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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number 0-16779
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1712898
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each Class on which registered
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<S> <C>
UNITS OF LIMITED PARTNERSHIP INTEREST NONE
</TABLE>
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes X No ----- -----
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. 59,646 of the registrant s
59,766 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/Growth Program Five-A, 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 September 4, 1986. 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"). Prior to March 1993, the general partner of the general partner
of Falcon Cablevision was Falcon Holding Group, Inc., a California corporation
("FHGI"), which provided certain management services to the Partnership. On
March 29, 1993 a new entity, Falcon Holding Group, L.P. ("FHGLP"), was organized
to effect the consolidation of the ownership of various cable television
businesses (including that of Falcon Cablevision) that were previously under the
common management of FHGI. The management of FHGLP is substantially the same as
that of FHGI. See Item 13., "Certain Relationships and Related Transactions."
The Corporate General Partner, FHGLP and affiliated companies are responsible
for the day to day management of the Partnership and its operations. See
"Employees" below.
A cable television system receives television, radio and data
signals at the system's "headend" site by means of over-the-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The systems offer customers various levels (or "tiers") of cable
services consisting of broadcast television signals of local network,
independent and educational stations, a limited number of television signals
from so-called "super stations" originating from distant cities (such as WTBS,
WGN and WOR), various satellite-delivered, non-broadcast channels (such as Cable
News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"),
ESPN and Turner Network Television ("TNT"), programming originated locally by
the cable television system (such as public, governmental and educational access
programs) and informational displays featuring news, weather, stock market and
financial reports and public service announcements. A number of the satellite
services are also offered in certain packages. For an extra monthly charge, the
systems also offer "premium" television services to their customers. These
services (such as Home Box Office ("HBO"), Showtime, The Disney Channel and
selected regional sports networks) are satellite channels that consist
principally of feature films, live sporting events, concerts and other special
entertainment features, usually presented without commercial interruption. See
"Legislation and Regulation."
A customer generally pays an initial installation charge and
fixed monthly fees for basic, expanded basic, other tiers of satellite services
and premium programming services. Such monthly service fees constitute the
primary source of revenues for the systems. In addition to customer revenues,
the systems receive revenue from the sale of available advertising spots on
advertiser-supported programming. The systems also offer to their customers home
shopping services, which pay the systems a share of revenues from sales of
products in the systems' service areas, in addition to paying the systems a
separate fee in return for carrying their shopping service.
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All of the Partnership's cable television business operations are
conducted through its participation as a co-general partner with a 50% interest
in Enstar Cable of Cumberland Valley (the "Joint Venture"), the other general
partner of which is also a limited partnership sponsored by the General Partners
of the Partnership. 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 its financial resources. Because all of the
Partnership's operations are conducted through its participation in the Joint
Venture, much of the discussion in this report relates to the Joint Venture and
its activities. References to the Partnership include the Joint Venture, where
appropriate.
The Joint Venture began its cable television business operations
in January 1988 with the acquisition of certain cable television systems located
in Kentucky and expanded its operations during February 1989 with the
acquisition of certain cable television systems located in Arkansas and
Missouri. The Kentucky systems provide service to customers in and around the
Cumberland Valley area. The Missouri systems provide service to customers in and
around the municipality of Hermitage. As of December 31, 1995, the Joint Venture
served approximately 17,300 homes subscribing to cable service in these areas.
In February 1993, the systems serving Noel, Missouri were sold. The Joint
Venture does not expect to make any additional material acquisitions during the
remaining term of the Joint Venture.
FHGLP receives a management fee and reimbursement of expenses
from the Corporate General Partner for managing the Partnership's cable
television operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of FHGLP is Marc B. Nathanson. Mr.
Nathanson has managed FHGLP or its predecessors since 1975. Mr. Nathanson is a
veteran of more than 26 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices of
the Partnership, the General Partner and FHGLP are located at 10900 Wilshire
Boulevard, 15th Floor, Los Angeles, California 90024, and their telephone number
is (310) 824-9990. See Item 10., "Directors and Executive Officers of the
Registrant."
BUSINESS STRATEGY
Historically, the Joint Venture 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 Joint Venture's
business strategy has focused on serving small to medium-sized communities. The
Joint Venture believes that its cable television systems generally involve less
risk of increased competition than systems in large urban cities In the Joint
Venture's markets, consumers have access to only a limited number of
over-the-air broadcast television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. As a result,
the Joint Venture s cable television systems generally have a higher basic
penetration rate (the number of homes subscribing to cable service as a
percentage of homes passed by cable) with a more stable customer base than
systems in large cities. Nonetheless, the Joint Venture believes that all cable
operators will face increased competition in the future from alternative
providers of multi- channel video programming services. See "Competition."
On March 30, 1994, the Federal Communications Commission (the
"FCC") adopted significant amendments to its rules implementing certain
provisions of the 1992 Cable Act. The Joint Venture believes that compliance
with these amended rules has had a negative impact on the Joint Venture s
revenues and cash flow. These rules are subject to further amendment to give
effect to the Telecommunications Act of 1996 (the "1996 Telecom Act"). The 1996
Telecom Act is expected to have a significant affect on all participants in the
telecommunications industry, including the Joint Venture. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Clustering
The Joint Venture has sought to acquire cable television systems
in communities that are proximate to other owned or affiliated systems in order
to achieve the economies of scale and operating efficiencies associated with
regional "clusters" of systems. The Joint Venture believes clustering can reduce
marketing and personnel costs and can also reduce capital expenditures in cases
where cable service can be delivered to a number of systems within a single
region through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments," the Joint Venture s
systems have almost no available channel capacity with which to add new channels
or to provide pay-per-view offerings to customers. As a result, significant
amounts of capital for future upgrades will be required in order to increase
available channel capacity, improve quality of service and facilitate the
marketing of additional new services such as advertising, pay-per-view, new
unregulated tiers of satellite-delivered services and home shopping, so that the
systems remain competitive within the industry.
The Joint Venture s management has selected a technical standard
that mandates a 750 MHz fiber to the feeder architecture for the majority of all
its systems that are to be rebuilt. A system built to a 750 MHz standard can
provide approximately 95 channels of analog service. Such a system will also
permit the introduction of high speed data transmission and telephony services
in the future after incurring incremental capital expenditures related to these
services.
The Joint Venture's future capital expenditure plans are,
however, all subject to the availability of adequate capital on terms
satisfactory to the Joint Venture, of which there can be no assurance. As
discussed in prior reports, the Joint Venture postponed a number of rebuild and
upgrade projects that were planned for 1993 and 1994 because of the uncertainty
related to implementation of the 1992 Cable Act and the negative impact thereof
on the Joint Venture s business and access to capital. As a result, the Joint
Venture s systems will be significantly less technically advanced than had been
expected prior to the implementation of re-regulation. The Joint Venture spent
$1,975,800 on capital expenditures in 1995 primarily for line extensions and
equipment upgrades, and has budgeted capital expenditures of approximately
$608,800 in 1996, primarily to upgrade certain equipment. The Joint Venture
believes that the delays in upgrading its systems will, under present market
conditions, most likely have an adverse effect on the value of those systems
compared to systems that have been rebuilt to a higher technical standard. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Decentralized Management
The Corporate General Partner manages the 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.
Marketing
The Joint Venture 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 Joint Venture had offered four programming packages in
its upgraded addressable systems. These packages combined services at a lower
rate than the aggregate rates for such services purchased individually on an "a
la carte" basis. The new rules require that charges for cable-related
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equipment (e.g., converter boxes and remote control devices) and installation
services be unbundled from the provision of cable service and based upon actual
costs plus a reasonable profit. On November 10, 1994, the FCC announced the
adoption of further significant amendments to its rules. One amendment allows
cable operators to create new tiers of program services which the FCC has chosen
to exclude from rate regulation, so long as the programming is new to the
system. In addition, the FCC decided that discounted packages of non-premium
"new product tier" services will be subject to rate regulation in the future.
However, in applying this new policy to new product tier packages such as those
already offered by the Joint Venture and numerous other cable operators, the FCC
decided that where only a few services were moved from regulated tiers to the
new product tier package, the package will be treated as if it were a tier of
new program services as discussed above. Substantially all of the new product
tier packages offered by the Joint Venture have received this desirable
treatment. These amendments to the FCC s rules have allowed the Joint Venture to
resume its core marketing strategy and reintroduce programmed service packaging.
As a result, in addition to the basic service package, customers in
substantially all of the Systems may purchase an expanded basic service,
additional unregulated packages of satellite-delivered services and premium
services on either an a la carte or a discounted packaged basis. See
"Legislation and Regulation."
The Joint Venture has employed a variety of targeted marketing
techniques to attract new customers by focusing on delivering value, choice,
convenience and quality. The Joint Venture 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 Joint Venture offers discounts to customers who purchase
premium services on a limited trial basis in order to encourage a higher level
of service subscription. The Joint Venture also has a coordinated strategy for
retaining customers that includes televised retention advertising to reinforce
the initial decision to subscribe and encourage customers to purchase higher
service levels.
Customer Service and Community Relations
The Joint Venture places a strong emphasis on customer service
and community relations and believes that success in these areas is critical to
its business. FHGLP has developed and implemented a wide range of monthly
internal training programs for its employees, including its regional managers,
that focus on the Joint Venture's operations and employee interaction with
customers. The effectiveness of FHGLP s training program as it relates to the
employees' interaction with customers is monitored on an on-going basis, and a
portion of the regional managers compensation is tied to achieving customer
service targets. FHGLP conducts an extensive customer survey on an annual basis
and uses the information in its efforts to enhance service and better address
the needs of the Joint Venture s customers. In addition, the Joint Venture is
participating in the industry s recently announced Customer Service Initiative
which emphasizes an on-time guarantee program for service and installation
appointments. FHGLP s corporate executives and regional managers lead the Joint
Venture's involvement in a number of programs benefiting the communities the
Joint Venture 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 JOINT VENTURE'S SYSTEMS
The table below sets forth certain operating statistics for the
Joint Venture's cable systems as of December 31, 1995.
<TABLE>
<CAPTION>
Average
Monthly
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
System Passed(1) Service Penetration(2) Units(3) Penetration(4) Service(5) Subscribers(6)
- ------ ------ ------- ----------- ----- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Monticello, KY 21,145 16,179 76.5% 3,896 24.1% $30.35 22,259
Pomme De Terre, MO 3,583 1,131 31.6% 356 31.5% $26.47 1,342
------ ------ ----- ------
Total 24,728 17,310 70.0% 4,252 24.6% $30.10 23,601
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</TABLE>
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(1) Homes passed refers to estimates by the 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.
(4) Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
(5) Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1995.
(6) The Joint Venture reports subscribers for the Systems on an
equivalent subscriber basis and, unless otherwise indicated, the term
"SUBSCRIBERS" means equivalent subscribers, calculated by dividing aggregate
basic service revenues by the average lowest basic service rate within an
operating entity, adjusted to reflect the impact of regulation. Basic service
revenues include charges for basic programming, bulk and commercial accounts and
certain specialized "packaged programming" services, including the appropriate
components of new product tier revenue, and excluding premium television and
non-subscription services. Consistent with past practices, Subscribers is an
analytically derived number which is reported in order to provide a basis of
comparison to previously reported data. The computation of Subscribers has been
impacted by changes in service offerings made in response to the 1992 Cable Act.
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CUSTOMER RATES AND SERVICES
The Joint Venture's cable television systems offer customers
packages of services that include the local area network, independent and
educational television stations, a limited number of television signals from
distant cities, numerous satellite-delivered, non-broadcast channels (such as
CNN, MTV, USA, ESPN and TNT) and certain information and public access channels.
For an extra monthly charge, the systems provide certain premium television
services, such as HBO, Showtime, The Disney Channel and regional sports
networks.
The Joint Venture also offers other cable television services to
its customers. For additional charges, in most of its systems, the Joint Venture
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 Joint Venture vary from system
to system, depending upon a system's channel capacity and viewer interests.
Rates for services also vary from market to market and according to the type of
services selected.
Prior to the adoption of the 1992 Cable Act, the systems
generally were not subject to any rate regulation, i.e., they were adjudged to
be subject to effective competition under then-effective FCC regulations. The
1992 Cable Act, however, substantially changed the statutory and FCC rate
regulation standards. Under the new definition of effective competition, nearly
all cable television systems in the United States have become subject to local
rate regulation of basic service. The 1996 Telecom Act expanded this definition
to include situations where a local telephone company, or anyone using its
facilities, offers comparable video service by any means except direct broadcast
satellite ("DBS"). In addition, the 1992 Cable Act eliminated the 5% annual
basic rate increases previously allowed by the 1984 Cable Act without local
approval; allows the FCC to review rates for nonbasic service tiers other than
premium services in response to complaints filed by franchising authorities
and/or cable customers; prohibits cable television systems from requiring
customers to purchase service tiers above basic service in order to purchase
premium services if the system is technically capable of doing so; and adopted
regulations to establish, on the basis of actual costs, the price for
installation of cable television service, remote controls, converter boxes, and
additional outlets. The FCC implemented these rate regulation provisions on
September 1, 1993, which affected all the Joint Venture's systems which are not
deemed to be subject to effective competition under the FCC's definition. The
FCC substantially amended its rate regulation rules on February 22, 1994 and
again on November 10, 1994. The FCC will have to conduct a number of rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act. See "Legislation and Regulation."
At December 31, 1995, the Joint Venture's monthly rates for basic
cable service for residential customers, excluding special senior citizen
discount rates, ranged from $16.74 to $22.20 and premium service rates ranged
from $10.95 to $11.95, excluding special promotions offered periodically in
conjunction with the Joint Venture's marketing programs. A one-time installation
fee, which the Joint Venture may wholly or partially waive during a promotional
period, is usually charged to new customers. Prior to September 1, 1993, the
Joint Venture generally charged monthly fees for additional outlets, converters,
program guides and descrambling and remote control tuning devices. As described
above, these charges have either been eliminated or altered by the
implementation of rate regulation, and as a result of such implementation under
the FCC's guidelines, the rates for basic cable service for residential
customers correspondingly increased in some cases. As a result, while many
customers experienced a decrease in their monthly bill for all services, some
customers experienced an increase. However, substantially all of the Joint
Venture s customers did receive a decrease in their monthly charges in July 1994
upon implementation of the FCC s amended rules. Commercial customers, such as
hotels, motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. Most multi-unit dwellings are offered
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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 Joint Venture has no employees. The various personnel
required to operate the Joint Venture's business are employed by the Corporate
General Partner, its subsidiary corporation or FHGLP and its affiliates. The
cost of such employment is allocated and charged to the Joint Venture for
reimbursement pursuant to the partnership agreement and management agreement.
The amounts of these reimbursable costs to the Corporate General Partner are set
forth below in Item 11, "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Joint Venture
seeks to apply technological advances in the cable television industry to its
cable television systems on the basis of cost effectiveness, capital
availability, enhancement of product quality and service delivery and industry
wide acceptance. Currently, the Joint Venture systems have an average channel
capacity of 36 and, on average, 99% of the channel capacity of the systems was
utilized at December 31, 1995. The Joint Venture believes that system upgrades
would enable it to provide customers with greater programming diversity, better
picture quality and alternative communications delivery systems made possible by
the introduction of fiber optic technology and by the possible future
application of digital compression. The implementation of the Joint Venture s
capital expenditure plans is, however, subject to the availability of adequate
capital on terms satisfactory to the Joint Venture, of which there can be no
assurance. Also, as a result of the uncertainty created by recent regulatory
changes, the Joint Venture has deferred all plant rebuilds and upgrades. See
"Legislation and Regulation" and Item 7., "Management s Discussion and Analysis
of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial cable
is playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels and, accordingly, its
utilization is essential to the enhancement of a cable television system's
technical capabilities. The Joint Venture's current policy to utilize fiber
optic technology in substantially all rebuild projects which it undertakes is
based upon the benefits that the utilization of fiber optic technology provides
over traditional coaxial cable distribution plant, including lower per mile
rebuild costs due to a reduction in the number of required amplifiers, the
elimination of headends, lower ongoing maintenance and power costs and improved
picture quality and reliability.
DIGITAL COMPRESSION
The Joint Venture 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 Joint Venture 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 Joint Venture s
management has no plans to install it at this time based on its present
understanding of the costs as compared to the benefits of the digital equipment
currently available.
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PROGRAMMING
The Joint Venture purchases basic and premium programming for its
systems from Falcon Cablevision. In turn, Falcon Cablevision charges the Joint
Venture for these costs based on an estimate of what the Joint Venture could
negotiate for such services for the fifteen partnerships managed by the
Corporate General Partner as a group (approximately 94,600 homes subscribing to
cable service at December 31, 1995), which is generally based on a fixed fee per
customer or a percentage of the gross receipts for the particular service.
Falcon Cablevision s programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. Falcon Cablevision does not have
long-term programming contracts for the supply of a substantial amount of its
programming. Accordingly, no assurance can be given that its, and
correspondingly the 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 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 add channels
under retransmission carriage agreements entered into with certain programming
sources, increased costs to produce or purchase cable programming generally,
inflationary increases and other factors. Under the FCC rate regulations,
increases in programming costs for regulated cable services occurring after the
earlier of March 1, 1994, or the date a system's basic cable service became
regulated, may be passed through to customers. See "Legislation and Regulation -
Federal Regulation - Carriage of Broadcast Television Signals." Generally,
programming costs are charged among systems on a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated
under non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act. See "Legislation and Regulation."
As of December 31, 1995, the Joint Venture held 19 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 systems range up to 5% of the gross revenues generated by a system. The
1984 Cable Act prohibits franchising authorities from imposing franchise fees in
excess of 5% of gross revenues and also permits the cable system operator to
seek renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The following table groups the franchises of the Joint Venture's
cable television systems by date of expiration and presents the number of
franchises for each group of franchises and the approximate number and
percentage of homes subscribing to cable service for each group as of December
31, 1995.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
- -------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Prior to 1997 3 2,937 17.0%
1997 - 2001 13 11,261 65.1%
2002 and after 3 2,158 12.5%
-- ------ ----
Total 19 16,356 94.5%
== ====== ====
</TABLE>
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The Joint Venture operates cable television systems which serve
multiple communities and, in some circumstances, portions of such systems extend
into jurisdictions for which the Joint Venture believes no franchise is
necessary. In the aggregate, approximately 954 customers, comprising
approximately 5.5% of the Joint Venture's customers, are served by unfranchised
portions of such systems. In certain instances, however, 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
generally has satisfactory relationships with substantially all of its
franchising communities. The Joint Venture has never had a franchise revoked for
any of its systems and believes that it has satisfactory relationships with
substantially all of its franchising authorities.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over the air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
cassette players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment for
certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home Viewer Copyright Act of 1988, which became
effective January 1, 1989 for an initial six-year period. This Act establishes a
statutory compulsory license for certain transmissions made by satellite owners
to home satellite dishes, for which carriers are required to pay a royalty fee
to the Copyright Office. This Act has been extended by Congress until December
31, 1999. The 1992 Cable Act enhances the right of cable competitors to purchase
nonbroadcast satellite-delivered programming. See "Legislation and
Regulation-Federal Regulation."
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Television programming is now also being delivered to individuals
by high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in the
same orbital position. Video compression technology may also be used by cable
operators in the future to similarly increase their channel capacity. DBS
service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna, and it is more
accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. DBS service is being heavily marketed on a nation-wide basis. The
extent to which DBS systems will be competitive with cable television systems
will depend upon, among other things, the ability of DBS operators to obtain
access to programming, the availability of reception equipment, and whether
equipment and service can be made available to consumers at reasonable prices.
Multi-channel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS systems are less capital intensive, are
not required to obtain local franchises or to pay franchise fees and are subject
to fewer regulatory requirements than cable television systems. To date, the
ability of these so-called "wireless" cable services to compete with cable
television systems has been limited by channel capacity constraints and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few MMDS systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the development of
MMDS and other wireless cable systems as alternative means of distributing video
programming, including reallocating certain frequencies to these services and
expanding the permissible use and eligibility requirements for certain channels
reserved for educational purposes. The FCC's actions enable a single entity to
develop an MMDS system with a potential of up to 35 channels that could compete
effectively with cable television. MMDS systems qualify for the statutory
compulsory copyright license for the retansmission of television and radio
broadcast stations. FCC rules and the 1992 Cable Act prohibit the common
ownership of cable systems and MMDS facilities serving the same area.
Additional competition may come from private cable television
systems servicing condominiums, apartment complexes and certain other multiple
unit residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners' associations
which preclude franchised cable television operators from serving residents of
such private complexes. Although a number of states have enacted laws to afford
operators of franchised cable television systems access to such private
complexes, the U.S. Supreme Court has held that cable companies cannot have such
access without compensating the property owner. The access statutes of several
states have been challenged successfully in the courts, and other such laws are
under attack. However, the 1984 Cable Act gives franchised cable operators the
right to use existing compatible easements within their franchise areas upon
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to the terms and conditions of access to
those easements. There have been conflicting judicial decisions interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property.
Due to the widespread availability of reasonably-priced earth
stations, SMATV systems can offer both improved reception of local television
stations and many of the same satellite-delivered program services which are
offered by franchised cable television systems. Further, while a franchised
cable television system typically is obligated to extend service to all areas of
a community regardless of population density or economic risk, the SMATV system
may confine its operation to small areas that are easy to serve and more likely
to be profitable. Under the 1996 Telecom Act, SMATV systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights-of-way. However, a
SMATV system is subject to the 1984 Cable Act's franchise requirement if it uses
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physically closed transmission paths such as wires or cables to interconnect
separately owned and managed buildings if its lines use or cross any public
right-of-way. In some cases, SMATV operators may be able to charge a lower price
than could a cable system providing comparable services and the FCC's new
regulations implementing the 1992 Cable Act limit a cable operator's ability to
reduce its rates to meet this competition. Furthermore, the U.S. Copyright
Office has tentatively concluded that SMATV systems are "cable systems" for
purposes of qualifying for the compulsory copyright license established for
cable systems by federal law. The 1992 Cable Act prohibits the common ownership
of cable systems and SMATV facilities serving the same area. However, a cable
operator can purchase a SMATV system serving the same area and technically
integrate it into the cable system.
The FCC has authorized a new interactive television service which
will permit non-video transmission of information between an individual's home
and entertainment and information service providers. This service will provide
an alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used as well by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking
toward the allocation of frequencies in the 28 Ghz range for a new multi-channel
wireless video service which could make 98 video channels available in a single
market. It cannot be predicted at this time whether competitors will emerge
utilizing such frequencies or whether such competition would have a material
impact on the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership
and operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems" without
obtaining a local cable franchise, although telephone companies operating such
systems can be required to make payments to local governmental bodies in lieu of
cable franchise fees. Up to two-thirds of the channel capacity on an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC s video dialtone rules.
The 1996 Telecom Act also includes numerous provisions designed to make it
easier for cable operators and others to compete directly with local exchange
telephone carriers. With certain limited exceptions, neither a local exchange
carrier nor a cable operator can acquire more than 10% of the other entity
operating within its own service area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry. The ability of cable systems to
compete with present, emerging and future distribution media will depend to a
great extent on obtaining attractive programming. The availability and exclusive
use of a sufficient amount of quality programming may in turn be affected by
developments in regulation or copyright law. See "Legislation and Regulation."
The cable television industry competes with radio, television and
print media for advertising revenues. As the cable television industry continues
to develop programming designed specifically for distribution by cable,
advertising revenues may increase. Premium programming provided by cable systems
is subject to the same competitive factors which exist for other programming
discussed above. The continued profitability of premium services may depend
largely upon the continued availability of attractive programming at competitive
prices.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future materially affect the Partnership and the cable television industry. The
following is a summary of federal laws and regulations affecting the growth and
operation of the cable television industry and a description of certain state
and local laws.
RECENT DEVELOPMENTS
On February 8, 1996, the President signed the 1996 Telecom Act,
into law. This statute substantially amended the Communications Act of 1934 (the
"Communications Act") by, among other things, removing barriers to competition
in the cable television and telephone markets and reducing the regulation of
cable television rates. As it pertains to cable television, the 1996 Telecom
Act, among other things, (i) ends the regulation of certain nonbasic programming
services in 1999; (ii) expands the definition of effective competition, the
existence of which displaces rate regulation; (iii) eliminates the restriction
against the ownership and operation of cable systems by telephone companies
within their local exchange service areas; and (iv) liberalizes certain of the
FCC's cross-ownership restrictions. The FCC will have to conduct a number of
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act. See "Business - Competition" and "-Federal Regulation-Rate
Regulation."
The Partnership believes that the regulation of its industry
remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on the
Partnership.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984. This
federal statute, which amended the Communications Act, creates uniform national
standards and guidelines for the regulation of cable television systems.
Violations by a cable television system operator of provisions of the
Communications Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the 1984
Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions. It also prohibited non-grandfathered cable
television systems from operating without a franchise in such jurisdictions. In
connection with new franchises, the 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories. The 1984 Cable Act grandfathered, for the remaining term of existing
franchises, many but not all of the provisions in existing franchises which
would not be permitted in franchises entered into or renewed after the effective
date of the 1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This
legislation has effected significant changes to the legislative and regulatory
environment in which the cable industry operates. It amends the 1984 Cable Act
in many respects. The 1992 Cable Act became effective on December 4, 1992,
although certain provisions, most notably those dealing with rate regulation and
retransmission consent, became effective at later dates. The legislation
required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute, virtually all of which have been completed.
The 1992 Cable Act allows for a greater degree of regulation of the cable
industry with respect to, among other things: (i) cable system rates for both
basic and certain nonbasic services; (ii) programming access and
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exclusivity arrangements; (iii) access to cable channels by unaffiliated
programming services; (iv) leased access terms and conditions; (v) horizontal
and vertical ownership of cable systems; (vi) customer service requirements;
(vii) franchise renewals; (viii) television broadcast signal carriage and
retransmission consent; (ix) technical standards; (x) customer privacy; (xi)
consumer protection issues; (xii) cable equipment compatibility; (xiii) obscene
or indecent programming; and (xiv) requiring subscribers to subscribe to tiers
of service other than basic service as a condition of purchasing premium
services. Additionally, the legislation encourages competition with existing
cable television systems by allowing municipalities to own and operate their own
cable television systems without having to obtain a franchise; preventing
franchising authorities from granting exclusive franchises or unreasonably
refusing to award additional franchises covering an existing cable system's
service area; and prohibiting the common ownership of cable systems and
co-located MMDS or SMATV systems. The 1992 Cable Act also precludes video
programmers affiliated with cable television companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the
1992 Cable Act is still ongoing. On April 8, 1993, a three-judge district court
panel granted summary judgment for the government upholding the must-carry
provisions. That decision was appealed directly to the U.S. Supreme Court which
remanded the case back to the district court to determine whether there was
adequate evidence that the provisions were needed and whether the restrictions
chosen were the least intrusive. On December 12, 1995, the district court again
upheld the must-carry provisions. The Supreme Court has again agreed to review
the district court's decision.
On September 16, 1993, a constitutional challenge to the balance
of the 1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set- asides for DBS operators). An appeal from that decision is pending before
the U.S. Court of Appeals for the District of Columbia Circuit.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has heretofore promulgated regulations
covering such areas as the registration of cable television systems,
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, consumer education and
lockbox enforcement, origination cablecasting and sponsorship identification,
children's programming, the regulation of basic cable service rates in areas
where cable television systems are not subject to effective competition, signal
leakage and frequency use, technical performance, maintenance of various
records, equal employment opportunity, and antenna structure notification,
marking and lighting. The FCC has the authority to enforce these regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations. The 1992 Cable Act required the
FCC to adopt additional regulations covering, among other things, cable rates,
signal carriage, consumer protection and customer service, leased access,
indecent programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity, and
various aspects of direct broadcast satellite system ownership and operation.
The 1996 Telecom Act requires certain changes to various of these regulations. A
brief summary of certain of these federal regulations as adopted to date
follows.
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RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional nonbasic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the previous statutory and FCC rate regulation standards.
The 1992 Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable systems were not subject to local rate
regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to local rate regulation of basic service.
The 1996 Telecom Act expands the definition of effective competition to cover
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except DBS. Satisfaction of this test deregulates both
basic and nonbasic tiers. Additionally, the 1992 Cable Act eliminated the 5%
annual rate increase for basic service previously allowed by the 1984 Cable Act
without local approval; required the FCC to adopt a formula, for franchising
authorities to enforce, to assure that basic cable rates are reasonable; allowed
the FCC to review rates for nonbasic service tiers (other than per-channel or
per-program services) in response to complaints filed by franchising authorities
and/or cable customers; prohibited cable television systems from requiring
subscribers to purchase service tiers above basic service in order to purchase
premium services if the system is technically capable of doing so; required the
FCC to adopt regulations to establish, on the basis of actual costs, the price
for installation of cable service, remote controls, converter boxes and
additional outlets; and allows the FCC to impose restrictions on the retiering
and rearrangement of cable services under certain limited circumstances. The
1996 Telecom Act ends FCC regulation of nonbasic tier rates on March 31, 1999.
The FCC adopted rules designed to implement the 1992 Cable Act's
rate regulation provisions on April 1, 1993, and then significantly amended them
on reconsideration on February 22, 1994. The FCC's regulations contain standards
for the regulation of basic and nonbasic cable service rates (other than
per-channel or per-program services). The FCC's original rules became effective
on September 1, 1993. The rules have been further amended several times. The
rate regulations adopt a benchmark price cap system for measuring the
reasonableness of existing basic and nonbasic service rates, and a formula for
calculating additional rate increases. Alternatively, cable operators have the
opportunity to make cost-of-service showings which, in some cases, may justify
rates above the applicable benchmarks. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control devices) and
installation services be unbundled from the provision of cable service and based
upon actual costs plus a reasonable profit.
Local franchising authorities and/or the FCC are empowered to
order a reduction of existing rates which exceed the maximum permitted level for
either basic and/or nonbasic cable services and associated equipment, and
refunds can be required, measured from the date of a complaint to the FCC
challenging an existing nonbasic cable service rate or from September 1993, for
existing basic cable service rates under the original rate regulations, and from
May 15, 1994, under the February 22, 1994 amendments thereto. In general, the
reduction for existing basic and nonbasic cable service rates under the original
rate regulations would be to the greater of the applicable benchmark level or
the rates in force as of September 30, 1992, minus 10 percent, adjusted forward
for inflation. The amended regulations require an aggregate reduction of 17
percent, adjusted forward for inflation, from the rates in force as of September
30, 1992. The regulations also provide that future rate increases may not exceed
an inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable operator adds or deletes channels. Amendments adopted on November
10, 1994 incorporated an alternative method for adjusting the rate charged for a
regulated nonbasic tier when new services are added. Cable operators can
increase rates for such tiers by as much as $1.50 over a two year period to
reflect the addition of up to six new channels of service on nonbasic tiers (an
additional $0.20 for a seventh channel is permitted in the third year). In
addition, new product tiers consisting of services new to the cable system can
be created free of rate regulation as long as certain conditions are met such as
not moving services from
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existing tiers to the new tier. These provisions currently provide limited
benefit to the 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 Joint Venture for basic cable service and for
associated basic cable service equipment. In addition, a number of the Joint
Venture's customers have filed complaints with the FCC regarding the rates
charged for non-basic cable service.
The Joint Venture has adjusted its regulated programming service
rates and related equipment and installation charges in substantially all of its
systems so as to bring these rates and charges into compliance with the
applicable benchmark or equipment and installation cost levels. The Joint
Venture also implemented a program in substantially all of its systems under
which a number of the 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 related to systems owned by the Joint
Venture. There have been two rulings, however, on such packages offered by
affiliated partnerships managed by FHGLP. In one case, the FCC's Cable Services
Bureau ruled that a nine- channel a la carte package was an evasion of rate
regulation and ordered this package to be treated as a regulated tier. In the
other case, a six-channel package was held not to be an evasion, but rather is
to be considered an unregulated new product tier under the FCC's November 10,
1994 rule amendments. The deciding factor in all of the FCC's decisions related
to a la carte tiers appears to be the number of channels moved from regulated
tiers, with six or fewer channels being deemed not to be an evasion. Almost all
of the Joint 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).
In December 1995, the Joint Venture, and all of its affiliated
partnerships, filed petitions with the FCC seeking a determination that they are
eligible for treatment as "small cable operators" for purposes of being able to
utilize the FCC's streamlined cost-of-service rate-setting methodology. If such
relief is granted, many of the Joint Venture's systems would be able to increase
their basic and/or nonbasic service tier rates.
On March 11, 1993, the FCC adopted regulations pursuant to the
1992 Act which require cable systems to permit customers to purchase video
programming on a per channel or a per program basis without the necessity of
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally, this exemption
from compliance with the statute for cable systems that do not have such
technical capability is available until a cable system obtains the capability,
but not later than December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains new signal carriage requirements.
These new rules allowed commercial television broadcast stations which are
"local" to a cable system, i.e., the system is located in the station's Area of
Dominant Influence, to elect every three years whether to require the cable
system to carry the station, subject to certain exceptions, or whether the cable
system will have to negotiate for "retransmission consent" to carry the station.
The first such election was made on June 17, 1993. Local
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non-commercial television stations are also given mandatory carriage rights,
subject to certain exceptions, within the larger of: (i) a 50 mile radius from
the station's city of license; or (ii) the station's Grade B contour (a measure
of signal strength). Unlike commercial stations, noncommercial stations are not
given the option to negotiate retransmission consent for the carriage of their
signal. In addition, cable systems will have to obtain retransmission consent
for the carriage of all "distant" commercial broadcast stations, except for
certain "superstations," i.e., commercial satellite-delivered independent
stations such as WTBS. The 1992 Cable Act also eliminated, effective December 4,
1992, the FCC's regulations requiring the provision of input selector switches.
The must-carry provisions for non-commercial stations became effective on
December 4, 1992. Implementing must-carry rules for non-commercial and
commercial stations and retransmission consent rules for commercial stations
were adopted by the FCC on March 11, 1993. All commercial stations entitled to
carriage were to have been carried by June 2, 1993, and any non-must-carry
stations (other than superstations) for which retransmission consent had not
been obtained could no longer be carried after October 5, 1993. A number of
stations previously carried by the Joint Venture's cable television systems
elected retransmission consent. The Joint Venture was able to reach agreements
with broadcasters who elected retransmission consent or to negotiate extensions
to the October 6, 1993 deadline and has therefore not been required to pay cash
compensation to broadcasters for retransmission consent or been required by
broadcasters to remove broadcast stations from the cable television channel
line-ups. The Joint Venture has, however, agreed to carry some services (e.g.,
ESPN2 and a new service by FOX) in specified markets pursuant to retransmission
consent arrangements which it believes are comparable to those entered into by
most other large cable operator, and for which it pays monthly fees to the
service providers, as it does with other satellite providers. The next election
between must-carry and retransmission consent for local commercial television
broadcast stations will be October 1, 1996.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must,
upon the appropriate request of a local television station, delete the
simultaneous or nonsimultaneous network programming of a distant station when
such programming has also been contracted for by the local station on an
exclusive basis.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable system to delete or "black out" such programming from
other television stations which are carried by the cable system. The extent of
such deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The FCC
also has commenced a proceeding to determine whether to relax or abolish the
geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution rights
entirely by contract, and to determine whether such exclusivity rights should be
extended to noncommercial educational stations. It is possible that the outcome
of these proceedings will increase the amount of programming that cable
operators are requested to black out. Finally, the FCC has declined to impose
equivalent syndicated exclusivity rules on satellite carriers who provide
services to the owners of home satellite dishes similar to those provided by
cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under
the 1984 Cable Act, such payments cannot exceed 5% of a cable system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide cable-related
facilities and equipment and to enforce compliance with voluntary commitments.
In the case of franchises in effect prior to the effective date of the 1984
Cable Act, franchising authorities may enforce requirements contained in the
franchise relating to
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facilities, equipment and services, whether or not cable-related. The 1984 Cable
Act, under certain limited circumstances, permits a cable operator to obtain
modifications of franchise obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under
which a cable operator seeks to enforce his renewal rights which could make it
easier in some cases for a franchising authority to deny renewal. While a cable
operator must still submit its request to commence renewal proceedings within
thirty to thirty-six months prior to franchise expiration to invoke the formal
renewal process, the request must be in writing and the franchising authority
must commence renewal proceedings not later than six months after receipt of
such notice. The four-month period for the franchising authority to grant or
deny the renewal now runs from the submission of the renewal proposal, not the
completion of the public proceeding. Franchising authorities may consider the
"level" of programming service provided by a cable operator in deciding whether
to renew. For alleged franchise violations occurring after December 29, 1984,
franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
A recent federal court decision could, if upheld and if adopted
by other federal courts, make the renewal of franchises more problematic in
certain circumstances. The United States District Court for the Western District
of Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision has
been appealed. The Partnership was not a party to this litigation.
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act presently allows cable operators
substantial latitude in setting leased access rates, the 1992 Cable Act requires
leased access rates to be set according to a formula determined by the FCC.
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<PAGE> 19
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a
single cable television franchise and to impose certain franchise restrictions
upon cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be in a state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant franchises
to competing cable television systems and permits franchising authorities to
operate their own cable television systems without franchises.
OWNERSHIP
The 1984 Cable Act codified existing FCC cross-ownership
regulations, which, in part, prohibit local exchange telephone companies
("LECs") from providing video programming directly to customers within their
local exchange telephone service areas, except in rural areas or by specific
waiver of FCC rules. This restriction had been ruled unconstitutional in several
court cases, and was before the Supreme Court for review, when the 1996 Telecom
Act was passed. That statute repealed the rule in its entirety.
The 1984 Cable Act and the FCC's rules prohibit the common
ownership, operation, control or interest in a cable system and a local
television broadcast station whose predicted grade B contour (a measure of a
television station's significant signal strength as defined by the FCC's rules)
covers any portion of the community served by the cable system. The 1996 Telecom
Act eliminates the statutory ban and directs the FCC to review its rule within
two years. Common ownership or control has historically also been prohibited by
the FCC (but not by the 1984 Cable Act) between a cable system and a national
television network. The 1996 Telecom Act eliminates this prohibition. Finally,
in order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and MDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act codified
this restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom
Act exempts cable systems facing effective competition from this restriction.
The 1992 Cable Act permits states or local franchising authorities to adopt
certain additional restrictions on the ownership of cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder of
more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the U.S. District Court decision holding
the multiple ownership limit provision of the 1992 Cable Act unconstitutional.
The FCC has also adopted rules which limit the number of channels
on a cable system which can be occupied by programming in which the entity which
owns the cable system has an attributable interest. The limit is 40% of all
activated channels.
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
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<PAGE> 20
reporting and certification rules that apply to all cable system operators with
more than five full-time employees. Pursuant to the requirements of the 1992
Cable Act, the FCC has imposed more detailed annual EEO reporting requirements
on cable operators and has expanded those requirements to all multichannel video
service distributors. Failure to comply with the EEO requirements can result in
the imposition of fines and/or other administrative sanctions, or may, in
certain circumstances, be cited by a franchising authority as a reason for
denying a franchisee's renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner
in which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act precluded cable operators from selling or
otherwise transferring ownership of a cable television system within 36 months
after acquisition or initial construction, with certain exceptions. The 1996
Telecom Act repealed this restriction. The 1992 Cable Act also requires
franchising authorities to act on any franchise transfer request submitted after
December 4, 1992 within 120 days after receipt of all information required by
FCC regulations and by the franchising authority. Approval is deemed to be
granted if the franchising authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all
cable television systems must file a registration statement with the FCC listing
the broadcast signals they will carry and certain other information.
Additionally, cable operators periodically are required to file various
informational reports with the FCC. Cable operators who operate in certain
frequency bands are required on an annual basis to file the results of their
periodic cumulative leakage testing measurements. Operators who fail to make
this filing or who exceed the FCC's allowable cumulative leakage index risk
being prohibited from operating in those frequency bands in addition to other
sanctions.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable
to the cable channels on which broadcast stations are carried, and has
prohibited franchising authorities from adopting standards which were in
conflict with or more restrictive than those established by the FCC. The FCC has
revised such standards and made them applicable to all classes of channels which
carry downstream National Television System Committee (NTSC) video programming.
The FCC also has adopted additional standards applicable to cable television
systems using frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to
prevent harmful interference with aeronautical navigation and safety radio
services and has also established limits on cable system signal leakage.
Periodic testing by cable operators for compliance with the technical standards
and signal leakage limits is required. The 1992 Cable Act requires the FCC to
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. With respect to other kinds of channels,
the 1996 Telecom Act only requires that the audio and video portions of the
channel be fully blocked, at no charge, upon request of the person not
subscribing to the channel. The specific blocking requirements applicable to
sexually-oriented programming are being challenged in court on constitutional
grounds.
COPYRIGHT
Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations. Originally, the Federal Copyright Royalty Tribunal was
empowered to make and, in fact, did make several adjustments in copyright
royalty rates. This tribunal was eliminated by
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<PAGE> 22
Congress in 1993. Any future adjustment to the copyright royalty rates will be
done through an arbitration process to be supervised by the U.S. Copyright
Office. Requests to adjust the rates were made in January, 1996 and are pending
before the Copyright Office.
Cable operators are liable for interest on underpaid and unpaid
royalty fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at
examining its policies governing the consolidated reporting of commonly owned
and contiguous cable television systems. The present policies governing the
consolidated reporting of certain cable television systems have often led to
substantial increases in the amount of copyright fees owed by the systems
affected. These situations have most frequently arisen in the context of cable
television system mergers and acquisitions. While it is not possible to predict
the outcome of this proceeding, any changes adopted by the Copyright Office in
its current policies may have the effect of reducing the copyright impact of
certain transactions involving cable company mergers and cable television system
acquisitions.
Various bills have been introduced into Congress over the past
several years that would eliminate or modify the cable television compulsory
license. Without the compulsory license, cable operators would have to negotiate
rights from the copyright owners for all of the programming on the broadcast
stations carried by cable systems. Such negotiated agreements would likely
increase the cost to cable operators of carrying broadcast signals. The 1992
Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television broadcast stations and
cable operators do not obviate the need for cable operators to obtain a
copyright license for the programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks (such as HBO) and basic cable networks
(such as USA Network) is licensed by the networks through private agreements
with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc.
("BMI"), the two major performing rights organizations in the United States. As
a result of extensive litigation, both ASCAP and BMI now offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves on local
origination channels, in advertisements inserted locally on cable networks, et
cetera, must also be licensed. A blanket license is available from BMI. Cable
industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. State and/or
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
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
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<PAGE> 23
1984 Cable Act places certain limitations on a franchising authority's ability
to control the operation of a cable system operator and the courts have from
time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially in
the area of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided. The 1996 Telecom Act prohibits a franchising authority from
either requiring or limiting a cable operator's provision of telecommunications
services.
Various proposals have been introduced at the state and local
levels with regard to the regulation of cable television systems, and a number
of states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The attorneys general of approximately 25 states have announced
the initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
The foregoing does not purport to describe all present and
proposed federal, state and local regulations and legislation relating to the
cable television industry. Other existing federal regulations, copyright
licensing and, in many jurisdictions, state and local franchise requirements,
currently are the subject of a variety of judicial proceedings, legislative
hearings and administrative and legislative proposals which could change, in
varying degrees, the manner in which cable television systems operate. Neither
the outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
ITEM 2. PROPERTIES
The Joint Venture owns or leases parcels of real property for
signal reception sites (antenna towers and headends), microwave facilities and
business offices, and owns or leases its service vehicles. The Joint Venture
believes that its properties, both owned and leased, are in good condition and
are suitable and adequate for the Joint Venture's business operations.
The Joint Venture owns substantially all of the assets related to
its cable television operations, including its program production equipment,
headend (towers, antennae, electronic equipment and satellite earth stations),
cable plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
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<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership s business and management believes that the
outcome of all pending legal proceedings will not, in the aggregate, have a
material adverse effect on the financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 25
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 1,886 as of December 31, 1995. In addition to restrictions on the
transferability of units contained in the Partnership Agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended Partnership Agreement generally provides that all
cash distributions (as defined) be allocated 1% to the general partners and 99%
to the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The Partnership Agreement also provides that all Partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will 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 10% of their initial
investments less any distributions from previous system sales or refinancing of
systems. 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.
The policy of the Corporate General Partner (although there is no
contractual obligation to do so) is to cause the Partnership to make cash
distributions on a quarterly basis throughout the operational life of the
Partnership, assuming the availability of sufficient cash flow from the Joint
Venture operations. The amount of such distributions, if any, will vary from
quarter to quarter depending upon the Joint Venture's results of operations and
the Corporate General Partner's determination of whether otherwise available
funds are needed for the Joint Venture'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 in February 1988. The distributions were funded
primarily from distributions received by the Partnership from the Joint Venture.
No distributions were made during 1993, 1994 or 1995.
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<PAGE> 26
The Partnership's ability to pay distributions in the future, the
actual level of any such distributions and the continuance of distributions if
commenced, 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, if any. See Item 7., "Management s Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and
of the Joint Venture for the five years ended December 31, 1995.
THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Costs and expenses $ (68,400) $ (80,400) $ (44,300) $ (49,800) $ (32,000)
Depreciation and amortization (19,000) (4,800) - - -
----------- --------- --------- --------- ---------
Operating loss (87,400) (85,200) (44,300) (49,800) (32,000)
Interest expense (1,700) (2,500) (2,000) (1,700) (500)
Equity in net loss of joint (993,900) (664,000) (601,600) (642,500) (555,100)
venture ----------- --------- --------- --------- ---------
Net loss $(1,083,000) $(751,700) $(647,900) $(694,000) $(587,600)
=========== ========= ========= ========= =========
PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Net loss $ (17.94) $ (12.45) $ (10.73) $ (11.50) $ (9.73)
=========== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $7,413,500 $6,680,800 $5,948,000 $5,259,800 $4,663,400
General partners' deficit (50,900) (58,400) (64,900) (71,800) (77,700)
Limited partners' capital 7,378,700 6,634,500 5,993,100 5,306,000 4,724,300
</TABLE>
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<PAGE> 28
ENSTAR CABLE OF CUMBERLAND VALLEY
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,266,000 $ 5,917,800 $ 6,243,400 $ 6,173,900 $ 6,241,700
Cost and expenses (3,294,000) (3,446,400) (3,471,600) (3,657,600) (3,526,300)
Depreciation and amortization (2,969,600) (3,227,300) (3,012,700) (3,158,600) (3,104,900)
----------- ----------- ----------- ----------- -----------
Operating loss (997,600) (755,900) (240,900) (642,300) (389,500)
Interest expense (1,018,700) (587,000) (439,100) (664,800) (779,300)
Interest income 28,500 14,900 15,700 22,100 58,600
Loss on sale of cable television
system - - (538,900) - -
----------- ----------- ----------- ----------- -----------
Net loss $(1,987,800) $(1,328,000) $(1,203,200) $(1,285,000) $(1,110,200)
=========== =========== =========== ========= ===========
Distributions paid to venturers $ 72,200 $ 176,000 $ 264,000 $ 158,200 $ 18,000
=========== =========== =========== ========== ===========
OTHER OPERATING DATA
Net cash provided by
operating activities $ 1,068,400 $ 1,544,800 $ 1,627,600 $ 1,835,000 $ 2,045,900
EBITDA(1) 1,972,000 2,471,400 2,771,800 2,516,300 2,715,400
EBITDA to revenues 37.4% 41.8% 44.4% 40.8% 43.5%
Total debt to EBITDA 4.8x 3.5x 2.4x 2.7x 2.5x
Capital expenditures $ 672,400 $ 546,600 $ 532,900 $ 763,400 $ 1,975,800
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $26,209,700 $23,245,100 $19,406,000 $18,232,200 $17,049,700
Total debt 9,554,500 8,681,500 6,767,200 6,767,200 6,767,200
Venturers' capital 14,815,600 13,311,600 11,844,400 10,401,200 9,273,000
</TABLE>
- ---------------
(1) Operating income before depreciation and amortization. The Joint
Venture measures its financial performance by its EBITDA, among other items.
Based on its experience in the cable television industry, the General Partner
believes that EBITDA and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television companies
in several areas, such as liquidity, operating performance and leverage. This is
evidenced by the covenants in the primary debt instruments of the Joint Venture,
in which EBITDA-derived calculations are used as a measure of financial
performance. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of the Joint Venture's financial performance or as an
alternative to cash flows as a measure of liquidity.
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<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Compliance with the rules adopted by the Federal Communications
Commission (the "FCC") to implement the rate regulation provisions of the 1992
Cable Act has had a significant negative impact on the Joint Venture s revenues
and cash flow. Based on certain FCC decisions that have been released, however,
the Joint Venture s management presently believes that revenues for 1995 reflect
the impact of the 1992 Cable Act in all material respects. Moreover, recent
policy decisions by the FCC make it more likely that in the future the Joint
Venture will be permitted to increase regulated service rates in response to
specified cost increases, although certain costs may continue to rise at a rate
in excess of that which the Joint Venture will be permitted to pass on to its
customers. The FCC has recently adopted a procedure under which cable operators
may file abbreviated cost of service showings for system rebuilds and upgrades,
the result of which would be a permitted increase in regulated rates to allow
recovery of a portion of those costs. The FCC has also proposed a new procedure
for the pass-through of increases in inflation and certain external costs, such
as programming costs, under which cable operators could increase rates based on
actual and anticipated cost increases for the coming year. In addition to these
FCC actions, on February 8, 1996, President Clinton signed into law the 1996
Telecom Act. The 1996 Telecom Act revises, among other things, certain rate
regulation provisions of the 1992 Cable Act. Given events since the enactment of
the 1992 Cable Act, there can also be no assurance as to what, if any, future
action may be taken by the FCC, Congress or any other regulatory authority or
court, or the effect thereof on the Joint Venture s business. Accordingly, the
Joint Venture s historical annual financial results as described below are not
necessarily indicative of future performance. See "Legislation and Regulation"
and "Liquidity and Capital Resources."
All of the Partnership's cable television business operations are
conducted through its participation as a partner with a 50% interest in Enstar
Cable of Cumberland Valley. The Partnership participates equally with its
affiliated partner (Enstar Income/Growth Program Five-B, L.P.) under the Joint
Venture Agreement with respect to capital contributions, obligations and
commitments, and results of operations. Accordingly, in considering the
financial condition and results of operations of the Partnership, consideration
must also be made of those matters as they relate to the Joint Venture. The
following discussion reflects such consideration and provides a separate
discussion for each entity.
RESULTS OF OPERATIONS
THE PARTNERSHIP
All of the Partnership's cable television business operations,
which began in January 1988, are conducted through its participation as a
partner in the Joint Venture. The Joint Venture distributed an aggregate of
$132,000, $79,100 and $9,000 to the Partnership, representing the Partnership's
pro rata (i.e., 50%) share of the cash flow distributed from the Joint Venture's
operations, during 1993, 1994 and 1995, respectively. The Partnership did not
pay distributions to its partners during 1993, 1994 or 1995.
THE JOINT VENTURE
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $6,173,900 to
$6,241,700, or by 1.1%, during 1995 compared to 1994. Of the $67,800 increase in
revenues, $184,900 was due to increases in regulated service rates permitted
under the 1992 Cable Act that were implemented in April 1995, $76,500 was due to
greater numbers of subscriptions for cable service and $53,800 was due to
increases in unregulated rates charged for premium services implemented during
the fourth quarter of 1994. These increases were partially offset by rate
decreases implemented in 1994 to comply with the 1992 Cable Act, estimated by
the Joint
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<PAGE> 30
Venture to be approximately $238,400, and by a $9,000 decrease in other revenue
producing items. As of December 31, 1995, the Joint Venture had 17,310 homes
subscribing to cable service and 4,252 premium service units.
Service costs for the Joint Venture increased from $2,133,400 to
$2,177,600, or by 2.1%, during 1995 compared with 1994. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$44,200 increase, $99,200 was due to increases in property taxes and $65,300 was
due to increases in programming fees (including primary satellite fees). These
increases were partially offset by a $48,300 increase in the capitalization of
labor and overhead expense due to increased capital expenditure activity in
1995, a decrease of $44,200 in repair and maintenance expense, a decrease of
$14,000 in personnel costs and a decrease of $10,900 in pole rent expense. The
increase in programming fees was due to a combination of higher rates charged by
program suppliers and expanded programming usage relating to channel line-up
restructuring and retransmission consent arrangements implemented to comply with
the 1992 Cable Act.
General and administrative expenses decreased from $931,300 to
$786,100, or by 15.6%, during 1995 compared with 1994. Of the $145,200 decrease,
$77,500 was due to a decrease in bad debt expense, $26,300 was due to an
increase in the capitalization of labor and overhead expense, $22,600 was due to
lower marketing expenses and $11,900 was due to lower customer billing costs.
Management fees and reimbursed expenses decreased from $592,900
to $562,600, or by 5.1%, during 1995 compared with 1994. Of the $30,300
decrease, $33,700 was due to decreased reimbursable expenses resulting from
lower allocated personnel costs and expenses related to reregulation of the
cable industry during 1995. Management fees increased by $3,400 in direct
relation to increased revenues as described above.
Depreciation and amortization expense decreased from $3,158,600
to $3,104,900, or by 1.7%, during 1995 compared with 1994, due primarily to the
effect of certain tangible assets becoming fully depreciated in 1994 and certain
intangible assets becoming fully amortized in 1995. The decrease was partially
offset by depreciation of asset additions.
The Joint Venture's operating loss decreased from $642,300 to
$389,500, or by 39.4%, during 1995 as compared to 1994, primarily due to
increased revenues, decreased general and administrative expenses and lower
depreciation and amortization expense as described above.
Interest income increased from $22,100 to $58,600 during 1995 as
compared to 1994, due to higher cash balances available for investment and
higher interest rates earned on invested funds.
Interest expense increased from $664,800 to $779,300, or by
17.2%, during 1995 as compared to 1994, due to an increase in the average
interest rates paid by the Joint Venture on long-term borrowings (10.3% in 1995
as compared to 8.6% in 1994).
Due to the factors described above, the Joint Venture's net loss
decreased from $1,285,000 to $1,110,200, or by 13.6%, for the year ended
December 31, 1995 as compared with 1994.
Operating income before depreciation and amortization (EBITDA) as
a percentage of revenues increased from 40.8% during 1994 to 43.5% in 1995. The
increase was primarily due to the increased revenues and lower general and
administrative expenses discussed above. Accordingly, EBITDA increased from
$2,516,300 to $2,715,400, or by 7.9%, during 1995 compared to 1994.
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<PAGE> 31
1994 COMPARED TO 1993
The Joint Venture's revenues decreased from $6,243,400 to
$6,173,900, or by 1.1%, during 1994 compared to 1993. Revenues from continuing
operations decreased by $12,100 during 1994 as compared to 1993. Revenues for
1993 included $57,400 from the Noel, Missouri cable systems, which were sold in
February 1993. Of the net decrease in revenues, $143,600 was estimated to be due
to decreases in customer rates that were mandated by the 1992 Cable Act. The
decrease was partially offset by increases of $122,800 due to greater numbers of
subscriptions for service in 1994, and $8,700 due to other revenue producing
items. As of December 31, 1994, the Joint Venture had 17,248 homes subscribing
to cable service and 4,406 premium service units.
Service costs for the Joint Venture increased from $2,082,100 to
$2,133,400, or by 2.5%, during 1994 compared with 1993. Service costs represent
costs directly attributable to providing cable services to customers. Service
costs decreased by $23,000 during 1994 as compared to 1993 due to the sale of
the Noel systems. Service costs for continuing operations increased by $74,300
for the year ended December 31, 1994 as compared with 1993, primarily due to
increases of $92,600 in programming fees charged by program suppliers (including
primary satellite fees) and $17,800 in property taxes. The increase in
programming expense was also due to expanded programming usage related to
channel line-up restructuring and retransmission consent arrangements
implemented to comply with the 1992 Cable Act. An increase of $25,900 in
capitalized fixed costs related to the rebuild of plant damaged by severe winter
weather in Kentucky partially offset increases in service costs during 1994.
Franchise fee reductions approximating $21,200 also reduced service cost
increases in 1994.
General and administrative expenses increased from $819,600 to
$931,300, or by 13.6%, during 1994 compared with 1993. General and
administrative expenses for continuing operations increased by $127,600
primarily due to increased bad debt expense ($91,300), personnel costs ($15,200)
and marketing costs ($14,800). Increases in bad debt expense were the result of
significantly larger than normal write-offs attributable to severe winter
weather in Kentucky. The sale of the Noel, Missouri systems resulted in a
decrease of $15,900 in general and administrative expenses during 1994 as
compared with 1993.
Management fees and reimbursed expenses increased from $569,900
to $592,900, or by 4.0%, during 1994 compared with 1993. Management fees and
reimbursed expenses for continuing operations increased $29,800 from $563,100 to
$592,900, or by 5.2%, during 1994 compared to the prior year, primarily due to
increases of $30,400 in reimbursable expenses payable to the Corporate General
Partner. The increases were attributable to higher allocated personnel costs and
costs related to compliance with the 1992 Cable Act. The sale of the Noel,
Missouri systems resulted in a decrease of $6,800 during 1994 compared with
1993.
Depreciation and amortization expense increased from $3,012,700
to $3,158,600, or by 4.8%, for the year ended December 31, 1994 compared with
the prior year. The sale of the Noel, Missouri systems resulted in a $25,500
decrease during 1994 which was offset by an increase of $171,400 in depreciation
and amortization for continuing operations, attributable to depreciation of
asset additions and changes in the remaining lives of certain assets.
The Joint Venture's operating loss increased from $240,900 to
$642,300, during 1994 as compared to 1993, primarily due to lower revenues and
higher programming fees, bad debt expense and depreciation and amortization
expense as described above.
Interest expense increased from $439,100 to $664,800, or by
51.4%, for the year ended December 31, 1994 compared to the prior year, due to
an increase in the average interest rates paid by the Joint Venture (5.5% in
1993 as compared to 8.6% in 1994).
Interest income increased from $15,700 to $22,100, or by 40.8%,
during 1994 compared with 1993, due to higher cash balances available for
investment and higher interest rates earned on invested funds.
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<PAGE> 32
On February 23, 1993, the Joint Venture sold its Noel, Missouri
cable systems and recognized a loss on the sale of $538,900.
Due to the factors described above, the Joint Venture's net loss
increased from $1,203,200 to $1,285,000, or by 6.8%, for the year ended December
31, 1994 as compared with the previous year.
Operating income before depreciation and amortization (EBITDA) as
a percentage of revenues decreased from 44.4% during 1993 to 40.8% in 1994. The
change was primarily caused by higher programming fees and bad debt expense.
EBITDA decreased from $2,771,800 to $2,516,300, or by 9.2%, during 1994 compared
to 1993.
Distributions Made By The Cumberland Valley Joint Venture
The Joint Venture distributed $264,000, $158,200 and $18,000
equally among its two partners during 1993, 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The FCC's amended rate regulation rules were implemented during
the quarter ended September 30, 1994. Compliance with these rules has had a
negative impact on the Partnership's revenues and cash flow. See "Legislation
and Regulation."
The Partnership's primary objective, having invested its net
offering proceeds in the Joint Venture, is to distribute to its partners
distributions of cash flow received from the Joint Venture's operations and
proceeds from the sale of the Joint Venture's cable systems, if any, after
providing for expenses, debt service and capital requirements relating to the
expansion, improvement and upgrade of such cable systems. The Joint Venture
relies upon the availability of cash generated from operations and possible
borrowings to fund its ongoing expenses, debt service and capital requirements.
In general, these requirements involve expansion, improvement and upgrade of the
Joint Venture's existing cable television systems. The Joint Venture spent
$1,975,800 on capital expenditures in 1995 primarily for live extensions and
equipment upgrades and has budgeted capital expenditures of approximately
$304,400 in 1996, primarily to upgrade certain equipment.
Management believes that cash generated by operations of the
Joint Venture, together with available cash and proceeds from borrowings, will
be adequate to fund capital expenditures, debt service and other liquidity
requirements in 1996. As a result, the Corporate General Partner intends to use
its cash for such purposes. Accordingly, management does not anticipate a
resumption of distributions to unitholders during 1996.
In December 1993, the Joint Venture obtained a $9,000,000
reducing revolving credit facility (the "Facility") maturing on September 30,
1999. The Facility is secured by substantially all of the Joint Venture's
assets. Interest is payable at the Base Rate plus 1.50%. "Base Rate" means the
higher of the Lender s prime rate or the Federal Funds Effective Rate plus 1/2%.
The Facility provides for quarterly reductions of the maximum commitment
beginning on September 30, 1994 which are payable at the end of each fiscal
quarter. The Joint Venture is permitted to prepay amounts outstanding under the
Facility at any time without penalty, and is able to reborrow throughout the
term of the Facility up to the maximum commitment then available so long as no
event of default exists. The Joint Venture is also required to pay a commitment
fee of 1/2% per annum on the unused portion of the Facility. The Facility
contains certain financial tests and other covenants including, among others,
restrictions on capital expenditures, incurrence of indebtedness, distributions
and investments, sale of assets, acquisitions, and other covenants, defaults and
conditions. The Joint Venture believes that it was in compliance with its loan
covenants as of December 31, 1995. The Joint Venture's maximum commitment of
$8,200,000 at December 31, 1995 will decrease by
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<PAGE> 33
$1,350,000 in 1996 to $6,850,000, which will not require any repayment since the
outstanding balance under the Facility at December 31, 1995 was $6,767,200.
1995 VS. 1994
The Partnership used $11,400 more cash in operating activities
during the year ended December 31, 1995 than in 1994, primarily due to a $15,800
increase in receivables from affiliates and a $14,400 increase in the payment of
liabilities owed to the Corporate General Partner and third party creditors.
Partnership expenses used $18,900 less cash during 1995 than in 1994 after
adding back non-cash equity in net loss of Joint Venture.
Cash provided by investing activities decreased by $70,100 during
1995 as compared to 1994 due to reduced distributions from the Cumberland Valley
Joint Venture.
1994 VS. 1993
The Partnership used $85,500 less cash in operating activities
during the year ended December 31, 1994 than in 1993, primarily due to a $90,700
decrease in the payment of liabilities owed to the Corporate General Partner and
third party creditors. Partnership expenses used $5,200 more cash during 1994
than in 1993 after adding back non-cash equity in net loss of Joint Venture.
Cash provided by investing activities decreased by $52,900 during
1994 as compared to 1993 due to reduced distributions from the Cumberland Valley
Joint Venture.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed
Of, which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
INFLATION
Certain of the Partnership's and Joint Venture's expenses, such
as those for wages and benefits, equipment repair and replacement, and billing
and marketing generally increase with inflation. However, the Partnership does
not believe that its financial results have been, or will be, adversely affected
by inflation in a material way, provided that the Joint Venture is able to
increase its service rates periodically, of which there can be no assurance. See
"Legislation and Regulation."
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> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for
certain purposes, the functional equivalents of directors and executive
officers. The Corporate General Partner is Enstar Communications Corporation,
and Robert T. Graff, Jr. is the Individual General Partner. As part of Falcon
Cablevision's September 30, 1988 acquisition of the Corporate General Partner,
Falcon Cablevision received an option to acquire Mr. Graff's interest as
Individual General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General Partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993 pursuant to which, among other things, the Corporate General
Partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which was originally granted to Falcon
Cablevision.
Since its incorporation in Georgia in 1982, the Corporate General
Partner has been engaged in the cable/telecommunications business, both as a
general partner of 15 limited partnerships formed to own and operate cable
television systems and through a wholly-owned operating subsidiary. As of
December 31, 1995, the Corporate General Partner managed cable television
systems with approximately 126,200 Subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP currently
operates cable systems through a series of affiliated limited partnerships,
including Falcon Cablevision, Falcon Cable Systems Company, Falcon Telecable,
Falcon Cable Media, Falcon Classic Cable Income Properties, Falcon First, Inc.,
Falcon Community Cable and Falcon Video Communications, and also controls the
general partners of the 15 limited partnerships which operate under the Enstar
name (including the Partnership). Although these limited partnerships are
affiliated with FHGLP, their assets are owned by legal entities separate from
the Partnership.
Set forth below is certain general information about the
Directors and Executive Officers of the Corporate General Partner, all of whom
have served in such capacities since October 1988:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Marc B. Nathanson Director, Chairman of the Board, Chief Executive Officer and President
Frank J. Intiso Executive Vice President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General Counsel
Michael K. Menerey Chief Financial Officer and Secretary
</TABLE>
MARC B. NATHANSON, 50, has been Chairman of the Board, Chief Executive Officer
and President of FHGI and its predecessors since 1975. Prior to 1975, Mr.
Nathanson was Vice President of Marketing for Teleprompter Corporation, at that
time the largest multiple-system cable operator in the United States. He also
held executive positions with Warner Cable and Cypress Communications
Corporation. He is a former President of the California Cable Television
Association and a member of Cable Pioneers. He is currently a Director of the
National Cable Television Association ("NCTA") and serves on its Executive
Committee. At the 1986 NCTA convention, Mr. Nathanson was honored by being named
the recipient of the Vanguard Award for outstanding contributions to the growth
and development of the cable television industry. Mr. Nathanson is a 26-year
veteran of the cable television industry. He is a founder of the Cable
Television
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<PAGE> 35
Administration and Marketing Society ("CTAM") and the Southern California Cable
Television Association. Mr. Nathanson is also a Director of TV Por Cable
Nacional, S.A. de C.V. Mr. Nathanson is also Chairman of the Board and Chief
Executive Officer of Falcon International Communications, LLC ("FIC"). Mr.
Nathanson was appointed by President Clinton and confirmed by the U.S. Senate
for a three year term on the Board of Governors of International Broadcasting of
the United States Information Agency.
FRANK J. INTISO, 49, has been Executive Vice President and Chief Operating
Officer of FHGI and its predecessors since 1982. Mr. Intiso has been President
and Chief Operating Officer of Falcon Cable Group since its inception. Mr.
Intiso is responsible for the day-to-day operations of all cable television
systems under the management of FHGI. Mr. Intiso has a Master's Degree in
Business Administration from the University of California, Los Angeles, and is a
Certified Public Accountant. He serves as chair of the California Cable
Television Association, and is on the boards of Cable Advertising Bureau, Cable
In The Classroom, Community Antenna Television Association and California Cable
Television Association. He is a member of the American Institute of Certified
Public Accountants, the American Marketing Association, the American Management
Association, and the Southern California Cable Television Association.
STANLEY S. ITSKOWITCH, 57, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly
Fallek Chemical Company), which is a marketer of chemical products, since 1980.
He is a Certified Public Accountant and a former tax partner in the New York
office of Touche Ross & Co. (now Deloitte & Touche). He has a J.D. Degree and an
L.L.M. Degree in Tax from New York University School of Law. Mr. Itskowitch is
also Executive Vice President and General Counsel of FIC.
MICHAEL K. MENEREY, 44, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984 and has been Chief Financial Officer and
Secretary of Falcon Cable Group since its inception. Mr. Menerey is a Certified
Public Accountant and is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1995, biographical
information about certain officers of FHGI and Falcon Cable Group, a division of
FHGLP, who share certain responsibilities with the officers of the Corporate
General Partner with respect to the operation and management of the Partnership.
JAMES V. ASHJIAN, 51, has been Controller of FHGI and its predecessors since
October 1985 and Controller of Falcon Cable Group since its inception. Mr.
Ashjian is a Certified Public Accountant and was a partner in Bider &
Montgomery, a Los Angeles-based CPA firm, from 1978 to 1983, and self-employed
from 1983 to October 1985. He is a member of the American Institute of Certified
Public Accountants and the California Society of Certified Public Accountants.
LYNNE A. BUENING, 42, has been Vice President of Programming of Falcon Cable
Group since November 1993. From 1989 to 1993, she served as Director of
Programming for Viacom Cable, a division of Viacom International Inc. Prior to
that, Ms. Buening held programming and marketing positions in the cable,
broadcast, and newspaper industries.
OVANDO COWLES, 42, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
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<PAGE> 36
HOWARD J. GAN, 49, has been Vice President of Corporate Development and
Government Affairs of FHGI and its predecessors since 1988 and Vice President of
Corporate Development and Government Affairs of Falcon Cable Group since its
inception. He was General Counsel at Malarkey-Taylor Associates, a Washington,
DC based telecommunications consulting firm, from 1986 to 1988. He was Vice
President and General Counsel at the Cable Television Information Center from
1978 to 1983. In addition, he was an attorney and an acting Branch Chief of the
Federal Communications Commission's Cable Television Bureau from 1975 to 1978.
R.W. ("SKIP") HARRIS, 48, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television Committee.
Mr. Harris was National Director of Affiliate Marketing for the Disney Channel
from 1985 to 1991. He was also a sales manager, regional marketing manager and
director of marketing for Cox Cable Communications from 1978 to 1985.
JOE A. JOHNSON, 51, has been Executive Vice President - Operations of FHGI since
September 1995, and between January 1992 and that date was Senior Vice President
of Falcon Cable Group. He was a Divisional Vice President of FHGI between 1989
and 1992 and a Divisional Vice President of Falcon Cable Group from its
inception until 1992. From 1982 to 1989, he held the positions of Vice President
and Director of Operations for Sacramento Cable Television, Group W Cable of
Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and
Regional Manager positions with Warner Amex and Teleprompter.
JON W. LUNSFORD, 36, has been Vice President - Finance and Corporate Development
FHGI since September 1994. From 1991 to 1994 he served as Director of Corporate
Finance at Continental Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice
President with Crestar Bank.
JOAN SCULLY, 60, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources of Falcon
Cable Group since its inception. From 1987 to May 1988, she was self-employed as
a Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in the
entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.
MICHAEL D. SINGPIEL, 48, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992,
Mr. Singpiel was Vice President of C-Tec Cable Systems in Michigan.
Mr. Singpiel held various positions with Comcast in New Jersey and
Michigan from 1980 to 1990.
RAYMOND J. TYNDALL, 48, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various technical
positions with Choice TV and its predecessors. From 1967 to 1975, he held
various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer in
lightwave, microwave, satellite and broadband.
In addition, Falcon Cable Group has six Divisional Vice
Presidents who are based in the field. They are Ron L. Hall, Michael E. Kemph,
Nicholas A. Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
Each director of the Corporate General Partner is elected to a
one-year term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected and
qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
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<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership has a management agreement (the "Management
Agreement") with Enstar Cable Corporation, a wholly owned subsidiary of the
Corporate General Partner (the "Manager"), pursuant to which Enstar Cable
Corporation manages the Joint Venture's systems and provides all operational
support for the activities of the Partnership and Joint Venture. For these
services, the Manager receives a management fee of 5% of gross revenues,
excluding revenues from the sale of cable television systems or franchises,
calculated and paid monthly. In addition, the Partnership reimburses the Manager
for certain operating expenses incurred by the Manager in the day-to-day
operation of the Partnership's cable systems. The Management Agreement also
requires the Partnership to indemnify the Manager (including its officers,
employees, agents and shareholders) against loss or expense, absent negligence
or deliberate breach by the Manager of the Management Agreement. The Management
Agreement is terminable by the Partnership upon sixty (60) days written notice
to the Manager. The Manager has engaged FHGLP to provide certain management
services for the Partnership and pays FHGLP a portion of the management fees it
receives in consideration of such services and reimburses FHGLP for expenses
incurred by FHGLP on its behalf. The Corporate General Partner also performs
certain supervisory and administrative services for the Partnership, for which
it is reimbursed.
For the fiscal year ended December 31, 1995, the Joint Venture
paid approximately $249,700 of management fees and $250,500 of reimbursed
expenses. In addition, the Joint Venture paid the Corporate General Partner
approximately $62,400 in respect of its 1% special interest in the Joint
Venture. Certain programming services are purchased through Falcon Cablevision.
The Joint Venture paid Falcon Cablevision approximately $1,136,500 for these
programming services for fiscal year 1995.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from,
and profit and losses in, the Partnership. See Item 5, "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1996, the common stock of FHGI was owned as
follows: 78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson
is trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In connection with the formation
of Falcon Community Cable, on August 15, 1989, FHGI issued to Hellman & Friedman
Capital Partners, A California Limited Partnership ("H&F"), a $1,293,357
convertible debenture due 1999 convertible under certain circumstances into 10%
of the common stock of FHGI and entitling H&F to elect one director to the board
of directors of FHGI. H&F elected Marc B. Nathanson pursuant to such right. In
1991 FHGI issued to Hellman & Friedman Capital Partners II, A California Limited
Partnership ("H&FII"), additional convertible debentures due 1999 in the
aggregate amount of $2,006,198 convertible under certain circumstances into
approximately 6.3% of the common stock of FHGI and entitling H&FII to elect one
director to the board of directors of FHGI. As of March 3, 1996, H&FII had not
exercised this right. FHGLP also held 12.1% of the interests in the General
Partner, and Falcon Cable Trust, Frank Intiso, H&FII and two other individuals
held 58.9%, 12.1%, 16.3% and 0.6% of the General Partner, respectively. Such
interests entitle the holders thereof to an allocable share of cash
distributions and profits and losses of the General Partner in proportion to
their ownership. Greg A. Nathanson is Marc B. Nathanson's brother.
As of March 3, 1996, Marc B. Nathanson and members of his family
owned, directly or indirectly, outstanding partnership interests (comprising
both general partner interests and limited partner
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<PAGE> 38
interests) aggregating approximately 0.46% of Falcon Classic Cable Income
Properties, L.P., 2.58% of Falcon Video Communications and 30.0% of Falcon Cable
Systems Company. In accordance with the respective partnership agreements of the
partnerships mentioned above, after the return of capital to and the receipt of
certain preferred returns by the limited partners of such partnerships, FHGLP
and certain of its officers and directors had rights to future profits greater
than their ownership interests of capital in such partnerships.
On March 29, 1993, FHGLP was organized to effect the
consolidation of certain cable television businesses, including Falcon
Cablevision, Falcon Telecable, Falcon Cable Media and Falcon Community Cable,
into FHGLP. At the same time FHGLP assumed the cable system management
operations of FHGI. On December 28, 1995, FHGLP completed the acquisition of all
of the direct and indirect ownership interests in Falcon First, Inc., ("First"),
that it did not previously own. First was an affiliated entity prior to December
28, 1995. The ownership interests in FHGLP are as follows: Falcon management,
directors and affiliated individuals and entities: 38.2% (including 35.3% owned
by Marc B. Nathanson and members of his family directly or indirectly), H&F and
H&FII: 35.9%, Leeway & Co.: 10.9%, Boston Ventures Limited Partnership II and
Boston Ventures II-A Investment Corporation: 6.9%, Falcon First Communications,
LLC: 2.1% and other institutional investors, individuals and trusts: 6.0%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management
services operations of FHGI. Effective March 29, 1993, FHGLP began receiving
management fees and reimbursed expenses which had previously been paid by the
Partnership, as well as the other affiliated entities mentioned above, to FHGI.
The management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Cable Systems
Company, Falcon Classic Cable Income Properties, L.P., Falcon Video
Communications, L.P., and, through its management of the operation of Falcon
Cablevision (a subsidiary of FHGLP), the partnerships of which Enstar
Communications Corporation is the Corporate General Partner, including the
Partnership. On September 30, 1988, Falcon Cablevision acquired all of the
outstanding stock of Enstar Communications Corporation. Certain members of
management of the General Partner have also been involved in the management of
other cable ventures. FHGLP contemplates entering into other cable ventures,
including ventures similar to the Partnership.
Conflicts of interest involving acquisitions and dispositions of
cable television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the General Partner and
their management to certain conflicts of interest. Such conflicts of interest
relate to the time and services management will devote to the Partnership's
affairs and to the acquisition and disposition of cable television systems.
Management or its affiliates may establish and manage other entities which could
impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all
conflicts of interest in accordance with their fiduciary duties.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts
-38-
<PAGE> 39
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. The Georgia Revised Uniform Limited Partnership Act also
allows a partner to maintain a partnership derivative action if general partners
with authority to do so have refused to bring the action or if an effort to
cause those general partners to bring the action is not likely to succeed.
Certain cases decided by federal courts have recognized the right of a limited
partner to bring such actions under the Securities and Exchange Commission's
Rule 10b-5 for recovery of damages resulting from a breach of fiduciary duty by
a general partner involving fraud, deception or manipulation in connection with
the limited partner's purchase or sale of partnership units.
The Partnership Agreement provides that the General Partners will
be indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partner (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that its conduct was negligent. In addition, the
Partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited partners
will have a more limited right of action than they would have absent such
provisions. In addition, the Partnership maintains, at its expense and in such
reasonable amounts and at such reasonable prices as the Corporate General
Partner shall determine, a liability insurance policy which insures the
Corporate General Partner, FHGI and its affiliates (which includes FHGLP),
officers and directors and such other persons as the Corporate General Partner
shall determine against liabilities which they may incur with respect to claims
made against them for certain wrongful or allegedly wrongful acts, including
certain errors, misstatements, misleading statements, omissions, neglect or
breaches of duty. To the extent that the exculpatory provisions purport to
include indemnification for liabilities arising under the Securities Act of
1933, it is the opinion of the Securities and Exchange Commission that such
indemnification is contrary to public policy and therefore unenforceable.
-39-
<PAGE> 40
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
-40-
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1996.
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
-------------------------------
Marc B. Nathanson
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(*) Date
---------- ----- ----
<S> <C> <C>
/s/ Marc B. Nathanson Chairman of the Board, March 25, 1996
- ---------------------------- Chief Executive Officer
Marc B. Nathanson and President (Principal
Executive Officer)
/s/ Michael K. Menerey Chief Financial Officer, March 25, 1996
- ---------------------------- Secretary and Director
Michael K. Menerey (Principal Financial and
Accounting Officer)
/s/ Frank J. Intiso Chief Operating Officer, March 25, 1996
- ---------------------------- Executive Vice President
Frank J. Intiso and Director
/s/ Stanley S. Itskowitch Executive Vice President, March 25, 1996
- ---------------------------- General Counsel and
Stanley S. Itskowitch Director
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the registrant.
-41-
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Enstar Income/Growth Enstar Cable of
Program Five-A, L.P. Cumberland Valley
-------------------- -----------------
<S> <C> <C>
Reports of Independent Auditors F-2 F-10
Balance Sheets - December 31, 1994
and 1995 F-3 F-11
Financial Statements for each of
the three years in the period
ended December 31, 1995
Statements of Operations F-4 F-12
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-13
Statements of Cash Flows F-6 F-14
Summary of Accounting Policies F-7 F-15
Notes to Financial Statements F-8 F-17
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Five-A, L.P. (A Georgia Limited Partnership)
We have audited the balance sheets of Enstar Income Program Five-A, L.P. (A
Georgia Limited Partnership) as of December 31, 1994 and 1995, and the related
statements of operations, partnership capital (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The statements of operations,
partnership capital (deficit), and cash flows of Enstar Income/Growth Program
Five-A, L.P. for the year ended December 31, 1993 were audited by other auditors
whose report dated February 23, 1994, expressed an unqualified opinion on those
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program Five-A,
L.P. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996
F-2
<PAGE> 44
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
BALANCE SHEETS
=========================================
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS: 1994 1995
---------- ----------
<S> <C> <C>
Cash $ 59,200 $ 11,100
Due from affiliates - 15,800
Equity in net assets of joint venture 5,200,600 4,636,500
---------- ----------
$5,259,800 $4,663,400
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 10,500 $ 16,800
Due to affiliates 15,100 -
---------- ----------
TOTAL LIABILITIES 25,600 16,800
---------- ----------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (71,800) (77,700)
Limited partners 5,306,000 4,724,300
---------- ----------
TOTAL PARTNERSHIP CAPITAL 5,234,200 4,646,600
---------- ----------
$5,259,800 $4,663,400
========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-3
<PAGE> 45
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF OPERATIONS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative expenses $ 19,800 $ 23,700 $ 32,000
General Partner reimbursed expenses 24,500 26,100 -
--------- --------- ---------
Operating loss (44,300) (49,800) (32,000)
INTEREST EXPENSE (2,000) (1,700) (500)
--------- --------- ---------
Loss before equity in net loss of joint venture (46,300) (51,500) (32,500)
EQUITY IN NET LOSS OF JOINT VENTURE (601,600) (642,500) (555,100)
--------- --------- ---------
NET LOSS $(647,900) $(694,000) $(587,600)
========= ========= =========
NET LOSS PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (10.73) $ (11.50) $ (9.73)
========= ========= =========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 59,766 59,766 59,766
========= ========= =========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-4
<PAGE> 46
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
=========================================
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1993 $(58,400) $6,634,500 $6,576,100
Net loss for year (6,500) (641,400) (647,900)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1993 (64,900) 5,993,100 5,928,200
Net loss for year (6,900) (687,100) (694,000)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1994 (71,800) 5,306,000 5,234,200
Net loss for year (5,900) (581,700) (587,600)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 $(77,700) $4,724,300 $4,646,600
======== ========== =========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-5
<PAGE> 47
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF CASH FLOWS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(647,900) $(694,000) $(587,600)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of joint venture 601,600 642,500 555,100
Increase (decrease) from changes in:
Due from affiliates - - (15,800)
Accounts payable and due to affiliates (84,900) 5,800 (8,800)
--------- --------- ---------
Net cash used in operating activities (131,200) (45,700) (57,100)
--------- ---------- ---------
Cash flows from investing activities:
Distributions from joint venture 132,000 79,100 9,000
--------- --------- ---------
Net increase (decrease) in cash 800 33,400 (48,100)
Cash at beginning of year 25,000 25,800 59,200
--------- --------- ---------
Cash at end of year $ 25,800 $ 59,200 $ 11,100
========= ========= =========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-6
<PAGE> 48
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
SUMMARY OF ACCOUNTING POLICIES
=========================================
FORM OF PRESENTATION
Enstar Income/Growth Program Five-A, L.P., a Georgia limited
partnership (the "Partnership"), pays no income taxes as an entity. All of the
income, gains, losses, deductions and credits of the Partnership are passed
through to the general partners and the limited partners. Nominal taxes are
assessed by certain state jurisdictions. The basis in the Partnership's assets
and liabilities differs for financial and tax reporting purposes. At December
31, 1995, the book basis of the Partnership's net assets exceeds its tax basis
by $1,342,400.
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.
INVESTMENT IN JOINT VENTURE
The Partnership's investment and share of the income or loss in a
Joint Venture is accounted for on the equity method of accounting.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
<PAGE> 49
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - PARTNERSHIP MATTERS
The Partnership was formed on September 4, 1986 to acquire,
construct or improve, develop, and operate cable television systems in various
locations in the United States. The partnership agreement provides for Enstar
Communications Corporation (the "Corporate General Partner") and Robert T.
Graff, Jr. to be the general partners and for the admission of limited partners
through the sale of interests in the Partnership.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
The Partnership was formed with an initial capital contribution
of $1,100 comprised of $1,000 from the Corporate General Partner and $100 from
the initial limited partner. Sale of interests in the Partnership began in
January 1987, and the initial closing took place in March 1987. The Partnership
continued to raise capital until $15,000,000 (the maximum) was sold in July
1987.
The amended partnership agreement generally provides that all
cash distributions (as defined) be allocated 1% to the general partners and 99%
to the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 10% of their initial
investments less any distributions from previous system sales or refinancing of
systems. 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.
The Partnership's operating expenses and distributions to
partners are funded primarily from distributions received from the Joint
Venture.
F-8
<PAGE> 50
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
NOTES TO FINANCIAL STATEMENTS
(Concluded)
=========================================
NOTE 2 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and an affiliate partnership (Enstar
Income/Growth Program Five-B, L.P.) each own 50% of Enstar Cable of Cumberland
Valley, a Georgia general partnership (the "Joint Venture"). The Joint Venture
was initially funded through capital contributions made by each venturer during
1988 totaling $11,821,000 in cash and $750,000 in capitalized system acquisition
and related costs. Each partnership shares equally in the profits and losses of
the Joint Venture. The Joint Venture incurred losses of $1,203,200, $1,285,000
and $1,110,200 in 1993, 1994 and 1995 of which $601,600, $642,500 and $555,100
were allocated to the Partnership. The operations of the Joint Venture are
significant to the Partnership. Reference is made to the accompanying financial
statements of the Joint Venture on pages F-10 to F-20 of this report on Form
10-K, which should be read in connection with these financial statements.
NOTE 3 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and services agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 5% of gross receipts as defined,
from the operations of the Partnership. The Partnership did not own or operate
any cable television operations in 1993, 1994 or 1995 other than through its
investment in the Joint Venture. No management fees were paid by the Partnership
during 1993, 1994 and 1995.
The Agreement also provides that the Partnership will reimburse
the Manager for direct expenses incurred on behalf of the Partnership and for
the Partnership's allocable share of operational costs associated with services
provided by the Manager. Reimbursed expenses totaled approximately $24,500 and
$26,100 in 1993 and 1994. No reimbursable expenses were incurred on behalf of
the Partnership during 1995.
NOTE 4 - COMMITMENTS
The Partnership, together with Enstar Income/Growth Program 5-B,
L.P. has pledged its Joint Venture interest as collateral against the debt of
the Joint Venture.
F-9
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Cumberland Valley
We have audited the balance sheets of Enstar Cable of Cumberland Valley as of
December 31, 1994 and 1995, and the related statements of operations,
venturers' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Joint Venture's management.
Our responsibility is to express an opinion on these financial statements
based on our audits. The statements of operations, venturers' capital,
and cash flows of Enstar Cable of Cumberland Valley for the year
ended December 31, 1993 were audited by other auditors whose report thereon
dated February 16, 1994, expressed an unqualified opinion on those financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Cumberland
Valley at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996
F-10
<PAGE> 52
ENSTAR CABLE OF CUMBERLAND VALLEY
BALANCE SHEETS
=========================================
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS :
Cash and cash equivalents $ 1,079,800 $ 1,110,900
Accounts receivable, less allowance of $29,200
and $28,500 for possible losses 162,500 147,700
Insurance claim receivable 410,300 353,800
Prepaid expenses 41,700 59,700
Cable materials, equipment and supplies 196,300 196,300
Property, plant and equipment, less accumulated
depreciation and amortization 9,970,100 10,498,900
Franchise cost, net of accumulated
amortization of $11,630,100 and $12,989,000 6,107,100 4,477,000
Deferred loan costs and other, net 264,400 205,400
----------- -----------
$18,232,200 $17,049,700
=========== ===========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 671,000 $ 966,000
Due to affiliates 392,800 43,500
Note payable 6,767,200 6,767,200
----------- -----------
TOTAL LIABILITIES 7,831,000 7,776,700
----------- -----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL
Enstar Income/Growth Program Five-A, L.P. 5,200,600 4,636,500
Enstar Income/Growth Program Five-B, L.P. 5,200,600 4,636,500
----------- -----------
TOTAL VENTURERS' CAPITAL 10,401,200 9,273,000
----------- -----------
$18,232,200 $17,049,700
=========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-11
<PAGE> 53
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF OPERATIONS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 6,243,400 $ 6,173,900 $ 6,241,700
----------- ----------- -----------
OPERATING EXPENSES:
Service costs 2,082,100 2,133,400 2,177,600
General and administrative expenses 819,600 931,300 786,100
General Partner management fees
and reimbursed expenses 569,900 592,900 562,600
Depreciation and amortization 3,012,700 3,158,600 3,104,900
----------- ----------- -----------
6,484,300 6,816,200 6,631,200
----------- ----------- -----------
Operating loss (240,900) (642,300) (389,500)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (439,100) (664,800) (779,300)
Interest income 15,700 22,100 58,600
Loss on sale of cable television system (538,900) - -
----------- ----------- -----------
(962,300) (642,700) (720,700)
----------- ----------- -----------
NET LOSS $(1,203,200) $(1,285,000) $(1,110,200)
=========== =========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-12
<PAGE> 54
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF VENTURERS' CAPITAL
=========================================
<TABLE>
<CAPTION>
Enstar Income/ Enstar Income/
Growth Program Growth Program
Five-A, L.P. Five-B, L.P. Total
-------------- -------------- -----------
<S> <C> <C> <C>
BALANCE, January 1, 1993 $6,655,800 $6,655,800 $13,311,600
Distributions to venturers (132,000) (132,000) (264,000)
Net loss for year (601,600) (601,600) (1,203,200)
---------- ---------- -----------
BALANCE, December 31, 1993 5,922,200 5,922,200 11,844,400
Distributions to venturers (79,100) (79,100) (158,200)
Net loss for year (642,500) (642,500) (1,285,000)
---------- ---------- -----------
BALANCE, December 31, 1994 5,200,600 5,200,600 10,401,200
Distributions to venturers (9,000) (9,000) (18,000)
Net loss for year (555,100) (555,100) (1,110,200)
---------- ---------- -----------
BALANCE, December 31, 1995 $4,636,500 $4,636,500 $ 9,273,000
========== ========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-13
<PAGE> 55
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF CASH FLOWS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,203,200) $(1,285,000) $(1,110,200)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 3,012,700 3,158,600 3,104,900
Amortization of deferred loan costs - 52,200 52,200
Loss on sale of cable television system 538,900 - -
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses,
cable materials and other assets (6,000) (312,800) 53,300
Deferred loan costs (257,200) (47,400) -
Accounts payable and due to affiliates (457,600) 269,400 (54,300)
----------- ----------- -----------
Net cash provided by operating activities 1,627,600 1,835,000 2,045,900
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (532,900) (763,400) (1,975,800)
Proceeds from sale of cable television system 900,600 - -
Increase in intangible assets (14,500) (9,900) (21,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 353,200 (773,300) (1,996,800)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to venturers (264,000) (158,200) (18,000)
Borrowings from note payable 7,167,200 - -
Repayment of debt (9,081,500) - -
----------- ----------- -----------
Net cash used in financing activities (2,178,300) (158,200) (18,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (197,500) 903,500 31,100
Cash and cash equivalents at beginning of year 373,800 176,300 1,079,800
----------- ----------- -----------
Cash and cash equivalents at end of year $ 176,300 $ 1,079,800 $ 1,110,900
=========== =========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-14
<PAGE> 56
ENSTAR CABLE OF CUMBERLAND VALLEY
SUMMARY OF ACCOUNTING POLICIES
=========================================
FORM OF PRESENTATION
Enstar Cable of Cumberland Valley, a Georgia general partnership
(the "Joint Venture") operates cable systems in rural areas of Kentucky,
Arkansas and Missouri. As a Partnership, the Joint Venture pays no income
taxes. All of the income, gains, losses, deductions and credits of the Joint
Venture are passed through to the Joint Venturers. Nominal taxes are assessed
by certain state jurisdictions. The basis in the Joint Venture's assets and
liabilities differ for financial and tax reporting purposes. At December 31,
1995, the book basis of the Joint Venture's net assets exceeds its tax basis
by $2,684,800.
The financial statements do not give effect to any assets that
the Joint Venturers may have outside of their interest in the Joint Venture, nor
to any obligations, including income taxes, of the Joint Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Joint Venture
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents.
CABLE MATERIALS, EQUIPMENT AND SUPPLIES
Cable materials, equipment and supplies are stated at cost using
the first-in first-out method. These items are capitalized until they are used
for system upgrades, subscriber installations or repairs to existing systems. At
such time, they are either transferred to property, plant and equipment or
expensed as appropriate.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvement Life of lease
</TABLE>
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new, undeveloped franchises. These costs (primarily legal fees) are
direct and
F-15
<PAGE> 57
ENSTAR CABLE OF CUMBERLAND VALLEY
SUMMARY OF ACCOUNTING POLICIES
(Concluded)
=========================================
FRANCHISE COST (Continued)
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 Joint 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.
DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES
Costs related to obtaining new loan agreements are capitalized
and amortized to interest expense over the life of the related loan. Other
deferred charges are amortized using the straight-line method over two to five
years.
RECOVERABILITY OF ASSETS
The Joint Venture assesses on an on-going basis the
recoverability of intangible assets and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimate were less than net book value, net book
value would then be reduced to the undiscounted cash flow estimate. The Joint
Venture also evaluates the amortization periods of assets to determine whether
events or circumstances warrant revised estimates of useful lives.
In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Joint Venture will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
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.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the 1995 presentation.
F-16
<PAGE> 58
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - JOINT VENTURE MATTERS
The Joint Venture was formed under the terms of a general
partnership agreement (the "Partnership Agreement") effective January 11, 1988
between Enstar Income/Growth Program Five-A, L.P. and Enstar Income/Growth
Program Five-B, L.P. (collectively, the "Venturers"), which are two limited
partnerships sponsored by Enstar Communications Corporation (the "Corporate
General Partner"). The Joint Venture was formed to pool the resources of the two
limited partnerships to acquire, own, operate and dispose of certain cable
television systems.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
Under the terms of the Partnership Agreement, the Venturers share
equally in profits, losses, allocations and assets. Capital contributions, as
required, are also made equally.
NOTE 2 - INSURANCE CLAIM RECEIVABLE
Insurance claim receivable consists of an uncollected insurance
claim arising from storm related system damage incurred in 1994. The Joint
Venture is currently in negotiations with the insurance company to settle the
outstanding claim and believes it is fully collectible.
NOTE 3- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
---- ----
<S> <C> <C>
Cable television systems $16,520,400 $18,374,800
Furniture and equipment, vehicles
and leasehold improvements 430,500 518,800
----------- -----------
16,950,900 18,893,600
Less accumulated depreciation
and amortization (6,980,800) (8,394,700)
----------- -----------
$ 9,970,100 $10,498,900
=========== ===========
</TABLE>
NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short
maturity of these instruments.
F-17
<PAGE> 59
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(Continued)
=========================================
NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Note Payable
The carrying amount approximates fair value due to the variable
rate nature of the note payable.
NOTE 5 - NOTE PAYABLE
During 1993, the Joint Venture entered into a $9,000,000 reducing
revolving line of credit agreement (the "Credit Agreement") with a final
maturity of September 30, 1999. The Credit Agreement provides for quarterly
reductions of the maximum commitment which commenced September 30, 1994,
permanently reducing the maximum available borrowings under the Credit
Agreement. The commitment reduces in quarterly installments of $250,000 through
June 30, 1996, $425,000 through June 30, 1997, $500,000 through June 30, 1998,
$550,000 through June 30, 1999 and a final payment of $1,800,000 on September
30, 1999. Repayment of principal is required to the extent the loan balance then
outstanding exceeds the reduced maximum commitment.
The Joint Venture will be permitted to prepay amounts outstanding
under the Credit Agreement at any time without penalty, and will be able to
reborrow throughout the term of the Credit Agreement up to the maximum
commitment then available so long as no event of default exists.
Borrowings bear interest at the lender's base rate (8.5% at
December 31, 1995), as defined, plus 1.5%, payable quarterly. The Joint Venture
is also required to pay a commitment fee of .5% per annum on the unused portion
of the revolver. Borrowings under the Credit Agreement are collateralized by
substantially all assets of the Joint Venture and by a pledge of the Venturers'
interests in the Joint Venture. The Joint Venture has substantially utilized its
borrowing capacity under the note payable.
The Credit Agreement contains various requirements and
restrictions including maintenance of minimum operating results, required
financial reporting, restrictions on sales of assets and limitations on
investments, loans and advances. According to the Credit Agreement, the lender
may also require that at least 50% of borrowings under the Credit Agreement be
subject to a fixed rate of interest for a period of at least two years.
Management believes that the Venture was in compliance with all covenants at
December 31, 1995.
Principal maturities of the note payable as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1997 $1,767,200
1998 2,100,000
1999 2,900,000
----------
$6,767,200
==========
</TABLE>
F-18
<PAGE> 60
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(Continued)
=========================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Joint Venture leases buildings and tower sites associated
with the systems under operating leases expiring in various years through 2002.
Future minimum rental payments under non-cancelable leases that
have remaining terms in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C>
1996 $13,600
1997 13,600
1998 13,600
1999 13,600
2000 13,100
Thereafter 18,300
-------
$85,800
=======
</TABLE>
Rentals, other than pole rentals, charged to operations
approximated $48,100, $49,200 and $48,400 in 1993, 1994 and 1995, respectively,
while pole rental expense approximated $112,800, $106,700 and $95,800 in 1993,
1994 and 1995, respectively.
The Joint 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
Joint Venture s cable services. The Joint Venture believes that compliance with
the 1992 Cable Act has had a significant negative impact on its operations and
cash flow. It also believes that any potential future liabilities for refund
claims or other related actions would not be material. The Telecommunications
Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996.
This statute contains a significant overhaul of the federal regulatory
structure. As it pertains to cable television, the 1996 Telecom Act, among other
things, (i) ends the regulation of certain nonbasic programming services in
1999; (ii) expands the definition of effective competition, the existence of
which displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC will have to conduct a number of
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act.
F-19
<PAGE> 61
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(Concluded)
=========================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
The attorneys general of approximately 25 states have announced
the initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
A recent federal court decision could if upheld and if adopted by
other federal courts, make the renewal of franchises more problematic in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision has
been appealed. The Joint Venture was not a party to this litigation.
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Joint Venture has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 4% of gross receipts, as
defined, from the operations of the Joint Venture. Management fees approximated
$249,800, $247,000 and $ 249,700 in 1993, 1994 and 1995, respectively. In
addition, the Joint Venture is required to distribute 1% of its gross revenues
to the Corporate General Partner in respect to its interest as the Corporate
General Partner. This fee approximated $62,400, $61,700 and $62,400 in 1993,
1994 and 1995, respectively.
The Joint Venture also reimburses the Manager for direct expenses
incurred on behalf of the Joint 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 Joint Venture for these services approximated
$257,700, $284,200 and $250,500 during 1993, 1994 and 1995, respectively.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Joint Venture for these
costs based on an estimate of what the Joint Venture could negotiate for such
programming services on a stand-alone basis. The Joint Venture recorded
programming fee expense of $989,500, $1,071,200 and $1,136,500 in 1993, 1994 and
1995, respectively.
NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $447,000, $662,500 and
$777,400 in 1993, 1994 and 1995, respectively.
F-20
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3 Second Amended and Restated Agreement of Limited Partnership of Enstar
Income/Growth Program Five-A, L.P., dated as of August 1, 1988 (2)
10.1 Amended and Restated Partnership Agreement of Enstar Cable of
Cumberland Valley, dated as of April 28, 1988(2)
10.2 Management Agreement between Enstar Income/Growth Program Five-A, L.P.,
and Enstar Cable Corporation (1)
10.3 Management Agreement between Enstar Cable of Cumberland Valley and
Enstar Cable Corporation, as amended (2)
10.4 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Cumberland, Kentucky(1)
10.5 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Greensboro, Kentucky(1)
10.6 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Jellico, Tennessee(1)
10.7 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Liberty, Kentucky (1)
10.8 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Monticello, Kentucky(1)
10.9 Franchise ordinance and related documents thereto granting a non-
exclusive community antenna television system franchise for the City of
Russell Springs, Kentucky(1)
10.10 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
McCreary County, Kentucky (1)
10.11 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for Whitley
County, Kentucky (1)
10.12 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
Campbell County, Tennessee (1)
10.13 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system for Russell County,
Kentucky(2)
10.14 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system for Wayne County,
Kentucky(2)
10.15 Service Agreement between Enstar Communications Corporation, Enstar
Cable Corporation and Falcon Holding Group, Inc. dated as of October 1,
1988 (3)
10.16 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated April
29, 1988 between Enstar Cable of Cumberland Valley and Rhode Island
Hospital Trust National Bank, dated March 26, 1990.(4)
</TABLE>
E-1
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.17 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated April
29, 1988 between Enstar Cable of Cumberland Valley and Rhode Island
Hospital Trust National Bank, dated December 27, 1990. (4)
10.18 Amendment No. 4 to Revolving Credit and Term Loan Agreement dated April
29, 1988 between Enstar Cable of Cumberland Valley and Rhode Island
Hospital Trust National Bank, dated March 25, 1992.(5)
10.19 Amendment No. 5 to Revolving Credit and Term Loan Agreement dated April
29, 1988 between Enstar Cable of Cumberland Valley and Rhode Island
Hospital Trust National Bank, dated February 16, 1993.(6)
10.20 Amendment No. 6 to Revolving and Term Loan Agreement dated April 29,
1988 between Enstar Cable of Cumberland Valley and Rhode Island
Hospital Trust National Bank, dated March 23, 1993.(6)
10.21 Asset Purchase Agreement and related documents by and between Enstar
Cable of Cumberland Valley and W.K. Communications, Inc., dated as of
April 23, 1993.(6)
10.22 Loan Agreement between Enstar Cable of Cumberland Valley and Kansallis-
Osake-Pankki dated December 9, 1993. (8)
10.23 Amendment to Loan Agreement dated December 9, 1993 between Enstar Cable
of Cumberland Valley and Merita Bank Ltd., Successor in Interest to
Kansallis-Osake-Pankki, dated December 15, 1995.
16.1 Report of change in accountants (7)
21.1 Subsidiaries: Enstar Cable of Cumberland Valley.
</TABLE>
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1987.
(2) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1988.
(3) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1989.
(4) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1990.
(5) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-16779 for the quarter ended March 31, 1993.
(7) Incorporated by reference to the exhibit to the Registrant s Current Report
on Form 8-K, File No. 0-16779 dated October 17, 1994.
(8) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-16779 for the fiscal year ended December 31, 1993.
E-2
<PAGE> 1
EXHIBIT 10.23
The name of our new bank is
KANSALLIS-OSAKE-PANKKI MERITA BANK
New York Branch KANSALLIS UNION BANK OF FINLAND
- --------------------------------------------------------------------------------
MERITA BANK LTD
December 15, 1995
Enstar Cable of Cumberland Valley
c/o Falcon Cable TV
474 S. Raymond Ave., Suite 200
Pasadena, CA 91105
Attention: Mr. Michael K. Menerey
Chief Financial Officer
Re: Loan Agreement dated December 9, 1993 between Enstar Cable of
Cumberland Valley and Merita Bank Ltd, Successor in Interest to
Kansallis-Osake-Pankki
Gentlemen:
Section 4.38 of the Loan Agreement is hereby amended by the addition of
the following sentence:
Notwithstanding any of the foregoing provisions in this section, any
unused portion of permitted 1994 capital expenditures may be incurred in
1995 and 1996.
Sincerely,
Merita Bank Ltd
Charles J. Lansdown Kathi L. Gilbert
Vice President Vice President
- --------------------------------------------------------------------------------
Kansailis-Osake-Pankki 575 Fifth Avenue Telephone (212) 972-4545
Incorporated in Finland New York, NY 10017 Telex 424843
with Limited Liability
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1995, AND THE STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,100
<SECURITIES> 0
<RECEIVABLES> 15,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,663,400
<CURRENT-LIABILITIES> 16,800
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,663,400
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 32,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 500
<INCOME-PRETAX> (587,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (587,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (587,600)
<EPS-PRIMARY> (9.73)
<EPS-DILUTED> 0
</TABLE>
