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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to__________
Commission File Number 0-15686
ENSTAR INCOME PROGRAM IV-3, L.P.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Name of each exchange
Title of each Class on which registered
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant'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.
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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"). The
general partner of Falcon Cablevision is Falcon Holding Group, L.P. ("FHGLP"),
which provides certain management services to the Partnership. The general
partner of FHGLP is Falcon Holding Group, Inc., a California corporation
("FHGI"). See Item 13., "Certain Relationships and Related Transactions." The
General Partner, FHGLP and affiliated companies are responsible for the day to
day management of the Partnership and its operations. See "Employees" below.
A cable television system receives television, radio and data signals
at the system's "headend" site by means of over-the-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and
other information services for distribution through the system. Cable
television systems generally are constructed and operated pursuant to
non-exclusive franchises or similar licenses granted by local governmental
authorities for a specified term of years.
The 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 and WGN), various
satellite-delivered, non-broadcast channels (such as Cable News Network
("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN, Turner
Network Television ("TNT") and The Disney Channel), programming originated
locally by the cable television system (such as public, educational and
governmental access programs) and informational displays featuring news,
weather, stock market and financial reports and public service announcements.
A number of the satellite services are also offered in certain packages. For
an extra monthly charge, the systems also offer "premium" television services
to their customers. These services (such as Home Box Office ("HBO"), Showtime,
The Disney Channel and selected regional sports networks) are satellite
channels that consist principally of feature films, live sporting events,
concerts and other special entertainment features, usually presented without
commercial interruption. See "Legislation and Regulation."
A customer generally pays an initial installation charge and fixed
monthly fees for basic, expanded basic, other tiers of satellite services and
premium programming services. Such monthly service fees constitute the primary
source of revenues for the systems. In addition to customer revenues, the
systems receive revenue from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. The systems also offer
to their customers home shopping services, which pay the systems a share of
revenues from sales of products in the systems' service areas, in addition to
paying the systems a separate fee in return for carrying their shopping
service. Certain other new channels have also recently offered the cable
systems managed by FHGLP, including those of the Partnership, fees in return
for carrying their service. Due to a lack of channel capacity available for
adding new channels, the Partnership's management cannot predict the impact of
such potential payments on the Partnership's business. See Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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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 27 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices
of the Partnership, the Corporate General Partner and FHGLP are located at
10900 Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and their
telephone number is (310) 824-9990. See Item 10., "Directors and Executive
Officers of the Registrant."
BUSINESS STRATEGY
Historically, the 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 given a similar technical profile, 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 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."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") by the Federal Communications Commission (the "FCC") has had a negative
impact on the 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"). See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Clustering
The Partnership has sought to acquire cable television operations in
communities that are proximate to other systems in order to achieve the
economies of scale and operating efficiencies associated with regional
"clusters." The Partnership believes clustering can reduce marketing and
personnel costs and can also reduce capital expenditures in cases where cable
service can be delivered through a central headend reception facility.
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Capital Expenditures
As noted in "Technological Developments," a number of the
Partnership's systems and all of the Joint Venture's systems have no available
channel capacity with which to add new channels or to further expand their use
of pay-per-view offerings to customers. As a result, significant amounts of
capital for future upgrades will be required in order to increase available
channel capacity, improve quality of service and facilitate the expansion of
new services such as advertising, pay-per-view, new unregulated tiers of
satellite-delivered services and home shopping, as well as possible new
services such as video games, video-on-demand and other interactive
applications, so that the systems remain competitive within the industry. In
addition to these potential revenue opportunities, plant upgrades will enhance
picture quality and system reliability, reduce operating costs and improve
overall customer satisfaction.
The Partnership's systems have an average channel capacity of 60 and
39 with 70% and 100% of the channel capacity utilized at December 31, 1996.
The Joint Venture's systems had an average channel capacity of 38 which was
fully utilized at December 31, 1996.
The Partnership's management has selected a technical standard that
incorporates a 750 MHz fiber to the feeder architecture for the majority of all
its systems that are to be rebuilt. A system built to a 750 MHz standard can
provide approximately 95 channels of analog service. Such a system will also
permit the introduction of high speed data transmission and telephony services
in the future after incurring incremental capital expenditures related to these
services.
The Partnership is required to rebuild one of its Illinois cable
systems at an estimated total cost of $1,038,000 as a condition of its
franchise agreement. Construction began in the second quarter of 1996 and was
completed in March 1997. Rebuild capital expenditures in 1996 were
approximately $684,000 and the Partnership budgeted additional expenditures of
$354,000 in 1997 to complete the project. The Partnership is also rebuilding
portions of its cable systems in surrounding communities at an estimated total
additional cost of $191,000, which includes budgeted expenditures of
approximately $65,000 in 1997. Other capital expenditures budgeted for 1997
include approximately $285,200 for the upgrade of other assets. Similarly, the
Joint Venture is required to rebuild one of its Illinois cable systems as a
condition of its franchise agreement. Construction began in July 1996 and is
expected to be completed by June 30, 1997. Capital expenditures related to the
rebuild approximated $226,000 in 1996 with additional construction costs of
$153,000 projected for 1997. The Joint Venture is also rebuilding portions of
its plant in surrounding communities at an estimated total additional cost of
approximately $770,000, which includes expenditures of approximately $310,000
in 1997 to complete the rebuild. The Joint Venture's capital expenditures
budget for 1997 also includes $217,700 for the upgrade of other assets.
As discussed in prior reports, the Partnership and Joint Venture
postponed a number of rebuild and upgrade projects that were planned for 1994
and 1995 because of the uncertainty related to implementation of the 1992 Cable
Act and the negative impact thereof on the Partnership's business and access to
capital. As a result, the Partnership's and Joint Venture's systems will be
significantly less technically advanced than had been expected prior to the
implementation of reregulation. The Partnership believes that the delays in
upgrading its and the Joint Venture's systems will, under present market
conditions, most likely have an adverse effect on the value of those systems
compared to systems that have been rebuilt to a higher technical standard. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Decentralized Management
The Corporate General Partner manages the Partnership's and Joint
Venture's systems on a decentralized basis. The Corporate General Partner
believes that its decentralized management structure, by enhancing management
presence at the system level, increases its sensitivity to the needs of its
customers, enhances the effectiveness of its customer service efforts,
eliminates the need for maintaining a large centralized corporate staff and
facilitates the maintenance of good relations with local governmental
authorities.
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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 programming packages in its
systems. These packages combined services at a lower rate than the aggregate
rates for such services purchased individually on an "a la carte" basis. The
new rules require that charges for cable-related equipment (e.g., converter
boxes and remote control devices) and installation services be unbundled from
the provision of cable service and based upon actual costs plus a reasonable
profit. On November 10, 1994, the FCC announced the adoption of further
significant amendments to its rules. One amendment allows cable operators to
create new tiers of program services which the FCC has chosen to exclude from
rate regulation, so long as the programming is new to the system. However, in
applying this new policy to packages such as those already offered by the
Partnership and numerous other cable operators, the FCC decided that where only
a few services were moved from regulated tiers to a non-premium "new product
tier" package, the package will be treated as if it were a tier of new program
services as discussed above. Substantially all of the new product tier
packages offered by the Partnership have received this desirable treatment. In
addition, the FCC decided that discounted packages of non-premium programming
services will be subject to rate regulation in the future. These amendments to
the FCC's rules have allowed the 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 group of regulated services, additional
unregulated packages of satellite-delivered services and premium services on
either an a la carte or a discounted packaged basis. See "Legislation and
Regulation."
The Partnership has employed a variety of targeted marketing
techniques to attract new customers by focusing on delivering value, choice,
convenience and quality. The Partnership employs direct mail, radio and local
newspaper advertising, telemarketing and door-to-door selling utilizing
demographic "cluster codes" to target specific messages to target audiences. In
certain systems, the Partnership offers discounts to customers who purchase
premium services on a limited trial basis in order to encourage a higher level
of service subscription. The Partnership also has a coordinated strategy for
retaining customers that includes televised retention advertising 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 ongoing
basis, and a portion of the regional managers' compensation is tied to
achieving customer service targets. The Partnership conducts an extensive
customer survey on a periodic 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 Customer Service Initiative
which emphasizes an on-time guarantee program for service and installation
appointments. The Partnership's corporate executives and regional managers
lead the Partnership's involvement in a number of programs benefiting the
communities the Partnership serves, including, among others, Cable in the
Classroom, Drug Awareness, Holiday Toy Drive and the Cystic Fibrosis
Foundation. Cable in the Classroom is the cable television industry's public
service initiative to enrich education through the use of commercial-free cable
programming. In addition, a monthly publication, Cable in the Classroom
magazine provides educational program listings by curriculum area, as well as
feature articles on how teachers across the country use the programs.
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DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's and the Joint Venture's cable systems as of December 31, 1996.
<TABLE>
<CAPTION>
Average
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
System Passed(1) Service Penetration(2) Units(3) Penetration(4) Service(5) Subscribers(6)
------ ------- -------- ------------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Enstar Income
Program IV-3 L.P.:
Shelbyville, IL 4,504 3,848 85.4% 1,179 30.6% $ 47.00 5,294
Fulton, KY 4,067 2,324 57.1% 816 35.1% $ 35.07 3,286
----- ----- ----- -----
Total 8,571 6,172 72.0% 1,995 32.3% $ 41.49 8,580
===== ===== ===== =====
Enstar Cable of
Macoupin County:
Macoupin, IL 6,483 4,463 68.8% 1,776 39.8% $ 35.28 4,889
</TABLE>
__________________________________
(1) Homes passed refers to estimates by the Partnership and Joint
Venture of the approximate number of dwelling units in a particular community
that can be connected to the distribution system without any further extension
of principal transmission lines. Such estimates are based upon a variety of
sources, including billing records, house counts, city directories and other
local sources.
(2) Homes subscribing to cable service as a percentage of homes passed
by cable.
(3) Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee. Prior to July 1, 1996, The Disney Channel was
offered as a premium service. Effective July 1, 1996, it was offered as part of
an unregulated tier of services. As a result, the number of reported premium
service units was artificially reduced by this service offering change. The
number of Disney Channel premium service units at June 30, 1996 was 436.
(4) Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
(5) Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1996.
(6) The Partnership and Joint Venture report subscribers for the
systems on an equivalent subscriber basis and, unless otherwise indicated, the
term "SUBSCRIBERS" means equivalent subscribers, calculated by dividing
aggregate basic service revenues by the average basic service rate within an
operating entity, adjusted to reflect the impact of regulation. Basic service
revenues include charges for basic programming, bulk and commercial accounts and
certain specialized packaged programming services, including the appropriate
components of new product tier revenue, and excluding premium television and
non-subscription services. Consistent with past practices, Subscribers is an
analytically derived number which is reported in order to provide a basis of
comparison to previously reported data. The computation of Subscribers has been
impacted by changes in service offerings made in response to the 1992 Cable Act.
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CUSTOMER RATES AND SERVICES
The 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, TNT and The Disney Channel) and certain information and public
access channels. For an extra monthly charge, the systems provide certain
premium television services, such as HBO, Showtime and regional sports
networks. The Partnership also offers other cable television services to its
customers, including pay-per-view programming. 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 definition of effective competition, provided for in the
1992 Cable Act, nearly all cable television systems in the United States have
become subject to local rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to include situations in which
a local telephone company, or anyone using its facilities, offers comparable
video service by any means except direct broadcast satellite ("DBS"). In
addition, the 1992 Cable Act eliminated the 5% annual basic rate increases
previously allowed by the 1984 Cable Act without local approval; allows the FCC
to review rates for non-basic service tiers other than premium services in
response to complaints filed by franchising authorities and/or cable customers;
prohibits cable television systems from requiring customers to purchase service
tiers above basic service in order to purchase premium services if the system
is technically capable of doing so; and adopted regulations to establish, on
the basis of actual costs, the price for installation of cable television
service, remote controls, converter boxes, and additional outlets. The FCC
implemented these rate regulation provisions on September 1, 1993, affecting
all of the Partnership's systems not deemed to be subject to effective
competition under the FCC's definition. The FCC substantially amended its rate
regulation rules on February 22, 1994 and again on November 10, 1994. The FCC
is in the process of conducting a number of additional rulemaking proceedings
in order to implement many of the provisions of the 1996 Telecom Act. See
"Legislation and Regulation."
At December 31, 1996, the Partnership's and Joint Venture's monthly
rates for basic cable service for residential customers, excluding special
senior citizen discount rates, ranged from $19.49 to $24.99 and premium service
rates ranged from $8.45 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. Prior to
September 1, 1993, the Partnership generally charged monthly fees for
additional outlets, converters, program guides and descrambling and remote
control tuning devices. As described above, these charges have either been
eliminated or altered by the implementation of rate regulation. Substantially
all the Partnership's customers received a decrease in their monthly charges in
July 1994 upon implementation of the FCC's amended rules. Commercial
customers, such as hotels, motels and hospitals, are charged a negotiated,
non-recurring fee for installation of service and monthly fees based upon a
standard discounting procedure. Most multi-unit dwellings are offered a
negotiated bulk rate in exchange for single-point billing and basic service to
all units. These rates are also subject to regulation.
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 7, 1997,
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the Partnership had five employees, the cost of which is charged directly to
the Partnership. Personnel required to operate the Joint Venture's business
are employed by the Corporate General Partner, its subsidiary corporation and
FHGLP. The employment costs incurred by the Corporate General Partner, its
subsidiary corporation and FHGLP are allocated and charged to the Partnership
and the Joint Venture for reimbursement pursuant to the partnership agreement
and management agreement. Other personnel required to operate the Partnership's
business are employed by affiliates of the Corporate General Partner. The cost
of such employment is allocated and charged to the Partnership. 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's systems have an
average channel capacity of 60 in systems that serve 38% of its customers and
an average channel capacity of 39 in systems that serve 62% of the customers
and, on average, utilize 70% and 100% of their channel capacity. The Joint
Venture's systems have an average channel capacity of 38 in systems that serve
substantially all of the Joint Venture's customers and utilize 100% of their
channel capacity. The Partnership believes that system upgrades would enable
it and the Joint Venture 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 and Joint Venture's capital expenditure plans is, however,
dependent in part on the availability of adequate capital on terms satisfactory
to the Partnership, of which there can be no assurance. See "Business Strategy
- - Capital Expenditures," "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The use of fiber optic cable as an alternative to coaxial cable is
playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels and, accordingly, its
utilization is essential to the enhancement of a cable television system's
technical capabilities. The Partnership's current policy is to utilize fiber
optic technology in substantially all rebuild projects which it undertakes. The
benefits of fiber optic technology over traditional coaxial cable distribution
plant include lower per mile rebuild costs due to a reduction in the number of
required amplifiers, the elimination of headends, lower ongoing maintenance and
power costs and improved picture quality and reliability.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the area
of digital compression, a technology which is expected to enable cable
operators to increase the channel capacity of cable television systems by
permitting a significantly increased number of video signals to fit in a cable
television system's existing bandwidth. The Partnership believes that the
utilization of digital compression technology in the future could enable its
systems to increase channel capacity in certain systems in a manner that could
be more cost efficient than rebuilding such systems with higher capacity
distribution plant. The use of digital compression in its systems also could
expand the number and types of services these systems offer and enhance the
development of current and future revenue sources. Equipment vendors are
beginning to market products to provide this technology, but the Partnership's
management has no plans to install it at this time based on the current
technological profile of the Partnership's and Joint Venture's systems and
management's present understanding of the costs as compared to the benefits of
the digital equipment currently available. This issue is under frequent
management review.
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PROGRAMMING
The Partnership and the Joint Venture purchase basic and premium
programming for their systems from Falcon Cablevision. In turn, Falcon
Cablevision charges the Partnership and Joint Venture for these costs based on
an estimate of what the Corporate General Partner could negotiate for such
services for the 15 partnerships managed by the Corporate General Partner as a
group (approximately 94,300 homes subscribing to cable service at December 31,
1996), which is generally based on a fixed fee per customer or a percentage of
the gross receipts for the particular service. Certain other new channels have
also recently offered Cablevision and the Partnership's and Joint Venture's
systems fees in return for carrying their service. Due to a lack of channel
capacity available for adding new channels, the Partnership's management cannot
predict the impact of such potential payments on its business. Falcon
Cablevision's programming contracts are generally for a fixed period of time
and are subject to negotiated renewal. Falcon Cablevision does not have
long-term programming contracts for the supply of a substantial amount of its
programming. Accordingly, no assurance can be given that its, and
correspondingly the Partnership's and Joint Venture'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 and Joint Venture'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 carry
channels under retransmission carriage agreements entered into with certain
programming sources, increased costs to produce or purchase cable programming
generally, inflationary increases and other factors. The 1996 retransmission
carriage agreement negotiations were completed with essentially no change to
the previous agreements. Under the FCC rate regulations, increases in
programming costs for regulated cable services occurring after the earlier of
March 1, 1995, or the date a system's basic cable service became regulated, may
be passed through to customers. See "Legislation and Regulation - 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, 1996, the Partnership 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 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, 1996.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
-------------------- ----------- ------------- --------------
<S> <C> <C> <C>
Prior to 1998 0 0 0.0%
1998 - 2002 4 4,223 68.4%
2003 and after 3 1,704 27.6%
- ----- -----
Total 7 5,927 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 245 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, 1996, the Joint Venture held seven franchises.
These franchises, all of which are non-exclusive, provide for the payment of
fees to the issuing authority. Annual franchise fees imposed on the Joint
Venture's systems range up to 5% of the gross revenues generated by a system.
The 1984 Cable Act prohibits franchising authorities from imposing franchise
fees in excess of 5% of gross revenues and also permits the cable system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances.
The following table groups the franchises of the Joint Venture's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1996.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
-------------------- ---------- -------------- -------------
<S> <C> <C> <C>
Prior to 1998 3 2,351 52.7%
1998-2002 1 931 20.9%
2003 and after 3 1,181 26.4%
- ----- -------
Total 7 4,463 100.0%
= ===== =======
</TABLE>
In certain instances, where a single franchise comprises a large
percentage of the customers in an operating region, the loss of such franchise
could decrease the economies of scale achieved by the Joint Venture's
clustering strategy. The Joint Venture believes that it has satisfactory
relationships with its franchising communities. The Joint Venture has never
had a franchise revoked for any of its systems.
-10-
<PAGE> 11
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over-the-air television broadcast signals which
a viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
videodisk players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home Viewer Copyright Act of 1988, which became
effective January 1, 1989 for an initial six-year period. This Act establishes
a statutory compulsory license for certain transmissions made by satellite
owners to home satellite dishes, for which carriers are required to pay a
royalty fee to the Copyright Office. This Act has been extended by Congress
until December 31, 1999. The 1992 Cable Act enhances the right of cable
competitors to purchase nonbroadcast satellite-delivered programming. See
"Legislation and Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in
the same orbital position. Video compression technology may also be used by
cable operators in the future to similarly increase their channel capacity.
DBS service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna, and it is more
accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. DBS service is being heavily marketed on a nationwide basis by
several service providers.
Multichannel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS
-11-
<PAGE> 12
systems are less capital intensive, are not required to obtain local franchises
or to pay franchise fees, and are subject to fewer regulatory requirements than
cable television systems. To date, the ability of these so-called "wireless"
cable services to compete with cable television systems has been limited by
channel capacity and the need for unobstructed line-of-sight over-the-air
transmission. Although relatively few MMDS systems in the United States are
currently in operation or under construction, virtually all markets have been
licensed or tentatively licensed. The FCC has taken a series of actions
intended to facilitate the development of MMDS and other wireless cable systems
as alternative means of distributing video programming, including reallocating
certain frequencies to these services and expanding the permissible use and
eligibility requirements for certain channels reserved for educational
purposes. The FCC's actions enable a single entity to develop an MMDS system
with a potential of up to 35 channels that could compete effectively with cable
television. The use of digital compression technology may enable MMDS systems
to deliver even more channels. MMDS systems qualify for the statutory
compulsory copyright license for the retransmission of television and radio
broadcast stations. Several of the Regional Bell Operating Companies have
begun to enter the MMDS business as a way of breaking into video programming
delivery.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners' associations
which preclude franchised cable television operators from serving residents of
such private complexes. However, the 1984 Cable Act gives franchised cable
operators the right to use existing compatible easements within their franchise
areas upon nondiscriminatory terms and conditions. Accordingly, where there
are preexisting compatible easements, cable operators may not be unfairly
denied access or discriminated against with respect to the terms and conditions
of access to those easements. There have been conflicting judicial decisions
interpreting the scope of the access right granted by the 1984 Cable Act,
particularly with respect to easements located entirely on private property.
Further, while a franchised cable television system typically is obligated to
extend service to all areas of a community regardless of population density or
economic risk, a SMATV system may confine its operation to small areas that are
easy to serve and more likely to be profitable. Under the 1996 Telecom Act,
SMATV systems can interconnect non-commonly owned buildings without having to
comply with local, state and federal regulatory requirements that are imposed
upon cable systems providing similar services, as long as they do not use
public rights-of-way. In some cases, SMATV operators may be able to charge a
lower price than could a cable system providing comparable services and the
FCC's regulations implementing the 1992 Cable Act limit a cable operator's
ability to reduce its rates to meet this competition. Furthermore, the U.S.
Copyright Office has tentatively concluded that SMATV systems are "cable
systems" for purposes of qualifying for the compulsory copyright license
established for cable systems by federal law.
The FCC has initiated a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC also has a pending rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multichannel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on
the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems"
without obtaining a local cable franchise, although
-12-
<PAGE> 13
telephone companies operating such systems can be required to make payments to
local governmental bodies in lieu of cable franchise fees. Up to two-thirds of
the channel capacity on an "open video system" must be available to programmers
unaffiliated with the local telephone company. The open video system concept
replaces the FCC's video dialtone rules. The 1996 Telecom Act also includes
numerous provisions designed to make it easier for cable operators and others
to compete directly with local exchange telephone carriers. With certain
limited exceptions, neither a local exchange carrier nor a cable operator can
acquire more than 10% of the other entity operating within its own service
area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable industry. The ability of cable
systems to compete with present, emerging and future distribution media will
depend to a great extent on obtaining attractive programming. The availability
and exclusive use of a sufficient amount of quality programming may in turn be
affected by developments in regulation or copyright law. See "Legislation and
Regulation."
The cable television industry competes with radio, television and
print media for advertising revenues. As the cable television industry
continues to develop programming designed specifically for distribution by
cable, advertising revenues may increase. Premium programming provided by
cable systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services
may depend largely upon the continued availability of attractive programming at
competitive prices.
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<PAGE> 14
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect the Partnership and the cable television industry.
The following is a summary of federal laws and regulations affecting the growth
and operation of the cable television industry and a description of certain
state and local laws. The Partnership believes that the regulation of its
industry remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on the
Partnership and Joint Venture.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984. This
federal statute, which amended the Communications Act of 1934 (the
"Communications Act"), created uniform national standards and guidelines for
the regulation of cable television systems. Violations by a cable television
system operator of provisions of the Communications Act, as well as of FCC
regulations, can subject the operator to substantial monetary penalties and
other sanctions. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable television systems from operating
without a franchise in such jurisdictions. In connection with new franchises,
the 1984 Cable Act provides that in granting or renewing franchises,
franchising authorities may establish requirements for cable-related facilities
and equipment, but may not establish or enforce requirements for video
programming or information services other than in broad categories. The 1984
Cable Act grandfathered, for the remaining term of existing franchises, many
but not all of the provisions in existing franchises which would not be
permitted in franchises entered into or renewed after the effective date of the
1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This
legislation has effected significant changes to the legislative and regulatory
environment in which the cable industry operates. It amends the 1984 Cable Act
in many respects. The 1992 Cable Act became effective on December 4, 1992,
although certain provisions, most notably those dealing with rate regulation
and retransmission consent, became effective at later dates. The legislation
required the FCC to conduct a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation of the cable industry with respect to, among other things:
(i) cable system rates for both basic and certain nonbasic services; (ii)
programming access and exclusivity arrangements; (iii) access to cable channels
by unaffiliated programming services; (iv) leased access terms and conditions;
(v) horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x) customer
privacy; (xi) consumer protection issues; (xii) cable equipment compatibility;
(xiii) obscene or indecent programming; and (xiv) requiring subscribers to
subscribe to tiers of service other than basic service as a condition of
purchasing premium services. Additionally, the legislation encourages
competition with existing cable television systems by allowing municipalities
to own and operate their own cable television systems without having to obtain
a franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area; and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precludes video programmers affiliated with cable television companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the 1992
Cable Act is still ongoing. On April 8, 1993, a three-judge district court
panel granted summary judgment for the government
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<PAGE> 15
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 is reviewing the district court's decision.
On September 16, 1993, a constitutional challenge to the balance of
the 1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set-asides for DBS operators). On August 30, 1996, the U.S. Court of Appeals
for the District of Columbia Circuit sustained the constitutionality of all
provisions except for the multiple ownership limits and the limits on the
number of channels which can be occupied by programmers affiliated with the
cable operator, both of which are being challenged in a separate appeal.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the 1996 Telecom Act into
law. This statute substantially amended the Communications Act by, among other
things, removing barriers to competition in the cable television and telephone
markets and reducing the regulation of cable television rates. As it pertains
to cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain nonbasic programming services in 1999; (ii) expands the
definition of effective competition, the existence of which displaces rate
regulation; (iii) eliminates the restriction against the ownership and
operation of cable systems by telephone companies within their local exchange
service areas; and (iv) liberalizes certain of the FCC's cross-ownership
restrictions. The FCC is in the process of conducting a number of additional
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act. See "Business - Competition" and "Federal Regulation-Rate
Regulation."
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has heretofore promulgated regulations covering such
areas as the registration of cable television systems, cross-ownership between
cable television systems and other communications businesses, carriage of
television broadcast programming, consumer education and lockbox enforcement,
origination cablecasting and sponsorship identification, children's
programming, the regulation of basic cable service rates in areas where cable
television systems are not subject to effective competition, signal leakage and
frequency use, technical performance, maintenance of various records, equal
employment opportunity, and antenna structure notification, marking and
lighting. The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations. The 1992 Cable Act required the FCC to adopt
additional regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The 1996 Telecom Act requires certain changes to various of these
regulations. A brief summary of certain of these federal regulations as
adopted to date follows.
RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional nonbasic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable
Act substantially changed the previous statutory and FCC rate regulation
standards. The 1992 Cable Act
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<PAGE> 16
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 required the FCC to adopt a
formula, for franchising authorities to enforce, to assure that basic cable
rates are reasonable; allowed the FCC to review rates for nonbasic service
tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities and/or cable customers; prohibited
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium services if the system is
technically capable of doing so; required the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allows
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances. The 1996 Telecom Act limits the
class of complainants regarding nonbasic tier rates to franchising authorities
only and ends FCC regulation of nonbasic tier rates on March 31, 1999.
The FCC adopted rules designed to implement the 1992 Cable Act's rate
regulation provisions on April 1, 1993, and then significantly amended them on
February 22 and November 10, 1994. The FCC's regulations contain standards for
the regulation of basic and nonbasic cable service rates (other than
per-channel or per-program services). The rules have been further amended
several times. Local franchising authorities and/or the FCC are empowered to
order a reduction of existing rates which exceed the maximum permitted level
for either basic and/or nonbasic cable services and associated equipment, and
refunds can be required. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic service
rates. Alternatively, cable operators have the opportunity to make
cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment (e.g., converter boxes and remote control devices) and installation
services be unbundled from the provision of cable service and based upon actual
costs plus a reasonable profit. The regulations also provide that future rate
increases may not exceed an inflation-indexed amount, plus increases in certain
costs beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels. In
addition, new product tiers consisting of services new to the cable system can
be created free of rate regulation as long as certain conditions are met such
as not moving services from existing tiers to the new tier. These provisions
currently provide limited benefit to the Partnership's and Joint Venture'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 and Joint Venture for basic cable service
and for associated basic cable service equipment.
The Partnership and Joint Venture have adjusted their regulated
programming service rates and related equipment and installation charges in
substantially all of their systems so as to bring these rates and charges into
compliance with the applicable benchmark or equipment and installation cost
levels. The Partnership and Joint Venture also implemented a program in
substantially all of their systems under which a number of the Partnership's
and Joint Venture'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
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<PAGE> 17
related to systems owned by the Partnership or Joint Venture. There have been
three rulings, however, on such packages offered by affiliated partnerships
managed by FHGLP. In one case, the FCC's Cable Services Bureau ruled that a
nine-channel a la carte package was an evasion of rate regulation and ordered
this package to be treated as a regulated tier. In the second case, a
seven-channel a la carte package was ordered to be treated as a regulated tier.
In the third case, a six-channel package was held not to be an evasion, but
rather is to be considered an unregulated new product tier under the FCC's
November 10, 1994 rule amendments. The deciding factor in all of the FCC's
decisions related to a la carte tiers appears to be the number of channels
moved from regulated tiers, with six or fewer channels being deemed not to be
an evasion. Almost all of the Partnership's and Joint Venture'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).
On March 11, 1993, the FCC adopted regulations pursuant to the 1992
Act which require cable systems to permit customers to purchase video
programming on a per channel or a per program basis without the necessity of
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally, this
exemption from compliance with the statute for cable systems that do not have
such technical capability is available until a cable system obtains the
capability, but not later than December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contained new signal carriage requirements. These
rules allow commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B
contour (a measure of signal strength). Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable systems will have
to obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WTBS. The Partnership and
Joint Venture have thus far not been required to pay cash compensation to
broadcasters for retransmission consent or been required by broadcasters to
remove broadcast stations from the cable television channel line-ups. The
Partnership has, however, agreed to carry some services in specified markets
pursuant to retransmission consent arrangements which it believes are
comparable to those entered into by most other large cable operators, and for
which it pays monthly fees to the service providers, as it does with other
satellite providers. The second election between must-carry and retransmission
consent for local commercial television broadcast stations was October 1, 1996,
and the Partnership and Joint Venture were once again able to complete
negotiations with broadcasters with essentially no change to the previous
agreements. The next election between must-carry and retransmission consent
for local commercial television broadcast stations will be October 1, 1999.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an exclusive
basis.
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<PAGE> 18
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable system to delete or "black out" such programming from
other television stations which are carried by the cable system. The extent of
such deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The
FCC also has commenced a proceeding to determine whether to relax or abolish
the geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution
rights entirely by contract, and to determine whether such exclusivity rights
should be extended to noncommercial educational stations. It is possible that
the outcome of these proceedings will increase the amount of programming that
cable operators are requested to black out. Finally, the FCC has declined to
impose equivalent syndicated exclusivity rules on satellite carriers who
provide services to the owners of home satellite dishes similar to those
provided by cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide
cable-related facilities and equipment and to enforce compliance with voluntary
commitments. In the case of franchises in effect prior to the effective date
of the 1984 Cable Act, franchising authorities may enforce requirements
contained in the franchise relating to facilities, equipment and services,
whether or not cable-related. The 1984 Cable Act, under certain limited
circumstances, permits a cable operator to obtain modifications of franchise
obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even
if a franchise is renewed, a franchising authority may impose new and more
onerous requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
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."
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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 allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single
cable television franchise and to impose certain franchise restrictions upon
cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be uncertain. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable television systems and permits franchising
authorities to operate their own cable television systems without franchises.
OWNERSHIP
The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against
local exchange telephone companies ("LECs") providing video programming
directly to customers within their local telephone exchange service areas.
However, with certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecom Act also authorized LECs and others to operate "open
video systems" without obtaining a local cable franchise. See "Competition."
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's signal strength as defined by the FCC's rules) covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminates the
statutory ban and directs the FCC to review its rule within two years. Common
ownership or control has historically also been prohibited by the FCC (but not
by the 1984 Cable Act) between a cable system and a national television
network. The 1996 Telecom Act eliminated this prohibition. Finally, in order
to encourage competition in the provision of video programming, the FCC adopted
a rule prohibiting the common ownership, affiliation, control or interest in
cable television systems and MMDS facilities having overlapping service areas,
except in very limited circumstances. The 1992 Cable Act codified this
restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 are grandfathered. The 1996
Telecom Act exempts cable systems facing effective competition from the MMDS
and SMATV restriction. In addition, a cable operator can purchase a SMATV
system serving the same area and technically integrate it into the cable
system. The 1992 Cable Act permits states or local franchising authorities to
adopt certain additional restrictions on the ownership of cable television
systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these
purposes include voting interests of 5% or more (unless there is another single
holder of more than 50% of the voting stock), officerships, directorships and
general partnership interests. The FCC has stayed the effectiveness of these
rules pending the outcome of the appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
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<PAGE> 20
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which
owns the cable system has an attributable interest. The limit is 40% of the
first 75 activated channels.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and
women are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable system operators with more than five full-time
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual EEO reporting requirements on cable operators and
has expanded those requirements to all multichannel video service distributors.
Failure to comply with the EEO requirements can result in the imposition of
fines and/or other administrative sanctions, or may, in certain circumstances,
be cited by a franchising authority as a reason for denying a franchisee's
renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a
cable operator is found to have violated the customer privacy provisions of the
1984 Cable Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are strengthened to
require that cable operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to
the cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has revised such
standards and made them applicable to all classes of channels which carry
downstream National Television System Committee (NTSC) video programming. The
FCC also has adopted additional standards applicable to cable television
systems using frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to
prevent harmful interference with aeronautical navigation and safety radio
services and has also established limits on cable system signal leakage.
Periodic testing by cable operators for compliance with the technical standards
and signal leakage limits is required and an annual filing of the results of
these measurements is required. The 1992 Cable Act requires the FCC to
periodically update its technical standards to take into account changes in
technology. Under the 1996 Telecom Act, local franchising authorities may not
prohibit, condition or restrict a cable system's use of any type of subscriber
equipment or transmission technology.
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<PAGE> 21
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. This provision has been
temporarily stayed while certain programmers seek Supreme Court review on
constitutional grounds. With respect to other kinds of channels, the 1996
Telecom Act only requires that the audio and video portions of the channel be
fully blocked, at no charge, upon request of the person not subscribing to the
channel.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried,
and the location of the cable system with respect to over-the-air television
stations. Any future adjustment to the copyright royalty rates will be done
through an arbitration process supervised by the U.S. Copyright Office.
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<PAGE> 22
Cable operators are liable for interest on underpaid and unpaid
royalty fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television
system mergers and acquisitions. While it is not possible to predict the
outcome of this proceeding, any changes adopted by the Copyright Office in its
current policies may have the effect of reducing the copyright impact of
certain transactions involving cable company mergers and cable television
system acquisitions.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators would have to negotiate rights
from the copyright owners for all of the programming on the broadcast stations
carried by cable systems. Such negotiated agreements would likely increase the
cost to cable operators of carrying broadcast signals. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission consent
agreements between television broadcast stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks (such as HBO) and basic cable networks
(such as USA Network) is licensed by the networks through private agreements
with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc.
("BMI"), the two major performing rights organizations in the United States.
As a result of extensive litigation, both ASCAP and BMI now offer "through to
the viewer" licenses to the cable networks which cover the retransmission of
the cable networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves on local
origination channels, in advertisements inserted locally on cable networks, et
cetera, must also be licensed. A blanket license is available from BMI. Cable
industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. State and/or
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. Although the 1984 Cable Act provides for
certain procedural protections, there can be no assurance that renewals will be
granted or that renewals will be made on similar terms and conditions.
Franchises usually call for the payment of fees, often based on a percentage of
the system's gross customer revenues, to the granting authority. Upon receipt
of a franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same state,
historically ranging from reasonable to highly restrictive or burdensome. The
1984 Cable Act places certain limitations on a franchising authority's ability
to control the operation of a cable system operator and the courts have from
time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially
in
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<PAGE> 23
the area of customer service and rate regulation. The 1992 Cable Act also
allows franchising authorities to operate their own multichannel video
distribution system without having to obtain a franchise and permits states or
local franchising authorities to adopt certain restrictions on the ownership of
cable television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions
governing charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of
cable services provided. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
ITEM 2. PROPERTIES
The Partnership and Joint Venture own or lease parcels of real
property for signal reception sites (antenna towers and headends), microwave
facilities and business offices, and own or lease their service vehicles. The
Partnership and Joint Venture believe that their properties, both owned and
leased, are in good condition and are suitable and adequate for the their
business operations.
The Partnership and Joint Venture own substantially all of the assets
related to their cable television operations, including their program
production equipment, headend (towers, antennae, electronic equipment and
satellite earth stations), cable plant (distribution equipment, amplifiers,
customer drops and hardware), converters, test equipment and tools and
maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
The Partnership and Joint Venture are party to various legal
proceedings. Such legal proceedings are ordinary and routine litigation
proceedings that are incidental to the Partnership's and Joint Venture's
businesses 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 or Joint Venture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
LIQUIDITY
While the Partnership's equity securities, which consist of units of
limited partnership interests, are publicly held, there is no established
public trading market for the units and it is not expected that a market will
develop in the future. The approximate number of equity security holders of
record was 1,126 as of December 31, 1996. In addition to restrictions on the
transferability of units contained in the Partnership Agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 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's assets,
gain shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased
to zero, and thereafter as outlined in the preceding paragraph. Upon
dissolution of the Partnership, any negative capital account balances remaining
after all allocations and distributions are made must be funded by the
respective partners.
The policy of the Corporate General Partner (although there is no
contractual obligation to do so) is to cause the Partnership to make cash
distributions on a monthly basis throughout the operational life of the
Partnership, assuming the availability of sufficient cash flow from Partnership
operations. The amount of such distributions, if any, will vary from month to
month depending upon the Partnership's results of operations and the Corporate
General Partner's determination of whether otherwise available funds are needed
for the Partnership's ongoing working capital and liquidity requirements.
However, on February 22, 1994, the FCC announced significant amendments to its
rules implementing certain provisions of the 1992 Cable Act. Compliance with
these rules has had a negative impact on the Partnership's revenues and cash
flow.
The Partnership began making periodic cash distributions to limited
partners from operations during 1987 and distributed $498,800 ($12.50 per unit)
in each of 1994, 1995 and 1996. 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> 25
The Partnership's ability to pay distributions, the actual level of
distribution, and the continuance of distributions, if any, will depend on a
number of factors, including the amount of cash flow from operations, projected
capital expenditures, provision for contingent liabilities, availability of
bank refinancing, regulatory or legislative developments governing the cable
television industry, and growth in customers. Some of these factors are beyond
the control of the Partnership, and consequently, no assurances can be given
regarding the level or timing of future distributions.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and the
Joint Venture for the five years ended December 31, 1996. This data should be
read in conjunction with the Partnership's and Joint Venture's financial
statements included in Item 8 hereof and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7.
I. THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
---------- ---------- ---------- ---------- ----------
Revenues $2,065,100 $2,222,100 $2,241,600 $2,311,800 $2,489,000
Costs and expenses (1,305,700) (1,339,900) (1,448,800) (1,442,700) (1,428,700)
Depreciation and amortization (721,200) (727,100) (712,500) (689,100) (703,600)
---------- ---------- ---------- ---------- ----------
Operating income 38,200 155,100 80,300 180,000 356,700
Interest expense (119,800) (78,400) (58,500) (61,800) (30,500)
Interest income 35,100 20,400 9,600 32,000 23,400
Loss on sale of cable assets - - - - (4,700)
Equity in net income (loss)
of Joint Venture (52,400) (36,200) 11,900 28,000 123,500
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (98,900) $ 60,900 $ 43,300 $ 178,200 $ 468,400
========== ========== ========== ========== ==========
Distributions paid to partners $ - $ 503,800 $ 503,800 $ 503,800 $ 503,800
========== ========== ========== ========== ==========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income (loss) $ (2.45) $ 1.51 $ 1.07 $ 4.42 $ 11.62
========== ========== ========== ========== ==========
Distributions $ - $ 12.50 $ 12.50 $ 12.50 $ 12.50
========== ========== ========== ========== ==========
OTHER OPERATING DATA
Net cash provided by operating
activities $ 409,600 $ 811,500 $ 752,400 $1,174,100 $ 661,300
EBITDA(1) 759,400 882,200 792,800 869,100 1,060,300
EBITDA to revenues 36.8% 39.7% 35.4% 37.6% 42.6%
Total debt to EBITDA 1.8x 0.4x 0.5x 0.4x -
Capital expenditures $ 88,300 $ 227,900 $ 122,700 $ 373,700 $ 608,900
Year Ended December 31,
------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
Total assets $6,149,400 $4,734,600 $4,275,600 $4,293,800 $3,504,300
Total debt 1,341,700 383,200 383,200 383,200 -
General partners' deficit (39,500) (43,900) (48,500) (51,700) (52,000)
Limited partners' capital 4,427,900 3,989,400 3,533,500 3,211,100 3,176,000
</TABLE>
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<PAGE> 27
II. ENSTAR CABLE OF MACOUPIN COUNTY
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $1,466,700 $1,572,900 $1,590,800 $1,646,000 $1,870,600
Costs and expenses (826,000) (863,500) (876,900) (959,200) (898,300)
Depreciation and amortization (811,700) (826,500) (703,900) (634,800) (614,400)
---------- ---------- ---------- ---------- ----------
Operating income (loss) (171,000) (117,100) 10,000 52,000 357,900
Net income (loss) $ (157,200) $ (108,600) $ 35,700 $ 84,000 $ 370,500
========== ========== ========== ========== ==========
Distributions to venturers $ 600,000 $ - $1,050,000 $ - $1,050,000
========== ========== ========== ========== ==========
OTHER OPERATING DATA
Net cash provided by operating
activities $ 529,700 $ 734,100 $ 750,300 $ 799,900 $ 860,200
EBITDA(1) 640,700 709,400 713,900 686,800 972,300
EBITDA to revenues 43.7% 45.1% 44.9% 41.7% 52.0%
Capital expenditures $ 84,100 $ 115,500 $ 126,900 $ 325,500 $ 411,200
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $3,745,600 $3,662,700 $2,647,600 $2,840,100 $2,084,400
Venturers' capital 3,523,500 3,414,900 2,400,600 2,484,600 1,805,100
- --------------------
</TABLE>
(1) Operating income before depreciation and amortization. The
Partnership and Joint Venture measure their financial performance by their
EBITDA, among other items. Based on their 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. EBITDA should not be considered by the
reader as an alternative to net income, as an indicator of the Partnership's or
Joint Venture's financial performance or as an alternative to cash flows as a
measure of liquidity.
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<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the 1996
Telecom Act. This statute substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act, including certain of the rate regulation provisions
previously imposed by the 1992 Cable Act. Compliance with those rate
regulations has had a negative impact on the Partnership's and Joint Venture's
revenues and cash flow. However, in accordance with the FCC's regulations, the
Partnership and Joint Venture will be able to increase regulated service rates
in the future in response to inflation and specified historical and anticipated
cost increases, although certain costs may continue to rise at a rate in excess
of that which the Partnership and Joint Venture will be permitted to pass on to
their customers. The 1996 Telecom Act provides that certain of the rate
regulations will be phased-out altogether in 1999. Further, the regulatory
environment will continue to change pending, among other things, the outcome of
legal challenges and FCC rulemaking and enforcement activity in respect of the
1992 Cable Act and the 1996 Telecom Act. There can be no assurance as to what,
if any, future action may be taken by the FCC, Congress or any other regulatory
authority or court, or the effect thereof on the Partnership's business.
Accordingly, the Partnership's and Joint Venture's historical financial results
as described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership and the Joint Venture, as
discussed more fully elsewhere in this Report.
The Partnership conducts its 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
1996 COMPARED TO 1995
The Partnership's revenues increased from $2,311,800 to $2,489,000, or
by 7.7%, for the year ended December 31, 1996 as compared to 1995. Of the
$177,200 increase in revenues for the year ended December 31, 1996 as compared
to 1995, $175,600 was due to increases in regulated service rates that were
implemented by the Partnership in the second and fourth quarters of 1996,
$41,400 was due to increases in other revenue producing items including
advertising sales and $35,700 was due to the restructuring of The Disney
Channel from a premium channel to a tier channel effective July 1, 1996. These
increases were offset by a $75,500 decrease in revenues due to a decrease in
the number of subscriptions for service. As of December 31, 1996, the
Partnership had approximately 6,200 homes subscribing to cable service and
2,000 premium service units.
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<PAGE> 29
Service costs decreased from $804,700 to $771,100, or by 4.2%, for the
year ended December 31, 1996 as compared to 1995. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$33,600 decrease in service costs for the year ended December 31, 1996 as
compared to 1995, $50,700 was due to an increase in capitalization of labor and
overhead expense resulting from the rebuild of the Partnership's Shelbyville,
Illinois cable system during 1996 and $11,200 was due to a decrease in direct
personnel costs due to the transfer of an employee to the Corporate General
Partner's operations. These decreases were partially offset by a $9,000
increase in copyright fees, an $8,700 increase in programming fees, a $4,900
increase in repair and maintenance expense and a $4,700 increase in system
power costs. The increase in programming fees for the year ended December 31,
1996 included an $8,200 increase related to the restructuring of The Disney
Channel discussed above.
General and administrative expenses increased from $333,600 to
$341,200, or by 2.3%, for the year ended December 31, 1996 as compared to 1995.
Of the $7,600 increase for the year ended December 31, 1996 as compared to
1995, $24,600 was due to an increase in marketing expenses and $13,100 was due
to expenses allocated by an affiliate of the Corporate General Partner that
provides system operating management services to the Partnership. These
increases were partially offset by a $13,400 decrease in professional fees, a
$10,500 decrease in customer billing expense and a $6,700 increase in
capitalization of labor and overhead expense.
Management fees and reimbursed expenses increased from $304,400 to
$316,400, or by 3.9%, for the year ended December 31, 1996 as compared to 1995.
Management fees increased by $8,900 for the year ended December 31, 1996 as
compared to 1995 in direct relation to increased revenues as described above.
Reimbursed expenses increased by $3,100 for the year ended December 31, 1996 as
compared to 1995 primarily due to higher allocated personnel costs,
professional service fees and compliance costs associated with reregulation by
the FCC.
Depreciation and amortization expense increased from $689,100 to
$703,600, or by 2.1%, for the year ended December 31, 1996 as compared to 1995,
due to asset additions related to the upgrade of the Partnership's plant.
Operating income increased from $180,000 to $356,700, or by 98.2%, for
the year ended December 31, 1996 as compared to 1995, primarily due to
increased revenues described above.
Interest expense decreased from $61,800 to $30,500, or by 50.7%, for
the year ended December 31, 1996 as compared to 1995 due to the repayment of
the Partnership's note payable in February 1996. The decrease was partially
offset by a corresponding write-off to interest expense of the related deferred
loan costs.
Interest income decreased from $32,000 to $23,400, or by 26.9%, for
the year ended December 31, 1996 as compared to 1995 due to lower average
interest rates earned on invested funds and lower average cash balances
available for investment.
Due to the factors described above, the Partnership's net income
increased from $178,200 to $468,400 for the year ended December 31, 1996 as
compared to 1995.
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
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<PAGE> 30
$41,400 and $8,200 was due to a decrease in advertising sales revenue. As of
December 31, 1995 the Partnership had approximately 6,200 homes subscribing to
cable service and 2,400 premium service units.
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 compliance costs associated with reregulation by
the FCC. Management fees increased by $3,500, or 3.1%, in direct relation to
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.
DISTRIBUTIONS TO PARTNERS
The Partnership received distributions totaling $350,000 from the
Joint Venture during 1994 and 1996. The Joint Venture did not make
distributions during 1995. The Partnership distributed $503,800 to its
partners in each of 1994, 1995 and 1996.
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<PAGE> 31
THE MACOUPIN JOINT VENTURE
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $1,646,000 to $1,870,600,
or by 13.6%, for the year ended December 31, 1996 as compared to 1995. Of the
$224,600 increase in revenues for the year ended December 31, 1996 as compared
to 1995, $134,700 was due to increases in regulated service rates that were
implemented by the Joint Venture in the second and fourth quarters of 1996,
$74,400 was due to increases in other revenue producing items including
advertising sales and $25,800 was due to the restructuring of The Disney
Channel from a premium channel to a tier channel effective July 1, 1996. These
increases were offset by a $10,300 decrease due to decreases in the number of
subscriptions for service. As of December 31, 1996, the Joint Venture had
approximately 4,500 homes subscribing to cable service and 1,800 premium
service units.
Service costs increased from $500,300 to $532,500, or by 6.4%, for the
year ended December 31, 1996 as compared to 1995. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$32,200 increase in service costs for the year ended December 31, 1996 as
compared to 1995, $24,100 was due to an increase in programming fees charged by
program suppliers (including primary satellite fees), $23,400 was due to an
increase in copyright fees, $17,400 was due to an increase in franchise fees,
$8,200 was due to an increase in personnel costs, $5,400 was due to an increase
in program guide expense and $4,000 was due to an increase in system power
costs. These increases were partially offset by a $50,200 increase in
capitalization of labor and overhead expense resulting from the rebuild of the
Joint Venture's Auburn, Illinois cable system. The increase in programming
fees for the year ended December 31, 1996 included a $6,000 increase related to
the restructuring of The Disney Channel discussed above. Copyright and
franchise fees increased in direct relation to increased revenues. Franchise
fees also increased due to an increase in the fee percentage imposed by one of
the Joint Venture's franchising authorities. Copyright fees also increased due
to new charges in 1996 for retransmission of copyrighted music included in
cable networks' programming that is carried on the Joint Venture's systems.
See "Legislation and Regulation."
General and administrative expenses decreased from $232,300 to
$109,500, or by 52.9%, for the year ended December 31, 1996 as compared to
1995. Of the $122,800 decrease for the year ended December 31, 1996 as
compared to 1995, $101,300 was due to lower insurance expense, primarily
workers' compensation insurance costs, $28,000 was due to an increase in
capitalization of labor and overhead expense resulting from the Auburn rebuild
discussed above and $8,200 was due a decrease in personnel costs. These
decreases were partially offset by an $18,200 increase in marketing expense.
Management fees and reimbursed expenses increased from $226,600 to
$256,300, or by 13.1%, for the year ended December 31, 1996 as compared to
1995. Reimbursable expenses increased by $18,500 for the year ended December
31, 1996 as compared to 1995, primarily due to higher allocated personnel
costs, professional service fees and compliance costs associated with
reregulation by the FCC. Management fees increased by $11,200 for the year
ended December 31, 1996 as compared to 1995 in direct relation to increased
revenues as described above.
Depreciation and amortization expense decreased from $634,800 to
$614,400, or by 3.2%, for the year ended December 31, 1996 as compared to 1995
due to the effect of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Operating income increased from $52,000 to $357,900 for the year ended
December 31, 1996 as compared to 1995, primarily due to increased revenues and
lower insurance expense as described above.
Interest income, net of interest expense, decreased from $32,000 to
$12,000, or by 62.5%, for the year ended December 31, 1996 as compared to 1995
due to lower average cash balances available for investment.
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<PAGE> 32
Due to the factors described above, the Joint Venture's net income
increased from $84,000 to $370,500 for the year ended December 31, 1996 as
compared to 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 41.7% to 52.0% for the year ended
December 31, 1996 as compared to 1995. EBITDA increased from $686,800 to
$972,300, or by 41.6%, for the year ended December 31, 1996 as compared to
1995, primarily due to increased revenues and lower insurance expense as
described above.
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $1,590,800 to $1,646,000,
or by 3.5%, for the year ended December 31, 1995 compared to 1994. Of the
$55,200 increase in revenues, $53,400 was due to increases in regulated service
rates permitted under the 1992 Cable Act that were implemented by the
Partnership in April 1995, $27,600 was due to increases in the number of
subscriptions for services, $11,600 was due to increases in advertising sales
and other revenue producing items and $2,300 was due to increases in
unregulated rates charged for premium services. These increases were partially
offset by rate decreases implemented in September 1994 to comply with the 1992
Cable Act, estimated by the Joint Venture to be approximately $39,700. As of
December 31, 1995 the Joint Venture had approximately 4,400 homes subscribing
to cable service and 2,100 premium service units.
Service costs increased from $484,100 to $500,300, or by 3.3%, for the
year ended December 31, 1995 compared to 1994. Service costs represents costs
directly attributable to providing cable services to customers. Of the $16,200
increase, $18,400 was due to higher programming fees charged by program
suppliers (including primary satellite fees), $11,000 was due to an increase in
copyright fees, and $9,200 was due to an increase in personnel costs. These
increases were partially offset by a $24,400 increase in capitalization of
labor and overhead costs. The increase in programming expense was also due to
expanded programming usage relating to channel line-up restructuring and to
retransmission consent arrangements implemented to comply with the 1992 Cable
Act.
General and administrative expenses increased from $161,600 to
$232,300, or by 43.8%, for the year ended December 31, 1995 as compared to
1994. Of the $70,700 increase, $84,700 was due to higher insurance premiums
partially offset by an $8,600 decrease in bad debt expense and a $7,700
decrease in marketing expense.
Management fees and reimbursed expenses decreased from $231,200 to
$226,600, or by 2.0%, for the year ended December 31, 1995 as compared to 1994.
Of the $4,600 decrease, $7,400 was due to decreased reimbursable expenses
allocated by the Corporate General Partner, including lower allocated personnel
costs, property taxes, professional fees, compliance costs associated with
reregulation by the FCC, telephone costs and postage and messenger expense.
Management fees increased by $2,800, or by 3.5%, in direct relation to
increased revenues as described above.
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).
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<PAGE> 33
Due to the factors described above, the Joint Venture's net income
increased from $35,700 to $84,000 for the year ended December 31, 1995 as
compared to 1994.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 44.9% to 41.7% for the year ended
December 31, 1995 compared to 1994 primarily due to higher insurance premiums.
EBITDA decreased from $713,900 to $686,800, or by 3.8%, during 1995 compared to
1994.
DISTRIBUTIONS TO PARTNERS
The Macoupin Joint Venture distributed $1,050,000 equally among its
three partners in each of 1994 and 1996. No distributions were made during
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in 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 and capital
requirements. In general, these requirements involve expansion, improvement
and upgrade of the Partnership's existing cable television systems. The
Partnership is required to rebuild its Shelbyville, Illinois cable system at an
estimated total cost of $1,038,000 as a condition of its franchise agreement.
Capital expenditures related to the rebuild approximated $684,000 in 1996, with
additional construction costs of $354,000 budgeted for 1997. Construction
began in the second quarter of 1996 and was completed in March 1997. The
Partnership is also rebuilding portions of its cable systems in surrounding
communities at an estimated total additional cost of $191,000, which includes
budgeted expenditures of approximately $65,000 in 1997 to finish construction.
Additionally, the Joint Venture is required to rebuild its Auburn, Illinois
cable system by June 30, 1997 as a condition of its franchise agreement.
Construction began in July 1996 and is expected to be completed by June 1997.
Capital expenditures for the rebuild approximated $226,000 in 1996, with
additional construction costs of $153,000 projected for 1997. The Joint
Venture is also rebuilding portions of its plant in surrounding communities at
an estimated total additional cost of approximately $770,000, which includes
budgeted expenditures of approximately $310,000 in 1997 to complete the
project. The Partnership and the Joint Venture have also budgeted $285,200 and
$217,700, respectively, to upgrade other assets in 1997.
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 1997.
Management also believes that it is essential to preserve liquidity by
reserving cash for future rebuild requirements.
The Partnership paid distributions totaling $503,800 in 1996.
However, there can be no assurances regarding the level, timing or continuation
of future distributions.
On February 9, 1996, the Partnership repaid the balance of $383,200 on
its $1,000,000 revolving bank credit facility, which terminated the facility.
1996 VS. 1995
Operating activities provided $512,800 less cash during 1996 than in
1995. The Partnership used $714,600 more cash to pay liabilities owed to the
Corporate General Partner and third-party creditors due to the timing of
payments. Changes in accounts receivable and prepaid expenses used $18,500
more cash in 1996 than in 1995. This was partially offset by an increase in
cash generated by Partnership operations, which provided $220,300 more cash in
1996 than in 1995 after adding back non-cash items
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<PAGE> 34
consisting of depreciation, amortization, loss on sale of cable assets and
equity in net income of Joint Venture.
The Partnership used $127,000 less cash in investing activities during
1996 than in 1995 due to a $350,000 increase in distributions from the Joint
Venture, a $10,700 decrease in expenditures for intangible assets and $1,500 in
proceeds from the sale of equipment. The increases in cash were partially
offset by a $235,200 increase in capital expenditures. The Partnership used
$383,200 more cash in financing activities during 1996 than in 1995 to repay
its note payable.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 37.6% during 1995 to 42.6% in 1996. The
increase was principally attributable to increased revenues. EBITDA increased
from $869,100 to $1,060,300, or by 22.0%, in 1996 compared to 1995.
1995 VS. 1994
Cash provided by operating activities increased from $752,400 to
$1,174,100, or by $421,700 for the year ended December 31, 1995 compared to
1994. The Partnership used $342,200 less cash to pay liabilities owed to the
Corporate General Partner and third-party creditors in 1995 than in 1994 due to
the timing of payments. 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 and prepaid
expenses used $15,900 more cash in 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. Financing
activities used $5,600 cash in 1994 than in 1995 for the payment of deferred
loan costs related to the Partnership's revolving bank credit facility.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership and Joint Venture adopted
Statement 121 in the first quarter of 1996, the effects of which were not
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 Partnership and Joint Venture
are able to increase their service rates periodically, of which there can be no
assurance. See "Legislation and Regulation."
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<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988 acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co- sponsored with the Corporate General
Partner, and Mr. Graff received the right to cause Falcon Cablevision to
acquire such interests. These arrangements were modified and extended in an
amendment dated September 10, 1993 pursuant to which, among other things, the
Corporate General Partner obtained the option to acquire Mr. Graff's interest
in lieu of the purchase right described above which had been previously granted
to Falcon Cablevision. Since its incorporation in Georgia in 1982, the
Corporate General Partner has been engaged in the cable/telecommunications
business, both as a general partner of 15 limited partnerships formed to own
and operate cable television systems and through a wholly-owned operating
subsidiary. As of December 31, 1996, the Corporate General Partner managed
cable television systems serving approximately 125,000 Subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP currently
operates cable systems through a series of subsidiaries and also controls the
general partners of the 15 limited partnerships which operate under the Enstar
name (including the Partnership). Although these limited partnerships are
affiliated with FHGLP, their assets are owned by legal entities separate from
the Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Marc B. Nathanson Director, Chairman of the Board and Chief Executive
Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General
Counsel
Michael K. Menerey Director, Chief Financial Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Jon W. Lunsford Vice President - Finance and Corporate Development
Abel C. Crespo Controller
</TABLE>
MARC B. NATHANSON, 51, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19,
1995 also served as President. He has been Chairman of the Board and Chief
Executive Officer of Enstar Communications Corporation since October 1988, and
also served as its President prior to September 1995. Prior to 1975, Mr.
Nathanson was Vice President of Marketing for Teleprompter Corporation, at that
time the largest multiple-system cable operator in the United States. He also
held executive positions with Warner Cable and Cypress Communications
Corporation. He is a former President of the California Cable Television
Association and a member of Cable Pioneers. He is currently a Director of the
National Cable Television Association ("NCTA") and serves on its Executive
Committee. At the 1986 NCTA convention, Mr. Nathanson was honored by being
named the recipient of the Vanguard Award for outstanding contributions to the
growth and development of the cable television industry. Mr. Nathanson is a
27-year veteran of the cable television industry. He is a
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<PAGE> 37
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, 50, was appointed President and Chief Operating Officer of
FHGI in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. He has been President
and Chief Operating Officer of Enstar Communications Corporation since
September 1995, and between October 1988 and September 1995 held the positions
of Executive Vice President and Chief Operating Officer. Mr. Intiso is
responsible for the day-to-day operations of all cable television systems under
the management of FHGI. Mr. Intiso has a Masters Degree in Business
Administration from the University of California, Los Angeles, and is a
Certified Public Accountant. He serves as chair of the California Cable
Television Association, and is on the boards of Cable Advertising Bureau, Cable
In The Classroom, Community Antenna Television Association and California Cable
Television Association. He is a member of the American Institute of Certified
Public Accountants, the American Marketing Association, the American Management
Association, and the Southern California Cable Television Association.
STANLEY S. ITSKOWITCH, 58, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been Executive Vice President and General Counsel of Enstar Communications
Corporation since October 1988. He has been President and Chief Executive
Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a
marketer of chemical products, since 1980. He is a Certified Public Accountant
and a former tax partner in the New York office of Touche Ross & Co. (now
Deloitte & Touche). He has a J.D. Degree and an L.L.M. Degree in Tax from New
York University School of Law. Mr. Itskowitch is also Executive Vice President
and General Counsel of FIC.
MICHAEL K. MENEREY, 45, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984. He has been Chief Financial Officer and
Secretary of Enstar Communications Corporation since October 1988. Mr. Menerey
is a Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants.
JOE A. JOHNSON, 52, has been Executive Vice President - Operations of FHGI
since September 1995, and between January 1992 and that date was Senior Vice
President. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. He was a Divisional Vice
President of FHGI between 1989 and 1992. From 1982 to 1989, he held the
positions of Vice President and Director of Operations for Sacramento Cable
Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr.
Johnson held cable system and regional manager positions with Warner Amex and
Teleprompter.
JON W. LUNSFORD, 37, has been Vice President - Finance and Corporate
Development FHGI since September 1994. He has been Vice President-Finance and
Corporate Development of Enstar Communications Corporation since January 1996.
From 1991 to 1994 he served as Director of Corporate Finance at Continental
Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice President with
Crestar Bank.
ABEL C. CRESPO, 37, has been Controller of FHGI since January 1997. Mr. Crespo
joined Falcon in December 1984, and has held various accounting positions
during that time, most recently that of Senior Assistant Controller. Mr.
Crespo holds a Bachelor of Science degree in Business Administration from
California State University, Los Angeles.
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<PAGE> 38
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1996, biographical
information about certain officers of FHGI and Falcon Cable Group, a division of
FHGLP, who share certain responsibilities with the officers of the Corporate
General Partner with respect to the operation and management of the Partnership.
LYNNE A. BUENING, 43, has been Vice President of Programming of Falcon Cable
Group since November 1993. From 1989 to 1993, she served as Director of
Programming for Viacom Cable, a division of Viacom International Inc. Prior to
that, Ms. Buening held programming and marketing positions in the cable,
broadcast, and newspaper industries.
OVANDO COWLES, 43, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
HOWARD J. GAN, 50, has been Vice President of Regulatory Affairs of FHGI and
its predecessors since 1988 and Vice President of Regulatory Affairs of Falcon
Cable Group since its inception. He was General Counsel at Malarkey-Taylor
Associates, a Washington, DC based telecommunications consulting firm, from
1986 to 1988. He was Vice President and General Counsel at the Cable
Television Information Center from 1978 to 1983. In addition, he was an
attorney and an acting Branch Chief of the Federal Communications Commission's
Cable Television Bureau from 1975 to 1978.
R.W. ("SKIP") HARRIS, 49, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television
Committee. Mr. Harris was National Director of Affiliate Marketing for The
Disney Channel from 1985 to 1991. He was also a sales manager, regional
marketing manager and director of marketing for Cox Cable Communications from
1978 to 1985.
JOAN SCULLY, 61, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources of Falcon
Cable Group since its inception. From 1987 to May 1988, she was self-employed
as a Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree
in Human Resources Management from Pepperdine University.
MICHAEL D. SINGPIEL, 49, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992, Mr.
Singpiel was Vice President of C-Tec Cable Systems in Michigan. Mr. Singpiel
held various positions with Comcast in New Jersey and Michigan from 1980 to
1990.
RAYMOND J. TYNDALL, 49, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various
technical positions with Choice TV and its predecessors. From 1967 to 1975, he
held various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer in
lightwave, microwave, satellite and broadband.
In addition, Falcon Cable Group has six Divisional Vice Presidents who
are based in the field. They are Ron L. Hall, Michael E. Kemph, Nicholas A.
Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
Each director of the Corporate General Partner is elected to a one-year
term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected and
qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
-38-
<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership 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 Partnership's and 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 Partnership's gross revenues and 4% of the Joint Venture's gross
revenues, excluding revenues from the sale of cable television systems or
franchises, calculated and paid monthly. The Joint Venture also is required to
distribute 1% of its gross revenues to the Corporate General Partner in respect
of its interest as the Corporate General Partner of the Partnership. In
addition, the Partnership and Joint Venture reimburse the Manager for certain
operating expenses incurred by the Manager in the day-to-day operation of their
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.
Additionally, the Partnership receives certain system operating management
services from an affiliate of the Manager in lieu of directly employing
personnel to perform such services. The Partnership reimburses the affiliate
for its allocable share of the affiliate's operating costs. The Corporate
General Partner also performs certain supervisory and administrative services
for the Partnership and Joint Venture, for which it is reimbursed.
For the fiscal year ended December 31, 1996, the Partnership together
with the Joint Venture paid approximately $199,300 of management fees and
$354,700 of reimbursed expenses. In addition, the Joint Venture paid the
Corporate General Partner approximately $18,700 in respect of its 1% special
interest. The Partnership reimbursed an affiliate approximately $34,700 for
system operating management services. Certain programming services are
purchased through Falcon Cablevision. The Partnership, together with the Joint
Venture, paid Falcon Cablevision approximately $928,100 for these programming
services for fiscal year 1996.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5., "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1997, the common stock of FHGI was owned as follows:
78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In 1989, FHGI issued to Hellman
& Friedman Capital Partners, A California Limited Partnership ("H&F"), a
$1,293,357 convertible debenture due 1999 convertible under certain
circumstances into 10% of the common stock of FHGI and entitling H&F to elect
one director to the board of directors of FHGI. H&F elected Marc B. Nathanson
pursuant to such right. In 1991 FHGI issued to Hellman & Friedman Capital
Partners II, A California Limited Partnership ("H&FII"), additional convertible
debentures due 1999 in the aggregate amount of $2,006,198 convertible under
certain circumstances into approximately 6.3% of the common stock of FHGI and
entitling H&FII to elect one director to the board of directors of FHGI. As of
March 3, 1997, H&FII had not exercised this right. FHGLP also held 12.1% of
the interests in the General Partner, and Falcon Cable Trust, Frank Intiso and
H&FII held 58.9%, 12.1% and 16.3% of the General Partner, respectively. Such
interests entitle the
-39-
<PAGE> 40
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, 1997, Marc B. Nathanson and members of his family
owned, directly or indirectly, outstanding partnership interests (comprising
both general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P. and 2.58%
of Falcon Video Communications. In accordance with the respective partnership
agreements of these two partnerships, after the return of capital to and the
receipt of certain preferred returns by the limited partners of such
partnerships, FHGLP and certain of its officers and directors had rights to
future profits greater than their ownership interests of capital in such
partnerships.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Classic Cable Income
Properties, L.P., Falcon Video Communications, L.P., and, through its
management of the operation of Falcon Cablevision (a subsidiary of FHGLP), the
partnerships of which Enstar Communications Corporation is the Corporate
General Partner, including the Partnership. On September 30, 1988, Falcon
Cablevision acquired all of the outstanding stock of Enstar Communications
Corporation. Certain members of management of the Corporate General Partner
have also been involved in the management of other cable ventures. FHGLP
contemplates entering into other cable ventures, including ventures similar to
the Partnership.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the Corporate General Partner and
their management to certain conflicts of interest. Such conflicts of interest
relate to the time and services management will devote to the Partnership's
affairs and to the acquisition and disposition of cable television systems.
Management or its affiliates may establish and manage other entities which
could impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties. 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.
-40-
<PAGE> 41
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.
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.
-41-
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial
Statements on page F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial
Statements on page F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits
on Page E-1.
(b) Reports on Form 8-K
None.
-42-
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 26, 1997.
ENSTAR INCOME PROGRAM IV-3, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ MARC B. NATHANSON
-----------------------------
Marc B. Nathanson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on the 26th day of March 1997.
<TABLE>
<CAPTION>
Signatures Title(*)
-------------------------- -------------------------------------------------
<S> <C>
/s/ MARC B. NATHANSON Chairman of the Board and Chief Executive Officer
-------------------------- (Principal Executive Officer)
Marc B. Nathanson
/s/ MICHAEL K. MENEREY Chief Financial Officer, Secretary and Director
-------------------------- (Principal Financial and Accounting Officer)
Michael K. Menerey
/s/ FRANK J. INTISO President, Chief Operating Officer
-------------------------- and Director
Frank J. Intiso
/s/ STANLEY S. ITSKOWITCH Executive Vice President, General Counsel
-------------------------- and Director
Stanley S. Itskowitch
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the registrant.
-43-
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------------------------------
Enstar Income Enstar Cable
Program of Macoupin
IV-3, L.P. County
---------- ------
<S> <C> <C>
Reports of Independent Auditors F-2 F-13
Balance Sheets - December 31, 1995 and 1996 F-3 F-14
Financial Statement for each of
the three years in the period
ended December 31, 1996:
Statements of Operations F-4 F-15
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-16
Statements of Cash Flows F-6 F-17
Notes to Financial Statements F-7 F-18
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-3, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income Program IV-3,
L.P. (A Georgia Limited Partnership) as of December 31, 1995 and 1996, and the
related statements of operations, partnership capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program IV-3,
L.P. at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-2
<PAGE> 46
ENSTAR INCOME PROGRAM IV-3, L.P.
BALANCE SHEETS
================================
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 942,400 $ 450,900
Accounts receivable, less allowance of $9,300 and
$4,500 for possible losses 27,300 61,800
Prepaid expenses and other 22,200 25,900
Equity in net assets of joint venture 828,100 601,700
Property, plant and equipment, less accumulated
depreciation and amortization 1,539,700 1,642,100
Franchise cost, net of accumulated
amortization of $1,662,200 and $1,850,500 902,500 714,300
Deferred loan costs and other, net 31,600 7,600
------------- -------------
$ 4,293,800 $ 3,504,300
============= =============
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 503,600 $ 222,000
Due to affiliates 247,600 158,300
Note payable 383,200 -
------------- -------------
TOTAL LIABILITIES 1,134,400 380,300
------------- -------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (51,700) (52,000)
Limited partners 3,211,100 3,176,000
------------- -------------
TOTAL PARTNERSHIP CAPITAL 3,159,400 3,124,000
------------- -------------
$ 4,293,800 $ 3,504,300
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 47
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 2,241,600 $ 2,311,800 $ 2,489,000
------------- ------------- -------------
OPERATING EXPENSES:
Service costs 810,500 804,700 771,100
General and administrative expenses 304,300 333,600 341,200
General Partner management fees
and reimbursed expenses 334,000 304,400 316,400
Depreciation and amortization 712,500 689,100 703,600
------------- ------------- -------------
2,161,300 2,131,800 2,132,300
------------- ------------- -------------
Operating income 80,300 180,000 356,700
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (58,500) (61,800) (30,500)
Interest income 9,600 32,000 23,400
Loss on sale of cable assets - - (4,700)
------------- ------------- -------------
(48,900) (29,800) (11,800)
------------- ------------- -------------
Income before equity
in net income of joint venture 31,400 150,200 344,900
EQUITY IN NET INCOME OF JOINT VENTURE 11,900 28,000 123,500
------------- ------------- -------------
NET INCOME $ 43,300 $ 178,200 $ 468,400
============= ============= =============
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 1.07 $ 4.42 $ 11.62
============= ============= =============
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,900 39,900 39,900
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 48
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, 1994 $ (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
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 4,700 463,700 468,400
---------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 $ (52,000) $3,176,000 $3,124,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 49
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
===================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 43,300 $ 178,200 $ 468,400
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 712,500 689,100 703,600
Amortization of deferred loan costs 10,900 10,900 17,300
Loss on sale of cable assets -- -- 4,700
Equity in net income of joint venture (11,900) (28,000) (123,500)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets (3,900) (19,800) (38,300)
Accounts payable and due to affiliates 1,500 343,700 (370,900)
----------- ----------- -----------
Net cash provided by operating activities 752,400 1,174,100 661,300
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (122,700) (373,700) (608,900)
Proceeds from sale of property, plant and equipment -- -- 1,500
Increase in intangible assets (47,600) (19,100) (8,400)
Distributions from joint venture 350,000 -- 350,000
----------- ----------- -----------
Net cash provided by (used in)
investing activities 179,700 (392,800) (265,800)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to partners (503,800) (503,800) (503,800)
Repayment of debt -- -- (383,200)
Deferred loan costs (5,600) -- --
----------- ----------- -----------
Net cash used in financing activities (509,400) (503,800) (887,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 422,700 277,500 (491,500)
Cash and cash equivalents at beginning of year 242,200 664,900 942,400
----------- ----------- -----------
Cash and cash equivalents at end of year $ 664,900 $ 942,400 $ 450,900
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 50
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
=======================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program IV-3, L.P., a Georgia limited partnership (the
"Partnership"), owns and operates cable television systems in rural areas of
Illinois and Kentucky. The Partnership also participates as a co-general
partner in Enstar Cable of Macoupin County, a Georgia general partnership (the
"Joint Venture").
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. The carrying value of cash and cash
equivalents approximates fair value due to the short maturity of these
instruments.
Cash equivalents at December 31, 1996 include $388,000 of short-term
investments in commercial paper.
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:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises. These costs (primarily legal fees) are direct and
incremental to the acquisition of the franchise and are amortized using the
straight-line method over the lives of the franchises, ranging up to 15 years.
The Partnership periodically evaluates the amortization periods of these
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives. Costs relating to unsuccessful franchise
applications are charged to expense when it is determined that the efforts to
obtain the franchise will not be successful.
F-7
<PAGE> 51
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 1 - 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 years, and loan costs which
are capitalized and amortized to interest expense over the life of the related
loan. Deferred loan costs related to the Partnership's credit facility were
written off in 1996 due to repayment of the note.
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Partnership also evaluates the amortization periods of assets,
including intangible assets, to determine whether events or circumstances
warrant revised estimates of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
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, 1996, the book basis of the Partnership's net assets
exceeds its tax basis by $103,400.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses are allocated 99% to the limited partners and 1%
to the general partners. Earnings and losses per unit of limited partnership
interest are based on the weighted average number of units outstanding during
the year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1996 presentation.
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> 52
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 2 - 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 comprising $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
1986, and the initial closing took place 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 amended partnership agreement also provides that all partnership
profits, gains, operational losses, and credits (all as defined) be allocated
1% to the general partners and 99% to the limited partners until the limited
partners have been allocated net profits equal to the amount of cash flow
required for Capital Payback. After the limited partners have received cash
flow equal to their initial investments, the general partners will only receive
a 1% allocation of cash flow from sale or liquidation of a system until the
limited partners have received an annual simple interest return of at least 12%
of their initial investments less any distributions from previous system sales
and cash distributions from operations after Capital Payback. Thereafter, the
respective allocations will be made 20% to the general partners and 80% to the
limited partners. Any losses from system sales or exchanges shall be allocated
first to all partners having positive capital account balances (based on their
respective capital accounts) until all such accounts are reduced to zero and
thereafter to the Corporate General Partner. All allocations to individual
limited partners will be based on their respective limited partnership
ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
A portion of the Partnership's distributions to partners is funded
from distributions received from Enstar Cable of Macoupin County.
The amended partnership agreement limits the amount of debt the
Partnership may incur.
F-9
<PAGE> 53
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 3 - 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 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 generated income of
$35,700, $84,000 and $370,500 for 1994, 1995 and 1996, respectively, of which
$11,900, $28,000 and $123,500 was allocated to the Partnership for the
respective years. The operations of the 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-13 to F-21 of this Form 10-K.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cable television systems $ 5,470,400 $ 5,525,600
Vehicles, furniture and
equipment, and leasehold
improvements 212,700 203,700
----------- -----------
5,683,100 5,729,300
Less accumulated depreciation
and amortization (4,143,400) (4,087,200)
----------- -----------
$ 1,539,700 $ 1,642,100
=========== ===========
</TABLE>
NOTE 5 - 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, was
repaid on February 9, 1996.
F-10
<PAGE> 54
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 6 -COMMITMENTS AND CONTINGENCIES
The Partnership leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2009.
Future minimum rental payments under noncancelable operating leases
that have remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C>
1997 $ 14,400
1998 14,500
1999 11,800
2000 9,500
2001 9,500
Thereafter 36,300
---------
$ 96,000
=========
</TABLE>
Rentals, other than pole rentals, charged to operations amounted to
$15,500, $16,700 and $17,000 in 1994, 1995 and 1996, respectively. Pole
rentals were $27,400, $32,200 and $31,200 in 1994, 1995 and 1996, respectively.
Other commitments include approximately $354,000 at December 31, 1996
to complete the rebuild of the Partnership's Shelbyville, Illinois cable system.
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 is in
the process of conducting a number of additional rulemaking proceedings in
order to implement many of the provisions of the 1996 Telecom Act.
F-11
<PAGE> 55
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 7- 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 1994, 1995 or 1996.
NOTE 8 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with a wholly
owned subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 5% of gross receipts, as defined, from the operations of the
Partnership. Management fee expense was $112,100, $115,600 and $124,500 in
1994, 1995 and 1996, respectively.
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 $221,900, $188,800 and $191,900 in 1994, 1995 and
1996, respectively.
The Partnership also receives certain system operating management
services from an affiliate of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
one of the Partnership's cable systems. The Partnership reimburses the
affiliate for its allocable share of the affiliate's operational costs. The
total amount charged to the Partnership approximated $7,400, $10,900 and
$34,700 in 1994, 1995 and 1996, respectively. No management fee is payable to
the affiliate by the Partnership and there is no duplication of reimbursed
expenses and costs paid to the Manager.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Partnership for these
costs based on an estimate of what the Corporate General Partner could
negotiate for such programming services for the 15 partnerships managed by the
Corporate General Partner as a group. The Partnership recorded programming fee
expense of $498,900, $530,500 and $539,200 in 1994, 1995 and 1996,
respectively. Programming fees are included in service costs in the statements
of operations.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $58,400, $61,700 and $30,800 in
1994, 1995 and 1996, respectively.
F-12
<PAGE> 56
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Macoupin
County (A Georgia General Partnership) as of December 31, 1995 and 1996, and
the related statements of operations, venturers' capital, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Macoupin
County at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-13
<PAGE> 57
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
=================================
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
----------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $1,071,800 $ 442,200
Accounts receivable, less allowance of $4,700 and
$3,900, for possible losses 28,700 66,100
Prepaid expenses and other 16,800 25,700
Property, plant and equipment, less accumulated
depreciation and amortization 1,021,500 1,149,400
Franchise cost, net of accumulated
amortization of $2,829,600 and $3,162,000 701,300 401,000
---------- ----------
$2,840,100 $2,084,400
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 287,300 $ 196,200
Due to affiliates 68,200 83,100
---------- ----------
TOTAL LIABILITIES 355,500 279,300
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 828,200 601,700
Enstar Income Program IV-2, L.P. 828,200 601,700
Enstar Income Program IV-3, L.P. 828,200 601,700
---------- ----------
TOTAL VENTURERS' CAPITAL 2,484,600 1,805,100
---------- ----------
$2,840,100 $2,084,400
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 58
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
==================================
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $1,590,800 $1,646,000 $1,870,600
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 484,100 500,300 532,500
General and administrative expenses 161,600 232,300 109,500
General Partner management fees
and reimbursed expenses 231,200 226,600 256,300
Depreciation and amortization 703,900 634,800 614,400
---------- ---------- ----------
1,580,800 1,594,000 1,512,700
---------- ---------- ----------
Operating income 10,000 52,000 357,900
---------- ---------- ----------
INTEREST INCOME, net 25,700 32,000 12,000
GAIN ON SALE OF CABLE ASSETS -- -- 600
---------- ---------- ----------
NET INCOME $ 35,700 $ 84,000 $ 370,500
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 59
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
====================================
<TABLE>
<CAPTION>
Enstar Enstar Enstar
Income Income Income
Program Program Program
IV-1, L.P. IV-2, L.P. IV-3, L.P. Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994 $ 1,138,300 $ 1,138,300 $ 1,138,300 $ 3,414,900
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 11,900 11,900 11,900 35,700
----------- ----------- ----------- -----------
BALANCE, December 31, 1994 800,200 800,200 800,200 2,400,600
Net income for year 28,000 28,000 28,000 84,000
----------- ----------- ----------- -----------
BALANCE, December 31, 1995 828,200 828,200 828,200 2,484,600
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 123,500 123,500 123,500 370,500
----------- ----------- ----------- -----------
BALANCE, December 31, 1996 $ 601,700 $ 601,700 $ 601,700 $ 1,805,100
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 60
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
===============================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,700 $ 84,000 $ 370,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 703,900 634,800 614,400
Gain on sale of cable assets -- -- (600)
Increase (decrease) from changes in:
Accounts receivable and prepaid expenses 11,500 (27,400) (47,900)
Accounts payable and due to affiliates (800) 108,500 (76,200)
----------- ----------- -----------
Net cash provided by operating activities 750,300 799,900 860,200
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (126,900) (325,500) (411,200)
Increase in intangible assets (7,800) (14,500) (37,700)
Proceeds from sale of property, plant and
equipment -- -- 9,100
----------- ----------- -----------
Net cash used in investing activities (134,700) (340,000) (439,800)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to venturers (1,050,000) -- (1,050,000)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (434,400) 459,900 (629,600)
Cash and cash equivalents at beginning of year 1,046,300 611,900 1,071,800
----------- ----------- -----------
Cash and cash equivalents at end of year $ 611,900 $ 1,071,800 $ 442,200
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 61
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
=======================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership (the
"Venture"), owns and operates cable television systems in rural areas of
Illinois.
The financial statements do not give effect to any assets that Enstar
Income Program IV-1, L.P., Enstar Income Program IV-2, L.P. and Enstar Income
Program IV-3, L.P. (the "Venturers") may have outside of their interest in the
Venture, nor to any obligations, including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture considers
all highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the short maturity of those
instruments.
Cash equivalents at December 31, 1996 include $385,000 of short-term
investments in commercial paper.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises. In
addition, franchise cost includes capitalized costs incurred in obtaining new
franchises. These costs (primarily legal fees) are direct and incremental to the
acquisition of the franchise and are amortized using the straight-line method
over the lives of the franchises, ranging up to 15 years. The 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-18
<PAGE> 62
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=======================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing basis the recoverability of
intangible assets, including franchise costs, and capitalized plant assets based
on estimates of future undiscounted cash flows compared to net book value. If
the future undiscounted cash flow estimate were less than net book value, net
book value would then be reduced to estimated fair value, which would generally
approximate discounted cash flows. The Venture also evaluates the amortization
periods of assets, including franchise costs and other intangible assets, to
determine whether events or circumstances warrant revised estimates of useful
lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the Venture pays no income taxes. All of the income,
gains, losses, deductions and credits of the Venture are passed through to its
Venturers. The basis in the Venture's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1996, the tax basis of the
Venture's net assets exceeds its book basis by $12,300.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture agreement
effective December 30, 1987 among the Venturers, three limited partnerships
sponsored by Enstar Communications Corporation as their corporate general
partner. The Venture was formed to pool the resources of the three limited
partnerships to acquire, own, operate, and dispose of certain cable television
systems. In 1988, the Venture acquired two cable television systems in Illinois.
Under the terms of the agreement, the Venturers share equally in
profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Enstar
Communications Corporation.
F-19
<PAGE> 63
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
===================================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cable television systems $ 2,872,400 $ 3,263,300
Vehicles, furniture and
equipment, and leasehold
improvements 172,900 170,400
----------- -----------
3,045,300 3,433,700
Less accumulated depreciation
and amortization (2,023,800) (2,284,300)
----------- -----------
$ 1,021,500 $ 1,149,400
=========== ===========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the
systems under operating leases expiring in 1999.
Future minimum rental payments under non-cancelable operating leases
that have remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
1997 $ 5,900
1998 5,900
1999 2,800
-----------
$ 14,600
===========
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$7,200, $8,200 and $8,300 in 1994, 1995 and 1996, respectively, while pole
rental expense approximated $12,100, $16,300 and $13,600 in 1994, 1995 and
1996, respectively.
The Venture has guaranteed the debt of Enstar Income Program IV-1,
L.P. and Enstar Income Program IV-2, L.P.
Other commitments include approximately $153,000 at December 31, 1996
to complete the rebuild of the Venture's Auburn, Illinois cable system that was
started in 1996. However, the Venture is also rebuilding portions of its cable
systems in surrounding communities at an estimated additional cost of $310,000
in 1997 to complete the project.
F-20
<PAGE> 64
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
=======================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
The Venture is subject to regulation by various federal, state and
local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other
things, federal and local regulation of rates charged for basic cable service,
cable programming services and equipment and installation services.
Regulations issued in 1993 and significantly amended in 1994 by the Federal
Communications Commission (the "FCC") have resulted in changes in the rates
charged for the Venture's cable services. The Venture believes that compliance
with the 1992 Cable Act has had a significant negative impact on its operations
and cash flow. It also believes that any potential future liabilities for
refund claims or other related actions would not be material. The
Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on
February 8, 1996. This statute contains a significant overhaul of the federal
regulatory structure. As it pertains to cable television, the 1996 Telecom
Act, among other things, (i) ends the regulation of certain non-basic
programming services in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. The FCC is in
the process of conducting a number of additional rulemaking proceedings in
order to implement many of the provisions of the 1996 Telecom Act.
NOTE 5 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement with a wholly owned
subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 4% of gross receipts, as defined, from the operations of the
Venture. Management fees approximated $63,600, $65,800 and $74,800 in 1994,
1995 and 1996, respectively. In addition, the Venture is required to
distribute 1% of its gross revenues to the Corporate General Partner in respect
of its interest as the Corporate General Partner of the Partnership. This fee
approximated $15,900, $16,500 and $18,700 in 1994, 1995 and 1996, respectively.
The Venture also reimburses the Manager for direct expenses incurred
on behalf of the Venture and for the Venture's allocable share of operational
costs associated with services provided by the Manager. All cable television
properties managed by the Corporate General Partner and its subsidiaries are
charged a proportionate share of these expenses. Corporate office allocations
and district office expenses are charged to the properties served based
primarily on the respective percentage of basic customers or homes passed
(dwelling units within a system) within the designated service areas. The
total amounts charged to the Venture for these services approximated $151,700,
$144,300 and $162,800 during 1994, 1995 and 1996, respectively.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Venture for these costs
based on an estimate of what the Corporate General Partner could negotiate for
such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Venture recorded programming fee expense of
$346,400, $364,800 and $388,900 in 1994, 1995 and 1996, respectively.
Programming fees are included in service costs in the statements of operations.
F-21
<PAGE> 65
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)
E-1
<PAGE> 66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.17 Amended and Restated Partnership Agreement of Enstar Cable of
Macoupin County, as of October 1, 1993.(9)
10.18 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
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, 1996, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 450,900
<SECURITIES> 0
<RECEIVABLES> 66,300
<ALLOWANCES> 4,500
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,729,300
<DEPRECIATION> 4,087,200
<TOTAL-ASSETS> 3,504,300
<CURRENT-LIABILITIES> 380,300
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,504,300
<SALES> 0
<TOTAL-REVENUES> 2,489,000
<CGS> 0
<TOTAL-COSTS> 2,132,300
<OTHER-EXPENSES> (18,700)
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 30,500
<INCOME-PRETAX> 468,400
<INCOME-TAX> 0
<INCOME-CONTINUING> 468,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 468,400
<EPS-PRIMARY> 11.62
<EPS-DILUTED> 0
</TABLE>
