radio and data signals at
the system's "headend" site by means of over-the-air antennas, microwave relay
systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and
other information services for distribution through the system. Cable
television systems generally are constructed and operated pursuant to
non-exclusive franchises or similar licenses granted by local governmental
authorities for a specified term of years.
The Partnership's cable television systems, (the "systems"), offer
customers various levels (or "tiers") of cable services consisting of broadcast
television signals of local network, independent and educational stations, a
limited number of television signals from so-called "super stations"
originating from distant cities (such as WTBS, WGN and WOR), various
satellite-delivered, non-broadcast channels (such as Cable News Network
("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN and
Turner Network Television ("TNT"), programming originated locally by the cable
television system (such as public, governmental and educational access
programs) and informational displays featuring news, weather, stock market and
financial reports and public service announcements. A number of the satellite
services are also offered in certain packages. For an extra monthly charge,
the systems also offer "premium" television services to their customers. These
services (such as Home Box Office ("HBO"), Showtime, The Disney Channel and
selected regional sports networks) are satellite channels that consist
principally of feature films, live sporting events, concerts and other special
entertainment features, usually presented without commercial interruption. See
"Legislation and Regulation."
A customer generally pays an initial installation charge and fixed monthly
fees for basic, expanded basic, other tiers of satellite services and premium
programming services. Such monthly service fees constitute the primary source
of revenues for the systems. In addition to customer revenues, the systems
receive revenue from 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.
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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.
The Partnership began its cable television business operations in January
1987 with the acquisition of three cable television systems that provide
service to customers in and around the municipalities of Fairfield and
Shelbyville, Illinois and Fulton, Kentucky.
In 1988 The Partnership entered into a general partnership agreement with
two affiliated partnerships (which are also cable television limited
partnerships sponsored by the General Partners) to form Enstar Cable of
Macoupin County (the "Joint Venture"). The Joint Venture was formed in order
to enable each of its partners to participate in the acquisition and ownership
of a more diverse pool of systems by combining certain of their financial
resources. The Joint Venture began its cable television business operations in
January 1988 with the acquisition of a cable television system providing
service in and around the municipalities of Carlinville, Virden, Girard, Thayer
and Auburn, Illinois. Statements made in the remainder of this report
regarding the Partnership's operations and cable systems also apply to the
Joint Venture's operations and cable systems unless a separate discussion is
provided.
FHGLP receives a management fee and reimbursement of expenses from the
Corporate General Partner for managing the Partnership's cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of FHGLP is Marc B. Nathanson. Mr. Nathanson
has managed FHGLP or its predecessors since 1975. Mr. Nathanson is a veteran
of more than 26 years in the cable industry and, prior to forming FHGLP's
predecessors, held several key executive positions with some of the nation's
largest cable television companies. The principal executive offices of the
Partnership, the General Partner and FHGLP are located at 10900 Wilshire
Boulevard, 15th Floor, Los Angeles, California 90024, and their telephone
number is (310) 824-9990. See Item 10., "Directors and Executive Officers of
the Registrant."
BUSINESS STRATEGY
Historically, the Partnership has followed a systematic approach to
acquiring, operating and developing cable television systems based on the
primary goal of increasing operating cash flow while maintaining the quality of
services offered by its cable television systems. The Partnership's business
strategy has focused on serving small to medium-sized communities. The
Partnership believes that its cable television systems generally involve less
risk of increased competition than systems in large urban cities. Cable
television service is necessary in many of the Partnership's markets to receive
a wide variety of television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. As a
result, the Partnership's cable television systems generally have a higher
basic penetration rate (the number of homes subscribing to cable service as a
percentage of homes passed by cable) with a more stable customer base than
systems in large cities. The Partnership believes that, in comparison to urban
systems, its cable television systems also generally have lower labor,
operating and system construction costs. See "Competition."
On March 30, 1994, the Federal Communications Commission (the "FCC")
adopted significant amendments to its rules implementing certain provisions of
the 1992 Cable Act. The Partnership believes that compliance with these amended
rules has had a negative impact on the Partnership's revenues and cash flow.
These rules are subject to further amendment to give effect to the
Telecommunications Act of 1996 (the "1996 Telecom Act"). The 1996 Telecom Act
is expected to have a significant affect on all participants in the
telecommunications industry, including the Partnership. See "Legislation and
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Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Clustering
The Partnership has sought to acquire cable television systems in
communities that are proximate to other systems in order to achieve the
economies of scale and operating efficiencies associated with regional
"clusters" of systems. The Partnership believes clustering can reduce
marketing and personnel costs and can also reduce capital expenditures in cases
where cable service can be delivered to a number of systems within a single
region through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments," the Partnership's systems have
almost no available channel capacity with which to add new channels or to
further expand their use of pay-per-view offerings to customers. As a result,
significant amounts of capital for future upgrades will be required in order to
increase available channel capacity, improve quality of service and facilitate
the marketing of additional new services such as advertising, pay-per-view, new
unregulated tiers of satellite-delivered services and home shopping, so that
the systems remain competitive within the industry.
The Partnership's systems have an average channel capacity of 60 and 38
with 68% and 98% of the channel capacity utilized at December 31, 1995. As a
result, and to the extent permitted by covenants in the Partnership's credit
agreement, future upgrades may be required in order to increase available
channel capacity.
The Partnership's plan is to continue to upgrade its cable plant,
including the utilization of addressable technology and fiber optic cable, in
order to increase its current channel capacity and to seek to position the
Partnership to benefit from the further development of advertising,
pay-per-view and home shopping, as well as possible new services such as video
games, video-on-demand and other interactive applications. In addition to
these potential revenue opportunities, plant upgrades will enhance picture
quality and system reliability, reduce operating costs and improve overall
customer satisfaction.
The Partnership's management has selected a technical standard that
mandates a 750 MHz fiber to the feeder architecture for the majority of all its
systems that are to be rebuilt. A system built to a 750 MHz standard can
provide approximately 95 channels of analog service. Such a system will also
permit the introduction of high speed data transmission and telephony services
in the future after incurring incremental capital expenditures related to these
services.
The Partnership has budgeted capital expenditures of $1.1 million in 1996.
The Joint Venture has budgeted capital expenditures of $1.0 million in 1996.
The Partnership's future capital expenditure plans are, however, all subject to
the availability of adequate capital on terms satisfactory to the Partnership,
of which there can be no assurance. As discussed in prior reports, the
Partnership postponed a number of rebuild and upgrade projects that were
planned for 1993 and 1994 because of the uncertainty related to implementation
of the 1992 Cable Act and the negative impact thereof on their Partnership's
business and access to capital. As a result, the Partnership's systems will be
significantly less technically advanced than had been expected prior to the
implementation of re-regulation. The Partnership believes that the delays in
upgrading many of its systems will, under present market conditions, most
likely have an adverse effect on the value of those systems compared to systems
that have been rebuilt to a higher technical standard. See "Legislation and
Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
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Decentralized Management
The Corporate General Partner manages its four regions on a decentralized
basis. The Partnership believes that its decentralized management structure, by
enhancing management presence at the system level, increases its sensitivity to
the needs of its customers, enhances the effectiveness of its customer service
efforts, eliminates the need for maintaining a large centralized corporate
staff and facilitates the maintenance of good relations with local governmental
authorities.
Marketing
The Partnership has made substantial changes in the way in which it
packages and sells its services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Historically, the Partnership had offered four programming packages in its
upgraded addressable systems. These packages combined services at a lower rate
than the aggregate rates for such services purchased individually on an "a la
carte" basis. The new rules require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus
a reasonable profit. On November 10, 1994, the FCC announced the adoption of
further significant amendments to its rules. One amendment allows cable
operators to create new tiers of program services which the FCC has chosen to
exclude from rate regulation, so long as the programming is new to the system.
In addition, the FCC decided that discounted packages of non-premium "new
product tier" services will be subject to rate regulation in the future.
However, in applying this new policy to new product tier packages such as those
already offered by the Partnership and numerous other cable operators, the FCC
decided that where only a few services were moved from regulated tiers to the
new product tier package, the package will be treated as if it were a tier of
new program services as discussed above. Substantially all of the new product
tier packages offered by the Partnership have received this desirable
treatment. These amendments to the FCC's rules have allowed the Partnership to
resume its core marketing strategy and reintroduce programmed service
packaging. As a result, in addition to the basic service package, customers in
substantially all of the Systems may purchase an expanded basic service,
additional unregulated packages of satellite-delivered services and premium
services on either an a la carte or a discounted packaged basis. See
"Legislation and Regulation."
The Partnership has employed a variety of targeted marketing techniques to
attract new customers by focusing on delivering value, choice, convenience and
quality. The Partnership employs direct mail, radio and local newspaper
advertising, telemarketing and door-to-door selling utilizing demographic
"cluster codes" to target specific messages to target audiences. In certain
systems, the Partnership offers discounts to customer who purchase premium
services on a limited trial basis in order to encourage a higher level of
service subscription. The Partnership also has a coordinated strategy for
retaining customers that includes televised retention advertising 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 Partnership places a strong emphasis on customer service and community
relations and believes that success in these areas is critical to its business.
The Partnership has developed and implemented a wide range of monthly internal
training programs for its employees, including its regional managers, that
focus on the Partnership's operations and employee interaction with customers.
The effectiveness of the Partnership's training program as it relates to the
employees' interaction with customers is monitored on an on-going basis, and a
portion of the regional managers' compensation is tied to achieving customer
service targets. The Partnership conducts an extensive customer survey on an
annual basis and uses the information in its efforts to enhance service and
better address the needs of its customers. In addition, the Partnership is
participating in the industry's recently announced Customer Service Initiative
which emphasizes an on-time guarantee program for service and installation
appointments. The
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Partnership's corporate executives and regional managers lead the Partnership's
involvement in a number of programs benefiting the communities the Partnership
serves, including, among others, Cable in the Classroom, Drug Awareness,
Holiday Toy Drive and the Cystic Fibrosis Foundation. Cable in the Classroom is
the cable television industry's public service initiative to enrich education
through the use of commercial-free cable programming. In addition, a monthly
publication, Cable in the Classroom magazine provides educational program
listings by curriculum area, as well as feature articles on how teachers across
the country use the programs.
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DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's and the Joint Venture's cable systems as of December 31, 1995.
<TABLE>
<CAPTION>
Average
Monthly
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
System Passed(1) Service Penetration(2) Units(3) Penetration(4) Service(5) Subscribers(6)
- ------ --------- ----------- -------------- -------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fairfield, IL 2,637 2,343 88.9% 857 36.6% $29.95 3,275
Shelbyville, IL 1,867 1,533 82.1% 533 34.8% $32.02 2,067
Fulton, KY 3,291 2,293 69.7% 1,004 43.8% $31.59 3,243
----- ----- ----- -----
Total 7,795 6,169 79.1% 2,394 38.8% $31.08 8,585
===== ===== ===== =====
Enstar Cable of
Macoupin County:
Macoupin, IL 6,533 4,373 66.9% 2,083 47.6% $31.43 6,182
===== ===== ===== =====
</TABLE>
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(1) Homes passed refers to estimates by the Partnership of the
approximate number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
(2) Homes subscribing to cable service as a percentage of homes passed
by cable.
(3) Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
(4) Premium service units as a percentage of homes subscribing to
cable service. A customer may purchase more than one premium service, each of
which is counted as a separate premium service unit. This ratio may be
greater than 100% if the average customer subscribes for more than one premium
service.
(5) Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1995.
(6) The Partnership reports subscribers for the Systems on an equivalent
subscriber basis and, unless otherwise indicated, the term "SUBSCRIBERS" means
equivalent subscribers, calculated by dividing aggregate basic service revenues
by the average lowest basic service rate within an operating entity, adjusted
to reflect the impact of regulation. Basic service revenues include charges for
basic programming, bulk and commercial accounts and certain specialized
"packaged programming" services, including the appropriate components of new
product tier revenue, and excluding premium television and non-subscription
services. Consistent with past practices, Subscribers is an analytically
derived number which is reported in order to provide a basis of comparison to
previously reported data. The computation of Subscribers has been impacted by
changes in service offerings made in response to the 1992 Cable Act.
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CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offer customers packages of
services that include the local area network, independent and educational
television stations, a limited number of television signals from distant
cities, numerous satellite-delivered, non-broadcast channels (such as CNN, MTV,
USA, ESPN and TNT) and certain information and public access channels. For an
extra monthly charge, the systems provide certain premium television services,
such as HBO, Showtime, The Disney Channel and regional sports networks.
The Partnership also offers other cable television services to its
customers, including pay-per-view programming and, in certain test markets, the
Sega Channel. For additional charges, in most of the Systems, the Partnership
also rents remote control devices and VCR compatible devices (devices that make
it easier for a customer to tape a program from one channel while watching a
program on another).
The service options offered by the Partnership vary from system to system,
depending upon a system's channel capacity and viewer interests. Rates for
services also vary from market to market and according to the type of services
selected.
Prior to the adoption of the 1992 Cable Act, the systems generally were
not subject to any rate regulation, i.e., they were adjudged to be subject to
effective competition under then-effective FCC regulations. The 1992 Cable Act,
however, substantially changed the statutory and FCC rate regulation standards.
Under the new definition of effective competition, nearly all cable television
systems in the United States have become subject to local rate regulation of
basic service. The 1996 Telecom Act expanded this definition to include
situations where a local telephone company, or anyone using its facilities,
offers comparable video service by any means except direct broadcast satellite
("DBS"). In addition, the 1992 Cable Act eliminated the 5% annual basic rate
increases previously allowed by the 1984 Cable Act without local approval;
allows the FCC to review rates for nonbasic service tiers other than premium
services in response to complaints filed by franchising authorities and/or
cable customers; prohibits cable television systems from requiring customers to
purchase service tiers above basic service in order to purchase premium
services if the system is technically capable of doing so; and adopted
regulations to establish, on the basis of actual costs, the price for
installation of cable television service, remote controls, converter boxes, and
additional outlets. The FCC implemented these rate regulation provisions on
September 1, 1993, which affected all the Partnership's systems which are not
deemed to be subject to effective competition under the FCC's definition. The
FCC substantially amended its rate regulation rules on February 22, 1994 and
again on November 10, 1994. The FCC will have to conduct a number of rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act. See "Legislation and Regulation."
At December 31, 1995, the Partnership's monthly rates for basic cable
service for residential customers, excluding special senior citizen discount
rates, ranged from $19.05 to $22.36 and premium service rates ranged from
$7.45 to $11.95 excluding special promotions offered periodically in
conjunction with the Partnership's marketing programs. A one-time installation
fee, which the partnership may wholly or partially waive during a promotional
period, is usually charged to new customers. The Partnership, prior to
September 1, 1993, generally charged monthly fees for additional outlets,
converters, program guides and descrambling and remote control tuning devices.
As described above, these charges have either been eliminated or altered by the
implementation of rate regulation, and as a result of such implementation under
the FCC's guidelines, the rates for basic cable service for residential
customers correspondingly increased in some cases. As a result, while many
customers experienced a decrease in their monthly bill for all services, some
customers experienced an increase. However, substantially all the Partnership's
customers did receive a decrease in their monthly charges in July 1994 upon
implementation of the FCC's amended rules. Commercial customers, such as
hotels, motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. Most multi-
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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.
EMPLOYEES
The various personnel required to operate the Partnership's business are
employed by the Partnership, the Corporate General Partner, its subsidiary
corporation and FHGLP. As of February 12, 1996, the Partnership had 3
employees, the cost of which is charged directly to the Partnership. The
employment costs incurred by the Corporate General Partner, its subsidiary
corporation and FHGLP are allocated and charged to the Partnership for
reimbursement pursuant to the partnership agreement and management agreement.
The amounts of these reimbursable costs are set forth below in Item 11.,
"Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership seeks to
apply technological advances in the cable television industry to its cable
television systems on the basis of cost effectiveness, enhancement of product
quality and service delivery and industry-wide acceptance. The Partnership
continues to upgrade the technical quality of the Partnership's systems cable
plant and to increase channel capacity for the delivery of additional
programming and new services. Currently, the Partnership systems have an
average channel capacity of 60 in systems that serve 22% of its customers and
an average channel capacity of 38 in systems that serve 78% of the customers
and on average, utilize 68% and 98% of their channel capacity. The Partnership
believes that system upgrades would enable it to provide customers with greater
programming diversity, better picture quality and alternative communications
delivery systems made possible by the introduction of fiber optic technology
and by the possible future application of digital compression. The
implementation of the Partnership's capital expenditure plans is, however,
subject to the availability of adequate capital on terms satisfactory to the
Partnership, of which there can be no assurance. Also, as a result of the
uncertainty created by recent regulatory changes, the Partnership has deferred
most plant rebuilds and upgrades. See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The use of fiber optic cable as an alternative to coaxial cable is playing
a major role in expanding channel capacity and improving the performance of
cable television systems. Fiber optic cable is capable of carrying hundreds of
video, data and voice channels and, accordingly, its utilization is essential
to the enhancement of a cable television system's technical capabilities. The
Partnership's current policy to utilize fiber optic technology in substantially
all rebuild projects which it undertakes is based upon the benefits that the
utilization of fiber optic technology provides over traditional coaxial cable
distribution plant, including lower per mile rebuild costs due to a reduction
in the number of required amplifiers, the elimination of headends, lower
ongoing maintenance and power costs and improved picture quality and
reliability.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the area of
digital compression, a technology which is expected to enable cable operators
to increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. The Partnership believes that the utilization of
digital compression technology in the future could enable its systems to
increase channel capacity in certain systems in a manner that could be more
cost efficient than rebuilding such systems with higher capacity distribution
plant. The use of digital compression in its systems also could expand the
number and types of services these systems offer and enhance the development of
current and future revenue sources. Equipment vendors are beginning to market
products to provide this technology, but the Partnership's management has no
plans to install it at this time
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based on its present understanding of the costs as compared to the benefits of
the digital equipment currently available.
PROGRAMMING
The Partnership purchases basic and premium programming for its systems
from Falcon Cablevision. In turn, Falcon Cablevision charges the Partnership
for these costs based on an estimate of what the Partnership could negotiate
for such services for the fifteen partnerships managed by the Corporate General
Partner as a group (approximately 94,600 homes subscribing to cable service at
December 30, 1995), which is generally based on a fixed fee per customer or a
percentage of the gross receipts for the particular service. Falcon
Cablevision's programming contracts are generally for a fixed period of time
and are subject to negotiated renewal. Falcon Cablevision does not have
long-term programming contracts for the supply of a substantial amount if its
programming. Accordingly, no assurance can be given that its, and
correspondingly the Partnership's, programming costs will not increase
substantially in the near future, or that other materially adverse terms will
not be added to Falcon Cablevision's programming contracts. Management
believes, however, that Falcon Cablevision's relations with its programming
suppliers generally are good.
The Partnership's cable programming costs have increased in recent years
and are expected to continue to increase due to additional programming being
provided to basic customers, requirements to add channels under retransmission
carriage agreements entered into with certain programming sources, increased
costs to produce or purchase cable programming generally, inflationary
increases and other factors. Under the FCC rate regulations, increases in
programming costs for regulated cable services occurring after the earlier of
March 1, 1995, or the date a system's basic cable service became regulated, may
be passed through to customers. See "Legislation and Regulation - Federal
Regulation - Carriage of Broadcast Television Signals." Generally, programming
costs are charged among systems on a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act. See "Legislation and Regulation."
As of December 31, 1995, the Partnership held eight franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Partnership systems
range up to 5% of the gross revenues generated by a system. The 1984 Cable Act
prohibits franchising authorities from imposing franchise fees in excess of 5%
of gross revenues and also permits the cable system operator to seek
re-negotiation and modification of franchise requirements if warranted by
changed circumstances.
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The following table groups the franchises of the Partnership's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
- -------------------- ---------- -------------- --------------
<S> <C> <C> <C>
Prior to 1997 0 0 0.0%
1997 - 2001 4 4,209 68.2%
2002 and after 4 1,717 27.8%
----- ----- -----
Total 8 5,926 96.0%
===== ===== =====
</TABLE>
The Partnership operates cable television systems which serve multiple
communities and, in some circumstances, portions of such systems extend into
jurisdictions for which the Partnership believes no franchise is necessary. In
the aggregate, approximately 243 customers, comprising approximately 4.0% of
the Partnership's customers, are served by unfranchised portions of such
systems. In certain instances, where a single franchise comprises a large
percentage of the customers in an operating region, the loss of such franchise
could decrease the economies of scale achieved by the Partnership's clustering
strategy The Partnership has never had a franchise revoked for any of its
systems and believes that it has satisfactory relationships with substantially
all of its franchising authorities.
Macoupin Joint Venture
As of December 31, 1995, the Joint Venture held seven franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Joint Venture's
systems range up to 5% of the gross revenues generated by a system. The 1984
Cable Act prohibits franchising authorities from imposing franchise fees in
excess of 5% of gross revenues and also permits the cable system operator to
seek renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The following table groups the franchises of the Joint Venture's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
- -------------------- ---------- -------------- --------------
<S> <C> <C> <C>
Prior to 1997 2 1,144 26.2%
1997-2001 3 3,082 70.5
2002 and after 2 147 3.3
----- ----- -----
Total 7 4,373 100.0%
===== ===== =====
</TABLE>
In certain instances, where a single franchise comprises a large
percentage of the customers in an operating region, the loss of such franchise
could decrease the economies of scale achieved by the Joint Venture's
clustering strategy. The Joint Venture believes that it has satisfactory
relationships with its franchising communities. The Joint Venture has never had
a franchise revoked for any of its systems.
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<PAGE> 12
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld
or, if renewal is withheld, the franchise authority must pay the operator the
"fair market value" for the system covered by such franchise. In addition, the
1984 Cable Act establishes comprehensive renewal procedures which require that
an incumbent franchisee's renewal application be assessed on its own merit and
not as part of a comparative process with competing applications. See
"Legislation and Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over the air television broadcast signals which
a viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
cassette players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered program services formerly
available only to cable television subscribers. Most satellite-distributed
program signals are being electronically scrambled to permit reception only
with authorized decoding equipment for which the consumer must pay a fee. From
time to time, legislation has been introduced in Congress which, if enacted
into law, would prohibit the scrambling of certain satellite-distributed
programs or would make satellite services available to private earth stations
on terms comparable to those offered to cable systems. Broadcast television
signals are being made available to owners of earth stations under the
Satellite Home Viewer Copyright Act of 1988, which became effective January 1,
1989 for an initial six-year period. This Act establishes a statutory
compulsory license for certain transmissions made by satellite owners to home
satellite dishes, for which carriers are required to pay a royalty fee to the
Copyright Office. This Act has been extended by Congress until December 31,
1999. The 1992 Cable Act enhances the right of cable competitors to purchase
nonbroadcast satellite-delivered programming. See "Legislation and
Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in
the same orbital position. Video compression technology may also be used by
cable operators in the future to similarly increase their channel capacity.
DBS service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna, and it is more
accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. DBS service is being heavily marketed on a nation-wide basis. The
extent to which DBS systems will be competitive with cable television systems
will depend upon, among other things, the ability of DBS
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<PAGE> 13
operators to obtain access to programming, the availability of reception
equipment, and whether equipment and service can be made available to consumers
at reasonable prices.
Multi-channel multipoint distribution systems ("MMDS") deliver programming
services over microwave channels licensed by the FCC received by subscribers
with special antennas. MMDS systems are less capital intensive, are not
required to obtain local franchises or to pay franchise fees and are subject to
fewer regulatory requirements than cable television systems. To date, the
ability of these so-called "wireless" cable services to compete with cable
television systems has been limited by channel capacity constraints and the
need for unobstructed line-of-sight over-the-air transmission. Although
relatively few MMDS systems in the United States are currently in operation or
under construction, virtually all markets have been licensed or tentatively
licensed. The FCC has taken a series of actions intended to facilitate the
development of MMDS and other wireless cable systems as alternative means of
distributing video programming, including reallocating certain frequencies to
these services and expanding the permissible use and eligibility requirements
for certain channels reserved for educational purposes. The FCC's actions
enable a single entity to develop an MMDS system with a potential of up to 35
channels that could compete effectively with cable television. MMDS systems
qualify for the statutory compulsory copyright license for the retansmission of
television and radio broadcast stations. FCC rules and the 1992 Cable Act
prohibit the common ownership of cable systems and MMDS facilities serving the
same area.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners' associations
which preclude franchised cable television operators from serving residents of
such private complexes. Although a number of states have enacted laws to
afford operators of franchised cable television systems access to such private
complexes, the U.S. Supreme Court has held that cable companies cannot have
such access without compensating the property owner. The access statutes of
several states have been challenged successfully in the courts, and other such
laws are under attack. However, the 1984 Cable Act gives franchised cable
operators the right to use existing compatible easements within their franchise
areas upon nondiscriminatory terms and conditions. Accordingly, where there
are preexisting compatible easements, cable operators may not be unfairly
denied access or discriminated against with respect to the terms and conditions
of access to those easements. There have been conflicting judicial decisions
interpreting the scope of the access right granted by the 1984 Cable Act,
particularly with respect to easements located entirely on private property.
Due to the widespread availability of reasonably-priced earth stations,
SMATV systems can offer both improved reception of local television stations
and many of the same satellite-delivered program services which are offered by
franchised cable television systems. Further, while a franchised cable
television system typically is obligated to extend service to all areas of a
community regardless of population density or economic risk, the SMATV system
may confine its operation to small areas that are easy to serve and more likely
to be profitable. Under the 1996 Telecom Act, SMATV systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights-of-way. However, a
SMATV system is subject to the 1984 Cable Act's franchise requirement if it
uses physically closed transmission paths such as wires or cables to
interconnect separately owned and managed buildings if its lines use or cross
any public right-of-way. In some cases, SMATV operators may be able to charge
a lower price than could a cable system providing comparable services and the
FCC's new regulations implementing the 1992 Cable Act limit a cable operator's
ability to reduce its rates to meet this competition. Furthermore, the U.S.
Copyright Office has tentatively concluded that SMATV systems are "cable
systems" for purposes of qualifying for the compulsory copyright license
established for cable systems by federal law. The 1992 Cable Act prohibits the
common ownership of cable
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<PAGE> 14
systems and SMATV facilities serving the same area. However, a cable operator
can purchase a SMATV system serving the same area and technically integrate it
into the cable system.
The FCC has authorized a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used as well by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multi-channel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on
the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems"
without obtaining a local cable franchise, although telephone companies
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Up to two-thirds of the channel
capacity on an "open video system" must be available to programmers
unaffiliated with the local telephone company. The open video system concept
replaces the FCC's video dialtone rules. The 1996 Telecom Act also includes
numerous provisions designed to make it easier for cable operators and others
to compete directly with local exchange telephone carriers. With certain
limited exceptions, neither a local exchange carrier nor a cable operator can
acquire more than 10% of the other entity operating within its own service
area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable industry. The ability of cable
systems to compete with present, emerging and future distribution media will
depend to a great extent on obtaining attractive programming. The availability
and exclusive use of a sufficient amount of quality programming may in turn be
affected by developments in regulation or copyright law. See "Legislation and
Regulation."
The cable television industry competes with radio, television and print
media for advertising revenues. As the cable television industry continues to
develop programming designed specifically for distribution by cable,
advertising revenues may increase. Premium programming provided by cable
systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services
may depend largely upon the continued availability of attractive programming at
competitive prices.
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<PAGE> 15
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future materially affect the Partnership and the cable television industry.
The following is a summary of federal laws and regulations affecting the growth
and operation of the cable television industry and a description of certain
state and local laws.
RECENT DEVELOPMENTS
On February 8, 1996, the President signed the 1996 Telecom Act, into law.
This statute substantially amended the Communications Act of 1934 (the
"Communications Act") by, among other things, removing barriers to competition
in the cable television and telephone markets and reducing the regulation of
cable television rates. As it pertains to cable television, the 1996 Telecom
Act, among other things, (i) ends the regulation of certain nonbasic
programming services in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. The FCC will
have to conduct a number of rulemaking proceedings in order to implement many
of the provisions of the 1996 Telecom Act. See "Business - Competition" and
"-Federal Regulation-Rate Regulation."
The Partnership believes that the regulation of its industry remains a
matter of interest to Congress, the FCC and other regulatory authorities.
There can be no assurance as to what, if any, future actions such legislative
and regulatory authorities may take or the effect thereof on the Partnership.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984. This federal
statute, which amended the Communications Act, creates uniform national
standards and guidelines for the regulation of cable television systems.
Violations by a cable television system operator of provisions of the
Communications Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the
1984 Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions. It also prohibited non-grandfathered cable
television systems from operating without a franchise in such jurisdictions.
In connection with new franchises, the 1984 Cable Act provides that in granting
or renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories. The 1984 Cable Act grandfathered, for the remaining term of
existing franchises, many but not all of the provisions in existing franchises
which would not be permitted in franchises entered into or renewed after the
effective date of the 1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This legislation
has effected significant changes to the legislative and regulatory environment
in which the cable industry operates. It amends the 1984 Cable Act in many
respects. The 1992 Cable Act became effective on December 4, 1992, although
certain provisions, most notably those dealing with rate regulation and
retransmission consent, became effective at later dates. The legislation
required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute, virtually all of which have been completed.
The 1992 Cable Act allows for a greater degree of regulation of the cable
industry with respect to, among other
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<PAGE> 16
things: (i) cable system rates for both basic and certain nonbasic services;
(ii) programming access and exclusivity arrangements; (iii) access to cable
channels by unaffiliated programming services; (iv) leased access terms and
conditions; (v) horizontal and vertical ownership of cable systems; (vi)
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage and retransmission consent; (ix) technical standards;
(x) customer privacy; (xi) consumer protection issues; (xii) cable equipment
compatibility; (xiii) obscene or indecent programming; and (xiv) requiring
subscribers to subscribe to tiers of service other than basic service as a
condition of purchasing premium services. Additionally, the legislation
encourages competition with existing cable television systems by allowing
municipalities to own and operate their own cable television systems without
having to obtain a franchise; preventing franchising authorities from granting
exclusive franchises or unreasonably refusing to award additional franchises
covering an existing cable system's service area; and prohibiting the common
ownership of cable systems and co-located MMDS or SMATV systems. The 1992 Cable
Act also precludes video programmers affiliated with cable television companies
from favoring cable operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the 1992 Cable
Act is still ongoing. On April 8, 1993, a three-judge district court panel
granted summary judgment for the government upholding the must-carry
provisions. That decision was appealed directly to the U.S. Supreme Court
which remanded the case back to the district court to determine whether there
was adequate evidence that the provisions were needed and whether the
restrictions chosen were the least intrusive. On December 12, 1995, the
district court again upheld the must-carry provisions. The Supreme Court has
again agreed to review the district court's decision.
On September 16, 1993, a constitutional challenge to the balance of the
1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set-asides for DBS operators). An appeal from that decision is pending before
the U.S. Court of Appeals for the District of Columbia Circuit.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has heretofore promulgated regulations covering such areas as
the registration of cable television systems, cross-ownership between cable
television systems and other communications businesses, carriage of television
broadcast programming, consumer education and lockbox enforcement, origination
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations. The 1992 Cable Act required the FCC to adopt
additional regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The 1996 Telecom Act requires certain changes to various of these
regulations. A brief summary of certain of these federal regulations as
adopted to date follows.
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RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional nonbasic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the
FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992
Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable systems were not subject to local rate
regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to local rate regulation of basic service.
The 1996 Telecom Act expands the definition of effective competition to cover
situations where a local telephone company or its affiliate, or any
multichannel video provider using telephone company facilities, offers
comparable video service by any means except DBS. Satisfaction of this test
deregulates both basic and nonbasic tiers. Additionally, the 1992 Cable Act
eliminated the 5% annual rate increase for basic service previously allowed by
the 1984 Cable Act without local approval; required the FCC to adopt a formula,
for franchising authorities to enforce, to assure that basic cable rates are
reasonable; allowed the FCC to review rates for nonbasic service tiers (other
than per-channel or per-program services) in response to complaints filed by
franchising authorities and/or cable customers; prohibited cable television
systems from requiring subscribers to purchase service tiers above basic
service in order to purchase premium services if the system is technically
capable of doing so; required the FCC to adopt regulations to establish, on the
basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and allows the FCC to impose
restrictions on the retiering and rearrangement of cable services under certain
limited circumstances. The 1996 Telecom Act ends FCC regulation of nonbasic
tier rates on March 31, 1999.
The FCC adopted rules designed to implement the 1992 Cable Act's rate
regulation provisions on April 1, 1993, and then significantly amended them on
reconsideration on February 22, 1994. The FCC's regulations contain standards
for the regulation of basic and nonbasic cable service rates (other than
per-channel or per-program services). The FCC's original rules became
effective on September 1, 1993. The rules have been further amended several
times. The rate regulations adopt a benchmark price cap system for measuring
the reasonableness of existing basic and nonbasic service rates, and a formula
for calculating additional rate increases. Alternatively, cable operators have
the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment (e.g., converter boxes and remote control
devices) and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required, measured from the date of a complaint to the FCC challenging an
existing nonbasic cable service rate or from September 1993, for existing basic
cable service rates under the original rate regulations, and from May 15, 1994,
under the February 22, 1994 amendments thereto. In general, the reduction for
existing basic and nonbasic cable service rates under the original rate
regulations would be to the greater of the applicable benchmark level or the
rates in force as of September 30, 1992, minus 10 percent, adjusted forward for
inflation. The amended regulations require an aggregate reduction of 17
percent, adjusted forward for inflation, from the rates in force as of
September 30, 1992. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be
made in the event a cable operator adds or deletes channels. Amendments
adopted on November 10, 1994 incorporated an alternative method for adjusting
the rate charged for a regulated nonbasic tier when new services are added.
Cable operators can increase rates for such tiers by as much as $1.50 over a
two year period to reflect the
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<PAGE> 18
addition of up to six new channels of service on nonbasic tiers (an additional
$0.20 for a seventh channel is permitted in the third year). In addition, new
product tiers consisting of services new to the cable system can be created
free of rate regulation as long as certain conditions are met such as not
moving services from existing tiers to the new tier. These provisions currently
provide limited benefit to the Partnership's systems due to the lack of channel
capacity previously discussed. There is also a streamlined cost-of-service
methodology available to justify a rate increase on basic and regulated
nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate the
rates charged by the Partnership for basic cable service and for associated
basic cable service equipment. In addition, a number of the Partnership's
customers have filed complaints with the FCC regarding the rates charged for
non-basic cable service.
The Partnership has adjusted its regulated programming service rates and
related equipment and installation charges in substantially all of its systems
so as to bring these rates and charges into compliance with the applicable
benchmark or equipment and installation cost levels. The Partnership also
implemented a program in substantially all of its systems under which a number
of the Partnership's satellite-delivered and premium services are now offered
individually on a per channel (i.e., a la carte) basis, or as a group at a
discounted price. A la carte services were not subject to the FCC's rate
regulations under the rules originally issued to implement the 1992 Cable Act.
The FCC, in its reconsideration of the original rate regulations, stated
that it was going to take a harder look at the regulatory treatment of such a
la carte packages on an ad hoc basis. Such packages which are determined to be
evasions of rate regulation rather than true enhancements of subscriber choice
will be treated as regulated tiers and, therefore, subject to rate regulation.
There have been no FCC rulings related to systems owned by the Partnership.
There have been two rulings, however, on such packages offered by affiliated
partnerships managed by FHGLP. In one case, the FCC's Cable Services Bureau
ruled that a nine-channel a la carte package was an evasion of rate regulation
and ordered this package to be treated as a regulated tier. In the other case,
a six-channel package was held not to be an evasion, but rather is to be
considered an unregulated new product tier under the FCC's November 10, 1994
rule amendments. The deciding factor in all of the FCC's decisions related to
a la carte tiers appears to be the number of channels moved from regulated
tiers, with six or fewer channels being deemed not to be an evasion. Almost
all of the Partnership's systems moved six or fewer channels to a la carte
packages. Under the November 10, 1994 amendments, any new a la carte package
created after that date will be treated as a regulated tier, except for
packages involving traditional premium services (e.g., HBO).
In December 1995, the Partnership, and all of its affiliated partnerships,
filed petitions with the FCC seeking a determination that they are eligible for
treatment as "small cable operators" for purposes of being able to utilize the
FCC's streamlined cost-of-service rate-setting methodology. If such relief is
granted, many of the Partnership's systems would be able to increase their
basic and/or nonbasic service tier rates.
On March 11, 1993, the FCC adopted regulations pursuant to the 1992 Act
which require cable systems to permit customers to purchase video programming
on a per channel or a per program basis without the necessity of subscribing to
any tier of service, other than the basic service tier, unless the cable system
is technically incapable of doing so. Generally, this exemption from
compliance with the statute for cable systems that do not have such technical
capability is available until a cable system obtains the capability, but not
later than December 2002.
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CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains new signal carriage requirements. These new
rules allowed commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station. The
first such election was made on June 17, 1993. Local non-commercial television
stations are also given mandatory carriage rights, subject to certain
exceptions, within the larger of: (i) a 50 mile radius from the station's city
of license; or (ii) the station's Grade B contour (a measure of signal
strength). Unlike commercial stations, noncommercial stations are not given
the option to negotiate retransmission consent for the carriage of their
signal. In addition, cable systems will have to obtain retransmission consent
for the carriage of all "distant" commercial broadcast stations, except for
certain "superstations," i.e., commercial satellite-delivered independent
stations such as WTBS. The 1992 Cable Act also eliminated, effective December
4, 1992, the FCC's regulations requiring the provision of input selector
switches. The must-carry provisions for non-commercial stations became
effective on December 4, 1992. Implementing must-carry rules for
non-commercial and commercial stations and retransmission consent rules for
commercial stations were adopted by the FCC on March 11, 1993. All commercial
stations entitled to carriage were to have been carried by June 2, 1993, and
any non-must-carry stations (other than superstations) for which retransmission
consent had not been obtained could no longer be carried after October 5, 1993.
A number of stations previously carried by the Partnership's cable television
systems elected retransmission consent. The Partnership was able to reach
agreements with broadcasters who elected retransmission consent or to negotiate
extensions to the October 6, 1993 deadline and has therefore not been required
to pay cash compensation to broadcasters for retransmission consent or been
required by broadcasters to remove broadcast stations from the cable television
channel line-ups. The Partnership has, however, agreed to carry some services
(e.g., ESPN2 and a new service by FOX) in specified markets pursuant to
retransmission consent arrangements which it believes are comparable to those
entered into by most other large cable operator, and for which it pays monthly
fees to the service providers, as it does with other satellite providers. The
next election between must-carry and retransmission consent for local
commercial television broadcast stations will be October 1, 1996.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The
FCC also has commenced a proceeding to determine whether to relax or abolish
the geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution
rights entirely by contract, and to determine whether such exclusivity rights
should be extended to noncommercial educational stations. It is possible that
the outcome of these proceedings will increase the amount of programming that
cable operators are requested to black out. Finally, the FCC has declined to
impose equivalent syndicated exclusivity rules on satellite carriers who
provide services to the owners of home satellite dishes similar to those
provided by cable systems.
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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."
A recent federal court decision could, if upheld and if adopted by other
federal courts, make the renewal of franchises more problematical in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision
has been appealed. The Partnership was not a party to this litigation.
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<PAGE> 21
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require cable
operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act presently allows cable operators
substantial latitude in setting leased access rates, the 1992 Cable Act
requires leased access rates to be set according to a formula determined by the
FCC.
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single cable
television franchise and to impose certain franchise restrictions upon cable
television companies have been considered in several recent federal appellate
and district court decisions. These decisions have been somewhat inconsistent
and, until the U.S. Supreme Court rules definitively on the scope of cable
television's First Amendment protections, the legality of the franchising
process and of various specific franchise requirements is likely to be in a
state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable television systems and permits franchising
authorities to operate their own cable television systems without franchises.
OWNERSHIP
The 1984 Cable Act codified existing FCC cross-ownership regulations,
which, in part, prohibit local exchange telephone companies ("LECs") from
providing video programming directly to customers within their local exchange
telephone service areas, except in rural areas or by specific waiver of FCC
rules. This restriction had been ruled unconstitutional in several court
cases, and was before the Supreme Court for review, when the 1996 Telecom Act
was passed. That statute repealed the rule in its entirety.
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. The 1996 Telecom Act
eliminates the statutory ban and directs the FCC to review its rule within two
years. Common ownership or control has historically also been prohibited by the
FCC (but not by the 1984 Cable Act) between a cable system and a national
television network. The 1996 Telecom Act eliminates this prohibition. Finally,
in order to encourage competition in the provision of video programming, the
FCC adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and MDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act
codified this restriction and extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992 are grandfathered. The
1996 Telecom Act exempts cable systems facing effective competition from this
restriction. The 1992 Cable Act permits states or local franchising
authorities to adopt certain additional restrictions on the ownership of cable
television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number
of cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more
than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder
of more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the
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<PAGE> 22
effectiveness of these rules pending the outcome of the appeal from the U.S.
District Court decision holding the multiple ownership limit provision of the
1992 Cable Act unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which
owns the cable system has an attributable interest. The limit is 40% of all
activated channels.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and women
are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable system operators with more than five full-time
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual EEO reporting requirements on cable operators and
has expanded those requirements to all multichannel video service distributors.
Failure to comply with the EEO requirements can result in the imposition of
fines and/or other administrative sanctions, or may, in certain circumstances,
be cited by a franchising authority as a reason for denying a franchisee's
renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable system operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable operator
is found to have violated the customer privacy provisions of the 1984 Cable
Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act precluded cable operators from selling or otherwise
transferring ownership of a cable television system within 36 months after
acquisition or initial construction, with certain exceptions. The 1996 Telecom
Act repealed this restriction. The 1992 Cable Act also requires franchising
authorities to act on any franchise transfer request submitted after December
4, 1992 within 120 days after receipt of all information required by FCC
regulations and by the franchising authority. Approval is deemed to be granted
if the franchising authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC. Cable operators who operate in certain frequency bands are
required on an annual basis to file the results of their periodic cumulative
leakage testing measurements. Operators who fail to make this filing or who
exceed the FCC's allowable cumulative leakage index risk being prohibited from
operating in those frequency bands in addition to other sanctions.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to the
cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards
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<PAGE> 23
which were in conflict with or more restrictive than those established by the
FCC. The FCC has revised such standards and made them applicable to all
classes of channels which carry downstream National Television System Committee
(NTSC) video programming. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 Mhz and
225-400 Mhz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. Periodic testing by cable operators for compliance with
the technical standards and signal leakage limits is required. The 1992 Cable
Act requires the FCC to periodically update its technical standards to take
into account changes in technology. Under the 1996 Telecom Act, local
franchising authorities may not prohibit, condition or restrict a cable
system's use of any type of subscriber equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable systems and consumer
electronics equipment. These regulations, inter alia, generally prohibit cable
operators from scrambling their basic service tier and from changing the
infrared codes used in their existing customer premises equipment. This latter
requirement could make it more difficult or costly for cable operators to
upgrade their customer premises equipment and the FCC has been asked to
reconsider its regulations. The 1996 Telecom Act directs the FCC to set only
minimal standards to assure compatibility between television sets, VCRs and
cable systems, and to rely on the marketplace. The FCC must adopt rules to
assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
systems and other multichannel video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. A number of states and the District of
Columbia have certified to the FCC that they regulate the rates, terms and
conditions for pole attachments. In the absence of state regulation, the FCC
administers such pole attachment rates through use of a formula which it has
devised. The 1996 Telecom Act directs the FCC to adopt a new rate formula for
any attaching party, including cable systems, which offer telecommunications
services. This new formula will result in significantly higher attachment
rates for cable systems which choose to offer such services.
OTHER MATTERS
FCC regulation pursuant to the Communications Act, as amended, also
includes matters regarding a cable system's carriage of local sports
programming; restrictions on origination and cablecasting by cable system
operators; application of the fairness doctrine and rules governing political
broadcasts; customer service; obscenity and indecency; home wiring and
limitations on advertising contained in nonbroadcast children's programming.
The 1996 Telecom Act establishes a process for the creation and
implementation of a "voluntary" system of ratings for video programming
containing sexual, violent or other "indecent" material and directs the FCC to
adopt rules requiring most television sets manufactured in the United States or
shipped in interstate commerce to be technologically capable of blocking the
display of programs with a common rating. The 1996 Telecom Act also requires
video programming distributors to employ technology to restrict the reception
of programming by persons not subscribing to those channels. In the case of
channels primarily dedicated to sexually-oriented programming, the distributor
must fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide
such programming during a "safe harbor" period when children are not likely to
be in the audience, as determined by the FCC. With respect to other kinds of
channels, the 1996 Telecom Act only requires that the audio and video portions
of the channel be fully blocked, at no charge, upon request of the
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<PAGE> 24
person not subscribing to the channel. The specific blocking requirements
applicable to sexually-oriented programming are being challenged in court on
constitutional grounds.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried,
and the location of the cable system with respect to over-the-air television
stations. Originally, the Federal Copyright Royalty Tribunal was empowered to
make and, in fact, did make several adjustments in copyright royalty rates.
This tribunal was eliminated by Congress in 1993. Any future adjustment to the
copyright royalty rates will be done through an arbitration process to be
supervised by the U.S. Copyright Office. Requests to adjust the rates were
made in January, 1996 and are pending before the Copyright Office.
Cable operators are liable for interest on underpaid and unpaid royalty
fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television
system mergers and acquisitions. While it is not possible to predict the
outcome of this proceeding, any changes adopted by the Copyright Office in its
current policies may have the effect of reducing the copyright impact of
certain transactions involving cable company mergers and cable television
system acquisitions.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators would have to negotiate rights
from the copyright owners for all of the programming on the broadcast stations
carried by cable systems. Such negotiated agreements would likely increase the
cost to cable operators of carrying broadcast signals. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission consent
agreements between television broadcast stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
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
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<PAGE> 25
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and
in many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be granted
or that renewals will be made on similar terms and conditions. Franchises
usually call for the payment of fees, often based on a percentage of the
system's gross customer revenues, to the granting authority. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same state,
historically ranging from reasonable to highly restrictive or burdensome. The
1984 Cable Act places certain limitations on a franchising authority's ability
to control the operation of a cable system operator and the courts have from
time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially
in the area of customer service and rate regulation. The 1992 Cable Act also
allows franchising authorities to operate their own multichannel video
distribution system without having to obtain a franchise and permits states or
local franchising authorities to adopt certain restrictions on the ownership of
cable television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions
governing charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of
cable services provided. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
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<PAGE> 26
ITEM 2. PROPERTIES
The Partnership owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and
business offices, and owns or leases its service vehicles. The Partnership
believes that its properties, both owned and leased, are in good condition and
are suitable and adequate for the Partnership's business operations.
The Partnership owns substantially all of the assets related to its cable
television operations, including its program production equipment, headend
(towers, antennae, electronic equipment and satellite earth stations), cable
plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to various legal proceedings. Such legal
proceedings are ordinary and routine litigation proceedings that are incidental
to the Partnership's 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 27
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 1,149 as of March 1, 1995. In addition to restrictions on the
transferability of units contained in the Partnership Agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended Partnership Agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital
Payback"). The partnership agreement also provides that all partnership
profits, gains, operational losses, and credits (all as defined) be allocated
1% to the general partners and 99% to the limited partners until the limited
partners have been allocated net profits equal to the amount of cash flow
required for Capital Payback. After the limited partners have received cash
flow equal to their initial investments, the general partners will 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 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 1987 and distributed $498,800 ($12.50 per unit)
during 1993, 1994 and 1995. The Partnership will continue to determine the
Partnership's ability to pay distributions on a quarter-by-quarter basis. See
"Liquidity and Capital Resources."
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<PAGE> 28
As discussed below, there are a number of factors present in the cable
television industry which may cause long-term refinancing to be difficult to
obtain, including the continued concern on the part of many banks regarding the
recently passed 1992 Cable Act which will serve to re-regulate the cable
industry (including the imposition of new price regulation and competition on
cable companies), the current unstable financial climate and the relatively
small collateral base of the Partnership's systems. Thus, there can be no
assurance that the Corporate General Partner will be successful in obtaining
additional borrowings for the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and Enstar
Cable of Macoupin County.
THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $1,913,700 $2,065,100 $2,222,100 $2,241,600 $2,311,800
Costs and expenses (1,226,300) (1,305,700) (1,339,900) (1,448,800) (1,442,700)
Depreciation and amortization (806,200) (721,200) (727,100) (712,500) (689,100)
---------- ---------- ---------- ---------- ----------
Operating income (loss) (118,800) 38,200 155,100 80,300 180,000
Interest expense (201,500) (119,800) (78,400) (58,500) (61,800)
Interest income 53,200 35,100 20,400 9,600 32,000
Equity in net income (loss)
of Joint Venture (76,800) (52,400) (36,200) 11,900 28,000
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (343,900) $ (98,900) $ 60,900 $ 43,300 $ 178,200
========== ========== ========== ========== ==========
Distributions paid to partners $ - $ - $ 503,800 $ 503,800 $ 503,800
=========== =========== ========== ========== ==========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income (loss) $ (8.53) $ (2.45) $ 1.51 $ 1.07 $ 4.42
========== ========== ========== ========== ==========
Distributions $ - $ - $ 12.50 $ 12.50 $ 12.50
=========== =========== ========== ========== ==========
OTHER OPERATING DATA
Net cash provided by operating
activities $ 622,200 $ 409,600 $ 778,000 $ 746,800 $1,174,100
EBITDA(1) 687,400 759,400 882,200 792,800 869,100
EBITDA to revenues 35.9% 36.8% 39.7% 35.4% 37.6%
Total debt to EBITDA 2.7x 1.8x .4x .5x .4x
Capital expenditures $ 24,300 $ 88,300 $ 227,900 $ 122,700 373,700
Year Ended December 31,
---------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
Total assets $7,049,300 $6,149,400 $4,734,600 $4,275,600 $4,293,800
Total debt 1,869,700 1,341,700 383,200 383,200 383,200
General partners' deficit (38,500) (39,500) (43,900) (48,500) (51,700)
Limited partners' capital 4,525,800 4,427,900 3,989,400 3,533,500 3,211,100
</TABLE>
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<PAGE> 29
ENSTAR CABLE OF MACOUPIN COUNTY
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $1,321,100 $1,466,700 $1,572,900 $1,590,800 $1,646,000
Costs and expenses (755,400) (826,000) (863,500) (876,900) (959,200)
Depreciation and amortization (799,300) (811,700) (826,500) (703,900) (634,800)
----------- ----------- ----------- ----------- ----------
Operating income (loss) (233,600) (171,000) (117,100) 10,000 52,000
Net income (loss) $ (230,400) $ (157,200) $ (108,600) $ 35,700 $ 84,000
=========== =========== =========== =========== ==========
Distributions to venturers $ - $ 600,000 $ - $1,050,000 $ -
=========== =========== =========== =========== ==========
OTHER OPERATING DATA
Net cash provided by
operating activities $ 622,200 $ 529,700 $ 734,100 $ 750,300 $ 799,900
EBITDA(1) 565,700 640,700 709,400 713,900 686,800
EBITDA to revenues 42.8% 43.7% 45.1% 44.9% 41.7%
Capital expenditures $ 43,200 $ 84,100 $ 115,500 $ 126,900 $ 325,500
Year Ended December 31,
-------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ -----------
Total assets $4,630,300 $3,745,600 $3,662,700 $2,647,600 $2,840,100
Venturers' capital 4,280,700 3,523,500 3,414,900 2,400,600 2,484,600
</TABLE>
- -----------------
(1) Operating income before depreciation and amortization. The Partnership
and Joint Venture measure their financial performance by their EBITDA,
among other items. Based on its experience in the cable television
industry, the Partnership and Joint Venture believe that EBITDA and
related measures of cash flow serve as important financial analysis tools
for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage. This is evidenced
by the covenants in the primary debt instruments of the Partnership, in
which EBITDA-derived calculations are used as a measure of financial
performance. EBITDA should not be considered by the reader as an
alternative to net income as an indicator of the Partnership's or Joint
Ventures' financial performance or as an alternative to cash flows as a
measure of liquidity.
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<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
Compliance with the rules adopted by the Federal Communications Commission
(the "FCC") to implement the rate regulation provisions of the 1992 Cable Act
has had a significant negative impact on the Partnership's revenues and cash
flow. Based on certain FCC decisions that have been released, however, the
Partnership's management presently believes that revenues for 1995 reflect the
impact of the 1992 Cable Act in all material respects. Moreover, recent policy
decisions by the FCC make it more likely that in the future the Partnership
will be permitted to increase regulated service rates in response to specified
cost increases, although certain costs may continue to rise at a rate in excess
of that which the Partnership will be permitted to pass on to its customers.
The FCC has recently adopted a procedure under which cable operators may file
abbreviated cost of service showings for system rebuilds and upgrades, the
result of which would be a permitted increase in regulated rates to allow
recovery of a portion of those costs. The FCC has also proposed a new
procedure for the pass-through of increases in inflation and certain external
costs, such as programming costs, under which cable operators could increase
rates based on actual and anticipated cost increases for the coming year. In
addition to these FCC actions, on February 8, 1996, President Clinton signed
into law the 1996 Telecom Act. The 1996 Telecom Act revises, among other
things, certain rate regulation provisions of the 1992 Cable Act. Given events
since the enactment of the 1992 Cable Act, there can also be no assurance as to
what, if any, future action may be taken by the FCC, Congress or any other
regulatory authority or court, or the effect thereof on the Partnership's
business. Accordingly, the Partnership's historical annual financial results as
described below are not necessarily indicative of future performance. See
"Legislation and Regulation" and "Liquidity and Capital Resources." the FCC,
Congress or any other regulatory authority or court, or the effect thereof on
the Partnership's business. Accordingly, the Partnership's historical annual
financial results as described below are not necessarily indicative of future
performance. See "Legislation and Regulation" and "Liquidity and Capital
Resources."
The Partnership conducts it cable television business operations both (i)
through the direct ownership and operation of certain cable television systems
and (ii) through its participation as a partner with a one-third (1/3) interest
in Enstar Cable of Macoupin County. The Partnership participates equally with
its two affiliated co-partners under the Joint Venture's partnership agreement
with respect to capital contributions, obligations and commitments, and results
of operations. Accordingly, in considering the financial condition and results
of operations for the Partnership, consideration must also be made of those
matters as they relate to the Joint Venture. 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
1995 COMPARED TO 1994
The Partnership's revenues increased from $2,241,600 to $2,311,800, or by
3.1%, for the year ended December 31, 1995 compared to 1994. Of the $70,200
increase in revenues, $73,500 was due to increases in regulated service rates
permitted under the 1992 Cable Act that were implemented by the Partnership in
April 1995, $26,000 was due to increases in unregulated rates charged for
premium services, $12,100 was due to increases in other revenue producing items
and $8,200 was due to increases in the number of subscriptions for services.
These increases were partially offset by rate decreases implemented in
September 1994 to comply with the 1992 Cable Act, estimated by the Partnership
to be approximately $41,400 and $8,200 was due to a decrease in advertising
sales revenue. As of December 31, 1995 the Partnership had 6,169 homes
subscribing to cable service and 2,394 premium service units.
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Service costs decreased from $810,500 to $804,700 (less than one percent)
for year ended December 31, 1995 compared to 1994. Service costs represents
costs directly attributable to providing cable services to customers. Of the
$5,800 decrease, $30,500 was due to a decrease in personnel costs, $11,600 was
due to a decrease in repair and maintenance expense and $10,300 was due to an
increase in capitalization of labor and overhead costs. These decreases were
partially offset by a $31,600 increase in programming fees charged by program
suppliers (including primary satellite fees), a $7,900 increase in property
taxes and a $4,800 increase 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 increased from $304,300 to $333,600,
or by 9.6%, for the year ended December 31, 1995 as compared to 1994. Of the
$29,300 increase, $17,700 was due to higher insurance premiums, $13,900 was due
to an increase in professional fees and $5,000 was due to an increase in
personnel costs. These increases were partially offset by a $6,200 decrease in
marketing expense.
Management fees and reimbursed expenses decreased from $334,000 to
$304,400, or by 8.9%, for the year ended December 31, 1995 as compared to 1994.
Of the $29,600 decrease, $33,100 was due to decreased reimbursable expenses
allocated by the Corporate General Partner, including lower allocated personnel
costs, professional fees and costs associated with implementation of the 1992
Cable Act. Management fees increased by $3,500, or 3.1%, in direct relation
with increased revenues as described above.
Depreciation and amortization expense decreased by $23,400 from $712,500
to $689,100, or by 3.3%, for the year ended December 31, 1995 as compared to
1994, due to the retirement of certain tangible and intangible assets.
Operating income increased by $99,700 from $80,300 to $180,000, for the
year ended December 31, 1995 as compared to 1994, primarily due to increased
revenues and decreased reimbursable expenses as described above.
Interest expense increased by $3,300 from $58,500 to $61,800, or by 5.6%,
for the year ended December 31, 1995 as compared to 1994. The increase was due
to higher interest rates during 1995 compared to 1994 (10.3% in 1995 compared
to 8.7% in 1994).
Interest income increased by $22,400 from $9,600 to $32,000, for the year
ended December 31, 1995 compared to 1994, primarily due to higher average
interest rates earned on higher average invested cash balances in 1995 (5.3% on
$775,700 in 1995 as compared with 4.1% on $383,200 in 1994).
Due to the factors described above, the Partnership's net income increased
from $43,300 to $178,200 for the year ended December 31, 1995 as compared to
1994.
1994 COMPARED TO 1993
The Partnership's revenues increased from $2,222,100 to $2,241,600, or by
.9%, for the year ended December 31, 1994 compared to 1993. Of the $19,500
increase in revenues, approximately $40,300 was due to increases in the number
of subscriptions for services and $26,100 due to other revenue producing items.
Increases were partially offset by reductions of $46,900 estimated to be due to
decreases in rates charged to subscribers for cable service mandated by the
1992 Cable Act. As of December 31, 1994, the Partnership had 6,228 homes
subscribing to cable service and 2,825 premium service units.
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Service costs increased from $727,000 to $810,500, or by 11.5%, for the
year ended December 31, 1994 compared to 1993. Service costs represent costs
directly attributable to providing cable services to customers. The $83,500
increase was primarily due to an increase of $53,500 in programming fees
(including primary satellite fees), an increase of $13,500 in copyright fees as
a result of changes in copyright filing requirements bases on revenue levels
and an increase of $11,300 in franchise fees. The increase in programming
expense was also due to expanded programming usage relating to channel line-up
restructuring and retransmission consent arrangements implemented to comply
with the 1992 Cable Act.
General and administrative expenses increased from $302,100 to $304,300,
or by .7%, for the year ended December 31, 1994 compared to 1993. The $2,200
increase was primarily due to a $9,400 increase in insurance costs, a $4,000
decrease in capitalization of labor and overhead expense due to a reduction in
capital projects during 1994 and a $2,900 increase in bad debt expense. The
increases were partially offset by a $5,900 decrease in marketing costs, a
$4,500 decrease in professional fees and a $3,200 decrease in telephone
expense.
Management fees and reimbursed expenses increased from $310,800 to
$334,000, or by 7.5%, for the year ended December 31, 1994 compared to 1993. Of
the $23,200 increase, $22,200 was due to increased reimbursable expenses
allocated by the Corporate General Partner and $1,000 was due to management
fees, which increase with revenues. Reimbursed expenses increased primarily due
to allocated personnel costs, marketing expense, telephone expenses and costs
related to compliance with the 1992 Cable Act.
Depreciation and amortization expense decreased from $727,100 in 1993 to
$690,900 in 1994, or by 5.0%, due to retirement of certain tangible and
intangible assets.
Operating income decreased from $155,100 to $101,900, or by 34.3%, for the
year ended December 31, 1994 compared to 1993, principally due to higher
programming fees and reimbursable expenses payable to the Corporate General
Partner as described above.
Interest expense decreased from $78,400 to $58,500, or by 25.4%, for the
year ended December 31, 1994 compared to 1993, primarily due to lower average
borrowings of $383,200 in 1994 as compared with $1,084,300 in 1993.
Interest income decreased from $20,400 to $9,600, or by 52.9%, for the
year ended December 31, 1994 compared to 1993, primarily due to lower invested
cash balances in 1994 ($315,900 in 1994 as compared to $956,900 in 1993).
Due to the factors described above, the Partnership's net income decreased
from $60,900 to $43,300 for the year ended December 31, 1994 as compared to
1993.
Distributions to Partners
The Partnership received distributions totaling $350,000 from the Joint
Venture during 1994. The Joint Venture did not make distributions during 1993
and 1995. The Partnership distributed $503,800 to its partners during 1993,
1994 and 1995.
THE MACOUPIN JOINT VENTURE
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $1,590,800 to $1,646,000, or
by 3.5%, for the year ended December 31, 1995 compared to 1994. Of the $55,200
increase in revenues, $53,400 was due
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to increases in regulated service rates permitted under the 1992 Cable Act that
were implemented by the Partnership in April 1995, $27,600 was due to increases
in the number of subscriptions for services, $11,600 was due to increases in
advertising sales and other revenue producing items and $2,300 was due to
increases in unregulated rates charged for premium services. These increases
were partially offset by rate decreases implemented in September 1994 to comply
with the 1992 Cable Act, estimated by the Joint Venture to be approximately
$39,700. As of December 31, 1995 the Joint Venture had 4,373 homes subscribing
to cable service and 2,083 premium service units.
Service costs increased from $484,100 to $500,300, or by 3.3%, for the
year ended December 31, 1995 compared to 1994. Service costs represents costs
directly attributable to providing cable services to customers. Of the $16,200
increase, $18,400 was due to higher programming fees charged by program
suppliers (including primary satellite fees), $11,000 was due to an increase in
copyright fees, and $9,200 was due to an increase in personnel costs. These
increases were partially offset by a $24,400 increase in capitalization of
labor and overhead costs. The increase in programming expense was also due to
expanded programming usage relating to channel line-up restructuring and to
retransmission consent arrangements implemented to comply with the 1992 Cable
Act.
General and administrative expenses increased from $161,600 to $232,300,
or by 43.8%, for the year ended December 31, 1995 as compared to 1994. Of the
$70,700 increase, $84,700 was due to higher insurance premiums partially offset
by an $8,600 decrease in bad debt expense and a $7,700 decrease in marketing
expense.
Management fees and reimbursed expenses decreased from $231,200 to
$226,600, or by 2.0%, for the year ended December 31, 1995 as compared to 1994.
Of the $4,600 decrease, $7,400 was due to decreased reimbursable expenses
allocated by the Corporate General Partner, including lower allocated personnel
costs, property taxes, professional fees, costs associated with implementation
of the 1992 Cable Act, telephone and postage and messenger expense. Management
fees increased by $2,800, or 3.5%, in direct relation with increased revenues
as described above.
Depreciation and amortization expense decreased by $69,100 from $703,900
to $634,800, or by 9.8%, for the year ended December 31, 1995 as compared to
1994 due to the effect of certain tangible assets becoming fully depreciated
and intangible assets becoming fully amortized.
Operating income increased by $42,000 from $10,000 to $52,000, for the
year ended December 31, 1995 as compared to 1994, primarily due to decreased
depreciation and amortization expense and increased revenues as described
above.
Interest income, net of interest expense increased by $6,300 from $25,700
to $32,000, or by 24.5%, for the year ended December 31, 1995 compared to 1994
due to higher average interest rates earned on invested cash balances during
1995 (5.3% during 1995 compared to 3.5% during 1994).
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 44.9% to 41.7% for the year ended
December 31, 1995 compared to 1994 primarily due to higher insurance premiums.
EBITDA decreased from $713,900 to $686,700, or by 3.8%, during 1995 compared to
1994.
Due to the factors described above, the Joint Venture's net income
increased from $35,700 to $84,000 for the year ended December 31, 1995 as
compared to 1994.
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<PAGE> 34
1994 COMPARED TO 1993
The Joint Venture's revenues increased from $1,572,900 to $1,590,800, or
by 1.1%, for the year ended December 31, 1994 compared to 1993. Of the $17,900
increase in revenues, approximately $34,900 was due to increases in the number
of subscriptions for services and $1,000 was due to other revenue producing
items. Increases were partially offset by a reduction of $18,000 estimated to
be due to decreases in rates charged to subscribers for cable service mandated
by the 1992 Cable Act. As of December 31, 1994 the Joint Venture had 4,355
homes subscribing to cable service and 2,243 premium service units.
Service costs decreased from $501,600, to $484,100, or by 3.5%, for the
year ended December 31, 1994 compared to 1993. Service costs represents costs
directly attributable to providing cable services to customers. The $17,500
decrease in service costs was primarily due to a $17,100 increase in the
capitalization of labor and overhead expense due to more capital projects
during 1994, a $13,000 decrease in copyright fees and a decrease of $10,200 in
personnel costs. Decreases were partially offset by an increase of $15,000 in
programming fees charged by program suppliers (including primary satellite
fees) and a $3,300 increase in repair and maintenance expense. The increase in
programming expense in 1994 was also due to expanded programming usage relating
to channel line-up restructuring and to retransmission consent arrangements
implemented to comply with the 1992 Cable Act.
General and administrative expenses increased from $151,100 to $161,600,
or by 7.0%, for the year ended December 31, 1994 compared to 1993. The $10,500
increase included a $9,300 increase in insurance costs, an $8,700 increase in
bad debt expense and a $5,600 increase in professional fees. Increases were
partially offset by a $6,800 decrease in telephone expense and a $4,200
decrease in personnel costs.
Management fees and reimbursed expenses increased from $210,800 to
$231,200, or by 9.7%, for the year ended December 31, 1994 compared to 1993,
primarily due to an increase of $19,500 in reimbursable expenses payable to the
General Partner. The increases were caused principally by higher allocated
utility expenses, personnel costs, marketing expense and costs related to
compliance with the 1992 Cable Act.
Depreciation and amortization expense decreased from $826,500 to $687,300,
or by 16.8%, for the year ended December 31, 1994 compared to 1993, primarily
due to the retirement of certain tangible and intangible assets.
Operating income increased $143,700 from an operating loss of $117,100 in
1993 to operating income of $26,600 for the year ended December 31, 1994,
principally due to lower depreciation and amortization expense as described
above.
Interest income, net of interest expense, increased from $8,500 to
$25,700, for the year ended December 31, 1994 compared to 1993, primarily due
to higher average investment balances and higher average interest rates earned
during 1994.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues remained approximately the same at 45% for the year
ended December 31, 1994 compared to 1993. EBITDA increased from $709,400 to
$713,900, or by .6%, during 1994 compared to 1993.
Due to the factors described above, the Joint Venture's net income
increased from a $108,600 loss for the year ended December 31, 1993 to $35,700
of income for the year ended December 31, 1994.
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<PAGE> 35
Distributions Made By The Macoupin Joint Venture
The Joint Venture distributed $1,050,000 equally among its three partners
during 1994. No distributions were made during 1993 or 1995.
LIQUIDITY AND CAPITAL RESOURCES
The FCC's amended rate regulation rules were implemented during the
quarter ended September 30, 1994. Compliance with these rules has had a
negative impact on the Partnership's revenues and cash flow. See "Legislation
and Regulation."
The Partnership's primary objective, having invested its net offering
proceeds in cable systems and the Joint Venture, is to distribute to its
partners all available cash flow from operations and proceeds from the sale of
cable systems, if any, after providing for expenses, debt service and capital
requirements relating to the expansion, improvement and upgrade of its cable
systems. The Partnership relies upon the availability of cash generated from
operations and possible borrowings to fund its ongoing expenses, debt service
and capital requirements. In general, these requirements involve expansion,
improvement and upgrade of the Partnership's existing cable television systems.
The Partnership has budgeted 1996 capital expenditures of $1,441,000, which
include costs of $978,000 for completing the rebuild in the community of
Shelbyville, Illinois. Additionally, the Joint Venture has budgeted 1996
capital expenditures totaling $348,700 for the upgrade of its existing cable
plant and for the first segment of a $1,500,000 rebuild in the community of
Auburn, Illinois.
Management believes that existing cash and cash generated by operations of
the Partnership and Joint Venture will be adequate to fund capital expenditures
and the continued payment of distributions in 1996. Management also believes
that it is essential to preserve liquidity by reserving cash for future rebuild
requirements, including the continued future rebuild in the community of
Auburn, Illinois.
The Partnership paid distributions totaling $503,800 in 1995. However,
there can be no assurances regarding the level, timing or continuation of
future distributions beyond 1996.
The Partnership obtained from a lender a $1,000,000 revolving bank credit
agreement (the "Facility") maturing on June 30, 1997. Loans under the Facility
are secured by substantially all of the Partnership's assets. Interest is
payable at the Base Rate plus 1.5%. "Base Rate" means the higher of the
lender's prime rate or the Federal Funds Effective Rate plus 1/2%. The Facility
provides for quarterly reductions of the maximum commitment beginning September
30, 1994, payable at the end of each fiscal quarter. The Partnership will be
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 will also be required to pay a commitment fee of 1/2% per year on
the unused portion of the Facility. The Facility contains certain financial
tests and other covenants including, among others, restrictions on capital
expenditures, incurrence of indebtedness, distributions and investments, sale
of assets, acquisitions, and other covenants, defaults and conditions. The
outstanding balance under the facility at December 31, 1995 was $383,182, and
the balance was repaid on February 9, 1996, which terminated the Facility. The
Partnership was in compliance with its loan covenants at December 31, 1995.
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<PAGE> 36
THE PARTNERSHIP
1995 VS. 1994
Cash provided by operating activities increased from $746,800 to
$1,174,100, or by $427,300 for the year ended December 31, 1995 compared to
1994. The Partnership generated $342,200 more cash to pay liabilities owed to
the General Partner and third-party creditors in 1995. Partnership operations
generated $95,400 more cash in 1995 after adding back non-cash items consisting
of depreciation, amortization and equity in net income of Joint Venture.
Changes in receivables, prepaid expenses and deferred loan cost used $10,300
more cash in the year ended December 31, 1995 than in the prior year.
Investing activities used $572,500 more cash during 1995 than in 1994 due
to a $350,000 decrease in distributions from the Joint Venture. The
Partnership used $251,000 more cash for capital expenditures, partially offset
by a $28,500 decrease in expenditures for intangible assets.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 35.4% during 1994 to 37.6% in 1995. The
increase was principally attributable to increased revenues. EBITDA increased
$792,800 to $869,100, or by 9.6% for the year ended December 31, 1995 compared
to 1994.
1994 VS. 1993
Cash provided by operating activities decreased by $31,200 to $746,800
during 1994 compared to $778,000 during 1993. Partnership operations generated
$69,400 less income in 1994 after adding back non-cash items consisting of
depreciation, amortization, loss on retirement of assets and equity in net
income or loss of Joint Venture. Changes in receivables and prepaid expenses
used $4,600 additional cash. The Partnership used $27,900 less cash to pay
deferred loan costs in 1994 and $14,900 less cash to pay liabilities owed to
the General Partner and third-party creditors.
Investing activities provided cash totaling $179,700 in 1994 as compared
with 1993 when investing activities used cash of $247,800. The $427,500 cash
increase was due to $350,000 in distributions received from the Joint Venture
and a $105,200 reduction in expenditures for tangible assets. Expenditures for
intangible assets increased by $27,700. Cash flows from financing activities
used $958,500 less cash during 1994 due to the elimination of debt repayments
and borrowings from the Partnership's line of credit.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 39.7% during 1993 to 35.4% in 1994. The
decrease was primarily attributable to increased programming fees and
reimbursable expenses. EBITDA decreased from $882,200 to $792,800, or by 10.1%,
for the year ended December 31, 1994 compared to 1993.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that
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<PAGE> 37
are expected to be disposed of. The Partnership will adopt Statement 121 in
the first quarter of 1996 and, based on current circumstances, does not believe
the effect of adoption will be material.
INFLATION
Certain of the Partnership's and Joint Venture's expenses, such as those
for wages and benefits, equipment repair and replacement, and billing and
marketing generally increase with inflation. However, the Partnership does not
believe that its financial results have been, or will be, adversely affected by
inflation in a material way, provided that the Joint Venture is able to
increase its service rates periodically, of which there can be no assurance.
See "Legislation and Regulation."
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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PART III
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988 acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General
Partner, and Mr. Graff received the right to cause Falcon Cablevision to
acquire such interests. These arrangements were modified and extended in an
amendment dated September 10, 1993 pursuant to which, among other things, the
Corporate General Partner obtained the option to acquire Mr. Graff's interest
in lieu of the purchase right described above which was originally granted to
Falcon Cablevision.
Since its incorporation in Georgia in 1982, the Corporate General Partner
has been engaged in the cable/telecommunications business, both as a general
partner of 15 limited partnerships formed to own and operate cable television
systems and through a wholly-owned operating subsidiary. As of December 31,
1995 the Corporate General Partner managed cable television systems had
approximately 126,200 Subscribers.
Falcon Cablevision was formed in 1984 as a California limited partnership
and has been engaged in the ownership and operation of cable television systems
since that time. Falcon Cablevision is a wholly-owned subsidiary of FHGLP. FHGI
is the sole general partner of FHGLP. FHGLP currently operates cable systems
through a series of affiliated limited partnerships, including Falcon
Cablevision, Falcon Cable Systems Company, Falcon Telecable, Falcon Cable
Media, Falcon Classic Cable Income Properties, Falcon First, Inc., Falcon
Community Cable and Falcon Video Communications, and also controls the general
partners of 15 other limited partnerships which operate under the Enstar name
(including the Partnership). Although these limited partnerships are affiliated
with FHGLP, their assets are owned by legal entities separate from the
Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner, all of whom have served in
such capacities since October 1988:
<TABLE>
<CAPTION>
NAME POSITION
- --- --------
<S> <C>
Marc B. Nathanson Director, Chairman of the Board, Chief Executive Officer
Frank J. Intiso President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General Counsel
Michael K. Menerey Chief Financial Officer and Secretary
</TABLE>
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<PAGE> 39
MARC B. NATHANSON, 50, has been Chairman of the Board, Chief Executive Officer
and President of FHGI and its predecessors since 1975. Prior to 1975, Mr.
Nathanson was Vice President of Marketing for Teleprompter Corporation, at that
time the largest multiple-system cable operator in the United States. He also
held executive positions with Warner Cable and Cypress Communications
Corporation. He is a former President of the California Cable Television
Association and a member of Cable Pioneers. He is currently a Director of the
National Cable Television Association ("NCTA") and serves on its Executive
Committee. At the 1986 NCTA convention, Mr. Nathanson was honored by being
named the recipient of the Vanguard Award for outstanding contributions to the
growth and development of the cable television industry. Mr. Nathanson is a
26-year veteran of the cable television industry. He is a founder of the Cable
Television Administration and Marketing Society ("CTAM") and the Southern
California Cable Television Association. Mr. Nathanson is also a Director of TV
Por Cable Nacional, S.A. de C.V. Mr. Nathanson is also Chairman of the Board
and Chief Executive Officer of Falcon International Communications, LLC
("FIC"). Mr. Nathanson was appointed by President Clinton and confirmed by the
U.S. Senate for a three year term on the Board of Governors of International
Broadcasting of the United States Information Agency.
FRANK J. INTISO, 49, has been Executive Vice President and Chief Operating
Officer of FHGI and its predecessors since 1982. Mr. Intiso has been President
and Chief Operating Officer of Falcon Cable Group since its inception. Mr.
Intiso is responsible for the day-to-day operations of all cable television
systems under the management of FHGI. Mr. Intiso has a Master's Degree in
Business Administration from the University of California, Los Angeles, and is
a Certified Public Accountant. He serves as chair of the California Cable
Television Association, and is on the boards of Cable Advertising Bureau, Cable
In The Classroom, Community Antenna Television Association and California Cable
Television Association. He is a member of the American Institute of Certified
Public Accountants, the American Marketing Association, the American Management
Association, and the Southern California Cable Television Association.
STANLEY S. ITSKOWITCH, 57, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly
Fallek Chemical Company), which is a marketer of chemical products, since 1980.
He is a Certified Public Accountant and a former tax partner in the New York
office of Touche Ross & Co. (now Deloitte & Touche). He has a J.D. Degree and
an L.L.M. Degree in Tax from New York University School of Law. Mr. Itskowitch
is also Executive Vice President and General Counsel of FIC.
MICHAEL K. MENEREY, 44, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984 and has been Chief Financial Officer and
Secretary of Falcon Cable Group since its inception. Mr. Menerey is a Certified
Public Accountant and is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1995, biographical
information about certain officers of FHGI and Falcon Cable Group, a division
of FHGLP, who share certain responsibilities with the officers of the Corporate
General Partner with respect to the operation and management of the
Partnership.
JAMES V. ASHJIAN, 51, has been Controller of FHGI and its predecessors since
October 1985 and Controller of Falcon Cable Group since its inception. Mr.
Ashjian is a Certified Public Accountant and was a partner in Bider &
Montgomery, a Los Angeles-based CPA firm, from 1978 to 1983, and self-employed
from 1983 to October 1985. He is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants.
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<PAGE> 40
LYNNE A. BUENING, 42, has been Vice President of Programming of Falcon Cable
Group since November 1993. From 1989 to 1993, she served as Director of
Programming for Viacom Cable, a division of Viacom International Inc. Prior to
that, Ms. Buening held programming and marketing positions in the cable,
broadcast, and newspaper industries.
OVANDO COWLES, 42, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
HOWARD J. GAN, 49, has been Vice President of Corporate Development and
Government Affairs of FHGI and its predecessors since 1988 and Vice President
of Corporate Development and Government Affairs of Falcon Cable Group since its
inception. He was General Counsel at Malarkey-Taylor Associates, a Washington,
DC based telecommunications consulting firm, from 1986 to 1988. He was Vice
President and General Counsel at the Cable Television Information Center from
1978 to 1983. In addition, he was an attorney and an acting Branch Chief of
the Federal Communications Commission's Cable Television Bureau from 1975 to
1978.
R.W. ("SKIP") HARRIS, 48, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television Committee.
Mr. Harris was National Director of Affiliate Marketing for the Disney Channel
from 1985 to 1991. He was also a sales manager, regional marketing manager and
director of marketing for Cox Cable Communications from 1978 to 1985.
JOE A. JOHNSON, 51, has been Executive Vice President - Operations of FHGI
since September 1995, and between January 1992 and that date was Senior Vice
President of Falcon Cable Group. He was a Divisional Vice President of FHGI
between 1989 and 1992 and a Divisional Vice President of Falcon Cable Group
from its inception until 1992. From 1982 to 1989, he held the positions of
Vice President and Director of Operations for Sacramento Cable Television,
Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held
Cable System and Regional Manager positions with Warner Amex and Teleprompter.
JON W. LUNSFORD, 36, has been Vice President - Finance and Corporate
Development FHGI since September 1994. From 1991 to 1994 he served as Director
of Corporate Finance at Continental Cablevision, Inc. Prior to 1991, Mr.
Lunsford was a Vice President with Crestar Bank.
JOAN SCULLY, 60, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources of Falcon
Cable Group since its inception. From 1987 to May 1988, she was self-employed
as a Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree
in Human Resources Management from Pepperdine University.
MICHAEL D. SINGPIEL, 48, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992, Mr.
Singpiel was Vice President of C-Tec Cable Systems in Michigan. Mr. Singpiel
held various positions with Comcast in New Jersey and Michigan from 1980 to
1990.
RAYMOND J. TYNDALL, 48, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various
technical positions with Choice TV and its predecessors. From 1967 to 1975, he
held various technical positions with Sammons Communications. He
-40-
<PAGE> 41
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.
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership and Joint Venture have management agreements (the
"Management Agreements") with Enstar Cable Corporation, a wholly owned
subsidiary of the Corporate General Partner (the "Manager"), pursuant to which
Enstar Cable Corporation manages the Joint Venture's systems and provides all
operational support for the activities of the Partnership and the Joint
Venture. For these services, the Manager receives a management fee of 5% of the
Joint Venture's gross revenues, excluding revenues from the sale of cable
television systems or franchises, calculated and paid monthly. In addition, the
Joint Venture reimburses the Manager for certain operating expenses incurred by
the Manager in the day-to-day operation of the Joint Venture's cable systems.
The Management Agreement also requires the Partnership and Joint Venture 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 Agreements. The Management Agreements are
terminable by the Partnership upon sixty (60) days written notice to the
Manager. The Manager has engaged FHGLP to provide certain management services
for the Partnership and Joint Venture and pays FHGLP a portion of the
management fees it receives in consideration of such services and reimburses
FHGLP for expenses incurred by FHGLP on its behalf. The Corporate General
Partner also performs certain supervisory and administrative services for the
Partnership and Joint Venture, for which it is reimbursed.
For the fiscal year ended December 31, 1995, the Partnership together with
the Joint Venture paid approximately $181,400 of management fees and $333,100
of reimbursed expenses. In addition, the Joint Venture paid the Corporate
General Partner approximately $16,500 in respect of its 1% special interest in
the Joint Venture. Certain programming services are negotiated and purchased
through Falcon Cablevision. The Partnership together with the Joint Venture
paid Falcon Cablevision approximately $895,300 for these programming services
for fiscal year 1995.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5, "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
As of March 3, 1996, the common stock of FHGI was owned as follows: 78.5%
by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is trustee
and he and members of his family are
-41-
<PAGE> 42
beneficiaries; 20% by Greg A. Nathanson; and 1.5% by Stanley S. Itskowitch. In
connection with the formation of Falcon Community Cable, on August 15, 1989,
FHGI issued to Hellman & Friedman Capital Partners, A California Limited
Partnership ("H&F"), a $1,293,357 convertible debenture due 1999 convertible
under certain circumstances into 10% of the common stock of FHGI and entitling
H&F to elect one director to the board of directors of FHGI. H&F elected Marc
B. Nathanson pursuant to such right. In 1991 FHGI issued to Hellman & Friedman
Capital Partners II, A California Limited Partnership ("H&FII"), additional
convertible debentures due 1999 in the aggregate amount of $2,006,198
convertible under certain circumstances into approximately 6.3% of the common
stock of FHGI and entitling H&FII to elect one director to the board of
directors of FHGI. As of March 3, 1996, H&FII had not exercised this right.
FHGLP also held 12.1% of the interests in the General Partner, and Falcon Cable
Trust, Frank Intiso, H&FII and two other individuals held 58.9%, 12.1%, 16.3%
and 0.6% of the General Partner, respectively. Such interests entitle the
holders thereof to an allocable share of cash distributions and profits and
losses of the General Partner in proportion to their ownership. Greg A.
Nathanson is Marc B. Nathanson's brother.
As of March 3, 1996, Marc B. Nathanson and members of his family owned,
directly or indirectly, outstanding partnership interests (comprising both
general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P., 2.58% of
Falcon Video Communications and 30.0% of Falcon Cable Systems Company. In
accordance with the respective partnership agreements of the partnerships
mentioned above, after the return of capital to and the receipt of certain
preferred returns by the limited partners of such partnerships, FHGLP and
certain of its officers and directors had rights to future profits greater than
their ownership interests of capital in such partnerships.
On March 29, 1993, FHGLP was organized to effect the consolidation of
certain cable television businesses, including Falcon Cablevision, Falcon
Telecable, Falcon Cable Media and Falcon Community Cable, into FHGLP. At the
same time FHGLP assumed the cable system management operations of FHGI. On
December 28, 1995, FHGLP completed the acquisition of all of the direct and
indirect ownership interests in Falcon First, Inc., ("First"), that it did not
previously own. First was an affiliated entity prior to December 28, 1995. The
ownership interests in FHGLP are as follows: Falcon management, directors and
affiliated individuals and entities: 38.2% (including 35.3% owned by Marc B.
Nathanson and members of his family directly or indirectly), H&F and H&FII:
35.9%, Leeway & Co.: 10.9%, Boston Ventures Limited Partnership II and Boston
Ventures II-A Investment Corporation: 6.9%, Falcon First Communications, LLC:
2.1% and other institutional investors, individuals and trusts: 6.0%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Cable Systems Company, Falcon
Classic Cable Income Properties, L.P., Falcon Video Communications, L.P., and,
through its management of the operation of Falcon Cablevision (a subsidiary of
FHGLP), the partnerships of which Enstar Communications Corporation is the
Corporate General Partner, including the Partnership. On September 30, 1988,
Falcon Cablevision acquired all of the outstanding stock of Enstar
Communications Corporation. Certain members of management of the General
Partner have also been involved in the
-42-
<PAGE> 43
management of other cable ventures. FHGLP contemplates entering into other
cable ventures, including ventures similar to the Partnership.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the General Partner and their
management to certain conflicts of interest. Such conflicts of interest relate
to the time and services management will devote to the Partnership's affairs
and to the acquisition and disposition of cable television systems. Management
or its affiliates may establish and manage other entities which could impose
additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties. See "Fiduciary Duties"
below.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a fiduciary
and consequently must exercise good faith and integrity in handling partnership
affairs. Where the question has arisen, some courts have held that a limited
partner may institute legal action on his own behalf and on behalf of all other
similarly situated limited partners (a class action) to recover damages for a
breach of fiduciary duty by a general partner, or on behalf of the partnership
(a partnership derivative action) to recover damages from third parties.
Section 14-9-1001 of the Georgia Revised Uniform Limited Partnership Act also
allows a partner to maintain a partnership derivative action if general
partners with authority to do so have refused to bring the action or if an
effort to cause those general partners to bring the action is not likely to
succeed. Certain cases decided by federal courts have recognized the right of a
limited partner to bring such actions under the Securities and Exchange
Commission's Rule 10b-5 for recovery of damages resulting from a breach of
fiduciary duty by a general partner involving fraud, deception or manipulation
in connection with the limited partner's purchase or sale of partnership units.
The partnership agreement provides that the General Partners will be
indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partner (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that its conduct was negligent. In addition, the
partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited
partners will have a more limited right of action than they would have absent
such provisions. In addition, the Partnership may obtain, at its expense and
in such reasonable amounts and at such reasonable prices as the Corporate
General Partner shall determine, a general partner liability policy which would
insure the Corporate General Partner and its affiliates, officers and directors
against liabilities that 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.
-43-
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C> <C>
(a) 1. Financial Statements
Reference is made to the Index to Financial
Statements on page F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial
Statements on page F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits
on Page E-1.
(b) Reports on Form 8-K
None
</TABLE>
-44-
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 25, 1996.
ENSTAR INCOME PROGRAM IV-3, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
----------------------------------
Marc B. Nathanson
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signatures Title(*) Date
------------------------- ------------------------- --------------
/s/ Marc B. Nathanson Chairman of the Board, March 25, 1996
------------------------- Chief Executive Officer
Marc B. Nathanson and President (Principal
Executive Officer)
/s/ Michael K. Menerey Chief Financial Officer, March 25, 1996
------------------------- Secretary and Director
Michael K. Menerey (Principal Financial and
Accounting Officer)
/s/ Frank J. Intiso Chief Operating Officer, March 25, 1996
------------------------- Executive Vice President
Frank J. Intiso and Director
/s/ Stanley S. Itskowitch Executive Vice President, March 25, 1996
------------------------- General Counsel and
Stanley S. Itskowitch Director
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the registrant.
-45-
<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------------------------
Enstar Income Enstar Cable
Program of Macoupin
IV-3, L.P. County
------------- ------------
<S> <C> <C>
Reports of Independent Auditors F-2 F-14
Balance Sheets - December 31,
1994 and 1995 F-3 F-15
Financial Statement for each of
the three years in the period
ended December 31, 1995:
Statements of Income/Operations F-4 F-16
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-17
Statements of Cash Flows F-6 F-18
Summary of Accounting Policies F-7 F-19
Notes to Financial Statements F-9 F-21
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-3, L.P.
We have audited the accompanying balance sheets of Enstar Income Program
IV-3, L.P. as of December 31, 1994 and 1995, and the related statements of
income, partnership's capital (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The statements of income, partnership capital
(deficit), and cash flows of Enstar Income Program IV-3, L.P. for the year
ended December 31, 1993 were audited by other auditors whose report dated March
2, 1994, expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Enstar Income Program IV-3,
L.P. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996
F-2
<PAGE> 48
ENSTAR INCOME PROGRAM IV-3, L.P.
BALANCE SHEETS
--------------------
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1995
----------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 664,900 $ 942,400
Accounts Receivables, less allowance of $1,400
and $9,300 for possible losses 17,800 27,300
Prepaid expenses and other 11,900 22,200
Equity in net assets of joint venture 800,100 828,100
Property, plant and equipment, less accumulated
depreciation and amortization 1,648,000 1,539,700
Franchise cost, net of accumulated
amortization of $1,474,000 and $1,662,200 1,087,000 902,500
Deferred loan costs and other, net 45,900 31,600
---------- ----------
$4,275,600 $4,293,800
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 226,800 $ 503,600
Due to affiliates 180,600 247,600
Note payable 383,200 383,200
---------- ----------
TOTAL LIABILITIES 790,600 1,134,400
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (48,500) (51,700)
Limited partners 3,533,500 3,211,100
---------- ----------
TOTAL PARTNERSHIP CAPITAL 3,485,000 3,159,400
---------- ----------
$4,275,600 $4,293,800
========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-3
<PAGE> 49
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $2,222,100 $2,241,600 $2,311,800
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 727,000 810,500 804,700
General and administrative expenses 302,100 304,300 333,600
General Partner management fees
and reimbursed expenses 310,800 334,000 304,400
Depreciation and amortization 727,100 712,500 689,100
---------- ---------- ----------
2,067,000 2,161,300 2,131,800
---------- ---------- ----------
Operating income 155,100 80,300 180,000
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (78,400) (58,500) (61,800)
Interest income 20,400 9,600 32,000
---------- ---------- ----------
(58,000) (48,900) (29,800)
---------- ---------- ----------
Income before equity
in net income (loss) of joint venture 97,100 31,400 150,200
EQUITY IN NET INCOME (LOSS) OF JOINT
VENTURE (36,200) 11,900 28,000
---------- ---------- ----------
NET INCOME $ 60,900 $ 43,300 $ 178,200
========== ========== ==========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 1.51 $ 1.07 $ 4.42
========== ========== ==========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,900 39,900 39,900
========== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-4
<PAGE> 50
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1993 $(39,500) $4,427,900 $4,388,400
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 600 60,300 60,900
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1993 (43,900) 3,989,400 3,945,500
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 400 42,900 43,300
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1994 (48,500) 3,533,500 3,485,000
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 1,800 176,400 178,200
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 $(51,700) $3,211,100 $3,159,400
======== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-5
<PAGE> 51
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 60,900 $ 43,300 $ 178,200
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 727,100 712,500 689,100
Amortization of deferred loan costs - 10,900 10,900
Equity in net (income) loss of joint venture 36,200 (11,900) (28,000)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets 700 (3,900) (19,800)
Deferred loan costs (33,500) (5,600) -
Accounts payable and due to affiliates (13,400) 1,500 343,700
---------- --------- ----------
Net cash provided by
operating activities 778,000 746,800 1,174,100
---------- --------- ----------
Cash flows from investing activities:
Capital expenditures (227,900) (122,700) (373,700)
Increase in intangible assets (19,900) (47,600) (19,100)
Distributions from joint venture - 350,000 -
---------- --------- ----------
Net cash provided by (used
in) investing activities (247,800) 179,700 (392,800)
---------- --------- ----------
Cash flows from financing activities:
Distributions to partners (503,800) (503,800) (503,800)
Borrowings from note payable 883,200 - -
Repayment of debt (1,841,700) - -
---------- --------- ----------
Net cash used in financing
activities (1,462,300) (503,800) (503,800)
---------- --------- ----------
Net increase (decrease) in cash and
cash equivalents (932,100) 442,700 277,500
Cash and cash equivalents at beginning of year 1,174,300 242,200 664,900
---------- --------- ----------
Cash and cash equivalents at end of year $ 242,200 $ 664,900 $ 942,400
========== ========= ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-6
<PAGE> 52
ENSTAR INCOME PROGRAM IV-3, L.P.
SUMMARY OF ACCOUNTING POLICIES
--------------------
FORM OF PRESENTATION
Enstar Income Program IV-3, L.P., a Georgia limited partnership (the
"Partnership") operates cable television systems in rural areas of Illinois and
Kentucky. The Partnership pays no income taxes. All of the income, gains,
losses, deductions and credits of the Partnership are passed through to its
partners. Nominal taxes are assessed by certain state jurisdictions. The basis
in the Partnership's assets and liabilities differs for financial and tax
reporting purposes. At December 31, 1995, the tax basis of the Partnership's
net assets exceeds its book basis by $117,300.
The financial statements do not give effect to any assets that the
partners may have outside of their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership considers
all highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
INVESTMENT IN JOINT VENTURE
The Partnership's investment and share of the income or loss in the joint
venture is accounted for on the equity method of accounting.
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
Partnership periodically evaluates the amortization periods of these intangible
assets to determine whether events or circumstances warrant revised estimates
of useful lives. Costs relating to unsuccessful franchise applications are
charged to expense when it is determined that the efforts to obtain the
franchise will not be successful.
F-7
<PAGE> 53
ENSTAR INCOME PROGRAM IV-3, L.P.
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
-------------------
DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES
Deferred loan costs and other deferred charges include costs which are
amortized using the straight-line method over two to five years, and loan costs
which are capitalized and amortized to interest expense over the life of the
related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an on-going basis the recoverability of
intangible assets, and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to the undiscounted cash flow estimate. The Partnership also evaluates
the amortization periods of assets, including intangible assets, to determine
whether events or circumstances warrant revised estimates of useful lives.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are provided.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest are based on
the weighted average number of units outstanding during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE> 54
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
-------------------
NOTE 1 - PARTNERSHIP MATTERS
The Partnership was formed on November 4, 1985 to acquire, construct or
improve, develop and operate cable television systems in various locations in
the United States. The partnership agreement provides for Enstar Communications
Corporation (the "Corporate General Partner") and Robert T. Graff, Jr. to be
the general partners and for the admission of limited partners through the sale
of interests in the Partnership.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
The Partnership was formed with an initial capital contribution of $1,100
comprised of $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
1986, and the initial closing took place by November 1986. The Partnership
continued to raise capital until $10,000,000 (the maximum) was sold by January
1987.
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital
Payback"). The partnership agreement also provides that all partnership
profits, gains, operational losses, and credits (all as defined) be allocated
1% to the general partners and 99% to the limited partners until the limited
partners have been allocated net profits equal to the amount of cash flow
required for Capital Payback. After the limited partners have received cash
flow equal to their initial investments, the general partners will 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 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.
A portion of the Partnership's distributions to partners is funded from
distributions received from Enstar Cable of Macoupin County.
F-9
<PAGE> 55
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
--------------------
NOTE 2 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
those instruments.
Note Payable
The carrying amount approximates fair value due to the variable rate
nature of the note payable.
NOTE 3 - NOTE PAYABLE
During 1993, the Partnership entered into a $1,000,000 reducing revolving
line of credit agreement (the "Agreement") with a final maturity of June 30,
1997. The note, which bore interest at the lender's base rate (8.5% at December
31, 1995) plus 1.5%, was repaid on February 9, 1996.
NOTE 4 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and two affiliated partnerships (Enstar Income Program
IV-1, L.P. and Enstar Income Program IV-2, L.P.) each owns one third of Enstar
Cable of Macoupin County, a Georgia general partnership (the "Joint Venture").
The 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 Joint Venture acquired
certain cable television systems in Illinois from the Partnership's Corporate
General Partner. Each venturer shares equally in the profits and losses of the
Joint Venture. The Joint Venture incurred a loss of $108,600 in 1993 and
generated income of $35,700 and $84,000 for 1994 and 1995, respectively of
which $36,200, $11,900 and $28,000 was allocated to the Partnership for the
respective years. The operations of the Joint Venture are significant to the
Partnership and should be reviewed in conjunction with these financial
statements. Reference is made to the accompanying financial statements of the
Joint Venture on pages F-15 to F-23 of this Form 10-K.
F-10
<PAGE> 56
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
--------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Cable television systems $ 5,149,900 $ 5,470,400
Vehicles, furniture and
equipment, and leasehold
improvements 202,100 212,700
----------- -----------
5,352,000 5,683,100
Less accumulated depreciation
and amortization (3,704,000) (4,143,400)
----------- -----------
$ 1,648,000 $ 1,539,700
=========== ===========
</TABLE>
NOTE 6 - GENERAL PARTNERS AND AFFILIATES MATTERS
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. Management fee expense was $111,100, $112,100
and $115,600 in 1993, 1994 and 1995.
In addition to the monthly fee above, the Partnership reimburses the
Manager for direct expenses incurred on behalf of the Partnership and for the
Partnership's allocable share of operational costs associated with services
provided by the Manager. All cable television properties managed by the Manager
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 amount charged to the Partnership for these
services approximated $199,700, $221,900, and $188,800 in 1993, 1994 and 1995.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Partnership for these
costs based on an estimate of what the Partnership could negotiate for such
programming services on a stand-alone basis. The Partnership recorded
programming fee expense of $445,600, $498,900 and $530,500 in 1993, 1994 and
1995, respectively.
NOTE 7 -COMMITMENTS AND CONTINGENCIES
The Partnership leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2003.
F-11
<PAGE> 57
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
--------------------
NOTE 7 -COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum rental payments under noncancelable operating leases that
have remaining terms in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C>
1996 9,500
1997 9,500
1998 9,500
1999 9,500
2000 9,500
Thereafter 45,800
-------
$93,300
=======
</TABLE>
Rentals, other than pole rentals, charged to operations amounted to
$15,000, $15,500 and $16,700 in 1993, 1994 and 1995. Pole rentals were $25,900,
$27,400 and $32,200 in 1993, 1994 and 1995, respectively.
Other commitments include approximately $978,100 at December 31, 1995 to
rebuild certain existing cable systems. The Partnership expects to fund these
commitments in 1996 with its available cash combined with cash from operations.
The Partnership is subject to regulation by various federal, state and
local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other
things, federal and local regulation of rates charged for basic cable service,
cable programming services and equipment and installation services.
Regulations issued in 1993 and significantly amended in 1994 by the Federal
Communications Commission (the "FCC") have resulted in changes in the rates
charged for the Partnership's cable services. The Partnership believes that
compliance with the 1992 Cable Act has had a significant negative impact on its
operations and cash flow. It also believes that any potential future
liabilities for refund claims or other related actions would not be material.
The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law
on February 8, 1996. This statute contains a significant overhaul of the
federal regulatory structure. As it pertains to cable television, the 1996
Telecom Act, among other things, (i) ends the regulation of certain nonbasic
programming services in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. The FCC will
have to conduct a number of rulemaking proceedings in order to implement many
of the provisions of the 1996 Telecom Act.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
F-12
<PAGE> 58
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
--------------------
NOTE 7 -COMMITMENTS AND CONTINGENCIES (Continued)
A recent federal court decision could if upheld and if adopted by other
federal courts, make the renewal of franchises more problematic in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision
has been appealed. The Partnership was not a party to this litigation.
NOTE 8 - EMPLOYEE BENEFITS PLANS
The Partnership has a cash or deferred profit sharing plan (the "Profit
Sharing Plan") covering substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. The Partnership's
contribution to the Profit Sharing Plan, as determined by management, is
discretionary but may not exceed 15% of the annual aggregate compensation (as
defined) paid to all participating employees. There were no contributions
charged against operations of the Partnership for the Profit Sharing Plan in
1993, 1994 or 1995.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $78,500, $58,400 and $61,700 in 1993,
1994 and 1995, respectively.
F-13
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County
We have audited the accompanying balance sheets of Enstar Cable of
Macoupin County as of December 31, 1994 and 1995, and the related statements of
operations, venturers' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The statements of operations, venturers' capital, and cash flows
of Enstar Cable of Macoupin County for the year ended December 31, 1993 were
audited by other auditors whose report dated March 2, 1994, expressed an
unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Enstar Cable of Macoupin
County at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996
F-14
<PAGE> 60
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
--------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 611,900 $1,071,800
Accounts receivable, less allowance of $3,700
and $4,700, for possible losses 7,000 28,700
Prepaid expenses and other 9,900 16,800
Property, plant and equipment, less
accumulated depreciation and
amortization 973,100 1,021,500
Franchise cost, net of accumulated
amortization of $2,478,900
and $2,829,600 1,045,700 701,300
---------- ----------
$2,647,600 $2,840,100
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
LIABILITIES:
Accounts payable $ 112,200 $ 287,300
Due to affiliates 134,800 68,200
---------- ----------
TOTAL LIABILITIES 247,000 355,500
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 800,200 828,200
Enstar Income Program IV-2, L.P. 800,200 828,200
Enstar Income Program IV-3, L.P. 800,200 828,200
---------- ----------
TOTAL VENTURERS' CAPITAL 2,400,600 2,484,600
---------- ----------
$2,647,600 $2,840,100
========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-15
<PAGE> 61
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $1,572,900 $1,590,800 $1,646,000
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 501,600 484,100 500,300
General and administrative expenses 151,100 161,600 232,300
General Partner management fees
and reimbursed expenses 210,800 231,200 226,600
Depreciation and amortization 826,500 703,900 634,800
---------- ---------- ----------
1,690,000 1,580,800 1,594,000
---------- ---------- ----------
Operating income (loss) (117,100) 10,000 52,000
INTEREST INCOME, net 8,500 25,700 32,000
---------- ---------- ----------
NET INCOME (LOSS) $ (108,600) $ 35,700 $ 84,000
========== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-16
<PAGE> 62
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
--------------------
<TABLE>
<CAPTION>
Enstar Enstar Enstar
Income Income Income
Program Program Program
IV-1, L.P. IV-2, L.P. IV-3, L.P. Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993 $1,174,500 $1,174,500 $1,174,500 $ 3,523,500
Net loss for year (36,200) (36,200) (36,200) (108,600)
---------- ---------- ---------- -----------
BALANCE, December 31, 1993 1,138,300 1,138,300 1,138,300 3,414,900
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 11,900 11,900 11,900 35,700
---------- ---------- ---------- -----------
BALANCE, December 31, 1994 800,200 800,200 800,200 2,400,600
Net income for year 28,000 28,000 28,000 84,000
---------- ---------- ---------- -----------
BALANCE, December 31, 1995 $ 828,200 $ 828,200 $ 828,200 $ 2,484,600
========== ========== ========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-17
<PAGE> 63
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (108,600) $ 35,700 $ 84,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 826,500 703,900 634,800
Increase (decrease) from changes in:
Accounts receivable and prepaid expenses (9,500) 11,500 (27,400)
Accounts payable and due to
affiliates 25,700 (800) 108,500
---------- ----------- ----------
Net cash provided by
operating activities 734,100 750,300 799,900
---------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (115,500) (126,900) (325,500)
Increase in intangible assets (8,000) (7,800) (14,500)
---------- ----------- ----------
Net cash used in investing
activities (123,500) (134,700) (340,000)
---------- ----------- ----------
Cash flows from financing activities:
Distributions to venturers - (1,050,000) -
---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 610,600 (434,400) 459,900
Cash and cash equivalents at beginning of year 435,700 1,046,300 611,900
---------- ----------- ----------
Cash and cash equivalents at end of year $1,046,300 $ 611,900 $1,071,800
========== =========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-18
<PAGE> 64
ENSTAR CABLE OF MACOUPIN COUNTY
SUMMARY OF ACCOUNTING POLICIES
--------------------
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership (the
"Venture") operates cable television systems in rural areas of Illinois. As a
Partnership, Enstar Cable of Macoupin County pays no income taxes. All of the
income, gains, losses, deductions and credits of the Venture are passed through
to its Joint Venturers. The basis in the Venture's assets and liabilities
differs for financial and tax reporting purposes. At December 31, 1995 the tax
basis of the Venture's net assets exceeds its book basis by $163,900.
The financial statements do not give effect to any assets that the
Venturers may have outside of their interest in the Venture, nor to any
obligation including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the short maturity of those
instruments.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs associated
with installations in homes not previously served by cable are capitalized as
part of the distribution system, and reconnects are expensed as incurred. For
financial reporting, depreciation and amortization is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
</TABLE>
FRANCHISE COST
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises.
In addition, franchise cost includes capitalized costs incurred in obtaining
new franchises. These costs (primarily legal fees) are direct and incremental
to the acquisition of the franchise and are amortized using the straight-line
method over the lives of the franchises, ranging up to 15 years. The Venture
periodically evaluates the amortization periods of these intangible assets to
determine whether events or circumstances warrant revised estimates of useful
lives. Costs relating to unsuccessful franchise applications are charged to
expense when it is determined that the efforts to obtain the franchise will not
be successful.
F-19
<PAGE> 65
ENSTAR CABLE OF MACOUPIN COUNTY
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
--------------------
RECOVERABILITY OF ASSETS
The Venture assesses on an on-going basis the recoverability of intangible
assets, including franchise costs, and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimate were less than net book value, net book
value would then be reduced to the undiscounted cash flow estimate. The
Venture also evaluates the amortization periods of assets, including franchise
costs and other intangible assets, to determine whether events or circumstances
warrant revised estimates of useful lives.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Venture will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are provided.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-20
<PAGE> 66
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
--------------------
NOTE 1 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture agreement
effective December 30, 1987 between Enstar Income Program IV-1, L.P., Enstar
Income Program IV-2, L.P., and Enstar Income Program IV-3, L.P. (the
"Venturers"), three limited partnerships sponsored by Enstar Communications
Corporation as their corporate general partner. The Venture was formed to pool
the resources of the three limited partnerships to acquire, own, operate, and
dispose of certain cable television systems. In 1988, the Venture acquired two
cable television systems in Illinois.
Under the terms of the agreement, the Venturers share equally in profits,
losses, allocations, and assets. Capital contributions, as required, are also
made equally.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Enstar
Communications Corporation.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Venture has a management and service agreement (the "Agreement") with
a wholly owned subsidiary of the Corporate General Partner (the "Manager") for
a monthly management fee of 4% of gross receipts, as defined, from the
operations of the Venture. Prior to 1994, the management fee was 5%.
Management fees approximated $78,600, $63,600 and $65,800 in 1993, 1994 and
1995. In addition, beginning in 1994, the Venture is required to distribute 1%
of its gross revenues to the Corporate General Partner in respect to its
interest as the Corporate General Partner. Such expenses were $15,900 and
$16,500 in 1994 and 1995, respectively.
In addition to the monthly management fee, the Venture reimburses the
Manager for direct expenses incurred on behalf of the Venture and for the
Venture's allocable share of operational costs associated with services
provided by the Manager. All cable television properties managed by the
affiliate and its subsidiaries are charged a proportionate share of these
expenses. Corporate office allocations and district office expenses are
charged to the properties served based primarily on the respective percentage
of basic customers or homes passed (dwelling units within a system) within the
designated service areas. The total amounts charged to the Venture for these
services approximated $132,200, $151,700 and $144,300 during 1993, 1994 and
1995.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Venture for these costs
based on an estimate of what the Venture could negotiate for such programming
services on a stand-alone basis. The Venture recorded programming fee expense
of $331,400, $346,400 and $364,800 in 1993, 1994 and 1995, respectively.
F-21
<PAGE> 67
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(Continued)
--------------------
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995
------------ -----------
<S> <C> <C>
Cable television systems $ 2,568,800 $ 2,872,400
Vehicles, furniture and
equipment, and leasehold
improvements 167,900 172,900
----------- -----------
2,736,700 3,045,300
Less accumulated depreciation
and amortization (1,763,600) (2,023,800)
----------- -----------
$ 973,100 $ 1,021,500
=========== ===========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the systems
under operating leases expiring in 1999.
Future minimum rental payments under noncancelable operating leases that
have remaining terms in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C>
1996 5,900
1997 5,900
1998 5,900
1999 2,800
-------
$20,500
=======
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$7,300, $7,200 and $8,200 in 1993, 1994 and 1995, while pole rental expense
approximated $10,800, $12,100 and $16,300 in 1993, 1994 and 1995, respectively.
The Venture has guaranteed the debt of Enstar Income Program IV-1 and
Enstar Income Program IV-2.
Other commitments include approximately $905,300 at December 31, 1995 to
rebuild certain existing cable systems.
F-22
<PAGE> 68
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
--------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
The Venture is subject to regulation by various federal, state and local
government entities. The Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") provides for, among other things, federal
and local regulation of rates charged for basic cable service, cable
programming services and equipment and installation services. Regulations
issued in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Venture's cable services. The Venture believes that compliance with the 1992
Cable Act has had a significant negative impact on its operations and cash
flow. It also believes that any potential future liabilities for refund claims
or other related actions would not be material. The Telecommunications Act of
1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. This
statute contains a significant overhaul of the federal regulatory structure. As
it pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain nonbasic programming services in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC will have to conduct a number of
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
A recent federal court decision could if upheld and if adopted by other
federal courts, make the renewal of franchises more problematic in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision
has been appealed. The Venture was not a party to this litigation.
NOTE 6 - EMPLOYEE BENEFITS PLANS
The Venture has a cash or deferred profit sharing plan (the "Profit
Sharing Plan") covering substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. The Venturer's
contribution to the Profit Sharing Plan, as determined by management, is
discretionary but may not exceed 15% of the annual aggregate compensation (as
defined) paid to all participating employees. There were no contributions
charged against operations of the Venture for the Profit Sharing Plan in 1993,
1994 or 1995.
F-23
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3 Second Amended and Restated Agreement of Limited Partnership of Enstar
Income Program IV-3, L.P., as of August 1, 1988(3)
10.1 Management Agreement between Enstar Income Program IV-3 and Enstar
Cable Corporation(1)
10.2 Management Agreement between Enstar Cable of Macoupin County and Enstar
Cable Corporation(2)
10.3 Revolving Credit and Term Note dated December 31, 1987 between Enstar
Income Program IV-3 and Rhode Island Hospital Trust National Bank(2)
10.4 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Fairfield, IL(2)
10.5 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Shelbyville, IL(2)
10.6 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Fulton, KY(2)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of South Fulton, Tennessee(2)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Carlinville, IL(2)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Virden, IL(2)
10.10 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Thayer, IL(2)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Auburn, IL(2)
10.12 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Girard, IL(2)
10.13 Service agreement between Enstar Communications Corporation, Enstar
Cable Corporation and Falcon Holding Group, Inc. dated as of October 1,
1988(4)
10.14 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated
December 31, 1987 between Enstar Income Program IV-3 and Rhode Island
Hospital Trust National Bank, dated August 3, 1990.(5)
10.15 Resolution No. 92-16 of the City Council of Shelbyville, Illinois
Extending the Cable Television Franchise of Enstar Income Program IV-3.
Passed and adopted January 4, 1993.(6)
10.16 Loan Agreement between Enstar Income Program IV-3 and
Kansallis-Osake-Pankki dated December 9, 1993.(8)
10.17 Amended and Restated Partnership Agreement of Enstar Cable of Macoupin
County, as of October 1, 1993.(9).
</TABLE>
E-1
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.19 Franchise Agreement and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Shelbyville, Illinois.(9)
16.1 Report of change in accountants. (7)
21.1 Subsidiaries: Enstar Cable of Macoupin County
</TABLE>
FOOTNOTES REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 for the fiscal year ended December
31, 1992.
(7) Incorporated by reference to the exhibit to the Registrant's Current
Report on Form 8-K, File No. 0-15686 dated October 17, 1995.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15686 for the fiscal year ended December
31, 1993.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-15686 for the quarter ended March 31,
1995.
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1995, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 942,400
<SECURITIES> 0
<RECEIVABLES> 36,600
<ALLOWANCES> 9,300
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,683,100
<DEPRECIATION> 4,143,400
<TOTAL-ASSETS> 4,293,800
<CURRENT-LIABILITIES> 751,200
<BONDS> 383,200
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,293,800
<SALES> 0
<TOTAL-REVENUES> 2,311,800
<CGS> 0
<TOTAL-COSTS> 2,131,800
<OTHER-EXPENSES> (32,000)
<LOSS-PROVISION> 27,500
<INTEREST-EXPENSE> 61,800
<INCOME-PRETAX> 178,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 178,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,200
<EPS-PRIMARY> 4.42
<EPS-DILUTED> 0
</TABLE>
