<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
----------- -------------
Commission File Number 0-16789
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1713008
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
--------------
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act
Name of each exchange
Title of each Class on which registered
------------------- ---------------------
UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant. All of the registrant's 59,830 units of
limited partnership interests, its only class of equity securities, are held by
non-affiliates and were purchased at a price of $250 per unit. 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.
The Exhibit Index is located at Page E-1.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income/Growth Program Five-B, 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.
-2-
<PAGE> 3
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 Partnership 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."
-3-
<PAGE> 4
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
-4-
<PAGE> 5
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.
-5-
<PAGE> 6
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
====== ====== ===== ======
</TABLE>
- --------
(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.
-6-
<PAGE> 7
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
-7-
<PAGE> 8
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 the 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 the systems also could expand the number and
types of services these systems offer and enhance the development of current and
future revenue sources in these systems. 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 point based on its present understanding of
the costs as compared to the benefits of the digital equipment currently
available.
-8-
<PAGE> 9
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 30, 1995), which is generally based on a fixed fee per
customer or a percentage of the gross receipts for the particular service.
Falcon Cablevision's programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. Falcon Cablevision does not have
long-term programming contracts for the supply of a substantial amount 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.
-9-
<PAGE> 10
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>
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."
-10-
<PAGE> 11
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered program services formerly
available only to cable television subscribers. Most satellite-distributed
program signals are being electronically scrambled to permit reception only with
authorized decoding equipment for which the consumer must pay a fee. From time
to time, legislation has been introduced in Congress which, if enacted into law,
would prohibit the scrambling of certain satellite-distributed programs or would
make satellite services available to private earth stations on terms comparable
to those offered to cable systems. Broadcast television signals are being made
available to owners of earth stations under the Satellite Home Viewer Copyright
Act of 1988, which became effective January 1, 1989 for an initial six-year
period. This Act establishes a statutory compulsory license for certain
transmissions made by satellite owners to home satellite dishes, for which
carriers are required to pay a royalty fee to the Copyright Office. This Act has
been extended by Congress until December 31, 1999. The 1992 Cable Act enhances
the right of cable competitors to purchase nonbroadcast satellite-delivered
programming. See "Legislation and Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in the
same orbital position. Video compression technology may also be used by cable
operators in the future to similarly increase their channel capacity. DBS
service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna, and it is more
accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. DBS service is being heavily marketed on a nation-wide basis. The
extent to which DBS systems will be competitive with cable television systems
will depend upon, among other things, the ability of DBS operators to obtain
access to programming, the availability of reception equipment, and whether
equipment and service can be made available to consumers at reasonable prices.
Multi-channel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS systems are less capital intensive, are
not required to obtain local franchises or to pay franchise fees and are subject
to fewer regulatory requirements than cable television systems. To date, the
ability of these so-called "wireless" cable services to compete with cable
television systems has been limited by channel capacity constraints and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few MMDS systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the development of
MMDS and other wireless cable systems as alternative means of distributing video
programming, including reallocating certain frequencies to these services and
expanding the permissible use and eligibility requirements for certain channels
reserved for educational purposes. The FCC's actions enable a single entity to
develop an MMDS system with a potential of up to 35 channels that could compete
effectively with cable television. MMDS systems qualify for the statutory
compulsory copyright license for the retransmission 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
-11-
<PAGE> 12
compatible easements within their franchise areas upon nondiscriminatory terms
and conditions. Accordingly, where there are preexisting compatible easements,
cable operators may not be unfairly denied access or discriminated against with
respect to the terms and conditions of access to those easements. There have
been conflicting judicial decisions interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property.
Due to the widespread availability of reasonably-priced earth stations,
SMATV systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by
franchised cable television systems. Further, while a franchised cable
television system typically is obligated to extend service to all areas of a
community regardless of population density or economic risk, the SMATV system
may confine its operation to small areas that are easy to serve and more likely
to be profitable. Under the 1996 Telecom Act, SMATV systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights-of-way. However, a
SMATV system is subject to the 1984 Cable Act's franchise requirement if it uses
physically closed transmission paths such as wires or cables to interconnect
separately owned and managed buildings if its lines use or cross any public
right-of-way. In some cases, SMATV operators may be able to charge a lower price
than could a cable system providing comparable services and the FCC's new
regulations implementing the 1992 Cable Act limit a cable operator's ability to
reduce its rates to meet this competition. Furthermore, the U.S. Copyright
Office has tentatively concluded that SMATV systems are "cable systems" for
purposes of qualifying for the compulsory copyright license established for
cable systems by federal law. The 1992 Cable Act prohibits the common ownership
of cable systems and SMATV facilities serving the same area. However, a cable
operator can purchase a SMATV system serving the same area and technically
integrate it into the cable system.
The FCC has authorized a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used as well by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking toward
the allocation of frequencies in the 28 Ghz range for a new multi-channel
wireless video service which could make 98 video channels available in a single
market. It cannot be predicted at this time whether competitors will emerge
utilizing such frequencies or whether such competition would have a material
impact on the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems" without
obtaining a local cable franchise, although telephone companies operating such
systems can be required to make payments to local governmental bodies in lieu of
cable franchise fees. Up to two-thirds of the channel capacity on an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC's video dialtone rules.
The 1996 Telecom Act also includes numerous provisions designed to make it
easier for cable operators and others to compete directly with local exchange
telephone 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
-12-
<PAGE> 13
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.
-13-
<PAGE> 14
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future materially affect the Partnership and the cable television industry. The
following is a summary of federal laws and regulations affecting the growth and
operation of the cable television industry and a description of certain state
and local laws.
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
-14-
<PAGE> 15
1992 Cable Act allows for a greater degree of regulation of the cable industry
with respect to, among other things: (i) cable system rates for both basic and
certain nonbasic services; (ii) programming access and exclusivity arrangements;
(iii) access to cable channels by unaffiliated programming services; (iv) leased
access terms and conditions; (v) horizontal and vertical ownership of cable
systems; (vi) customer service requirements; (vii) franchise renewals; (viii)
television broadcast signal carriage and retransmission consent; (ix) technical
standards; (x) customer privacy; (xi) consumer protection issues; (xii) cable
equipment compatibility; (xiii) obscene or indecent programming; and (xiv)
requiring subscribers to subscribe to tiers of service other than basic service
as a condition of purchasing premium services. Additionally, the legislation
encourages competition with existing cable television systems by allowing
municipalities to own and operate their own cable television systems without
having to obtain a franchise; preventing franchising authorities from granting
exclusive franchises or unreasonably refusing to award additional franchises
covering an existing cable system's service area; and prohibiting the common
ownership of cable systems and co-located MMDS or SMATV systems. The 1992 Cable
Act also precludes video programmers affiliated with cable television companies
from favoring cable operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the 1992
Cable Act is still ongoing. On April 8, 1993, a three-judge district court panel
granted summary judgment for the government upholding the must-carry provisions.
That decision was appealed directly to the U.S. Supreme Court which remanded the
case back to the district court to determine whether there was adequate evidence
that the provisions were needed and whether the restrictions chosen were the
least intrusive. On December 12, 1995, the district court again upheld the
must-carry provisions. The Supreme Court has again agreed to review the district
court's decision.
On September 16, 1993, a constitutional challenge to the balance of the
1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set-asides for DBS operators). An appeal from that decision is pending before
the U.S. Court of Appeals for the District of Columbia Circuit.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has heretofore promulgated regulations covering such areas as
the registration of cable television systems, cross-ownership between cable
television systems and other communications businesses, carriage of television
broadcast programming, consumer education and lockbox enforcement, origination
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities often used in connection with cable
operations. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, signal carriage, consumer protection
and customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of direct
broadcast satellite system ownership and operation. The 1996 Telecom Act
requires certain changes to various of these regulations. A brief summary of
certain of these federal regulations as adopted to date follows.
-15-
<PAGE> 16
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
-16-
<PAGE> 17
can be created free of rate regulation as long as certain conditions are met
such as not moving services from existing tiers to the new tier. These
provisions currently provide limited benefit to the Partnership's systems due to
the lack of channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the 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.
-17-
<PAGE> 18
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains new signal carriage requirements. These new
rules allowed commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station. The
first such election was made on June 17, 1993. Local non-commercial television
stations are also given mandatory carriage rights, subject to certain
exceptions, within the larger of: (i) a 50 mile radius from the station's city
of license; or (ii) the station's Grade B contour (a measure of signal
strength). Unlike commercial stations, noncommercial stations are not given the
option to negotiate retransmission consent for the carriage of their signal. In
addition, cable systems will have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations," i.e., commercial satellite-delivered independent stations such
as WTBS. The 1992 Cable Act also eliminated, effective December 4, 1992, the
FCC's regulations requiring the provision of input selector switches. The
must-carry provisions for non-commercial stations became effective on December
4, 1992. Implementing must-carry rules for non-commercial and commercial
stations and retransmission consent rules for commercial stations were adopted
by the FCC on March 11, 1993. All commercial stations entitled to carriage were
to have been carried by June 2, 1993, and any non-must-carry stations (other
than superstations) for which retransmission consent had not been obtained could
no longer be carried after October 5, 1993. A number of stations previously
carried by the 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.
-18-
<PAGE> 19
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide cable-related
facilities and equipment and to enforce compliance with voluntary commitments.
In the case of franchises in effect prior to the effective date of the 1984
Cable Act, franchising authorities may enforce requirements contained in the
franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. While a cable operator
must still submit its request to commence renewal proceedings within thirty to
thirty-six months prior to franchise expiration to invoke the formal renewal
process, the request must be in writing and the franchising authority must
commence renewal proceedings not later than six months after receipt of such
notice. The four-month period for the franchising authority to grant or deny the
renewal now runs from the submission of the renewal proposal, not the completion
of the public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
For alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
A recent federal court decision could, if upheld and if adopted by
other federal courts, make the renewal of franchises more 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.
-19-
<PAGE> 20
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act presently allows cable operators
substantial latitude in setting leased access rates, the 1992 Cable Act requires
leased access rates to be set according to a formula determined by the FCC.
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single
cable television franchise and to impose certain franchise restrictions upon
cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be in a state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant franchises
to competing cable television systems and permits franchising authorities to
operate their own cable television systems without franchises.
OWNERSHIP
The 1984 Cable Act codified existing FCC cross-ownership regulations,
which, in part, prohibit local exchange telephone companies ("LECs") from
providing video programming directly to customers within their local exchange
telephone service areas, except in rural areas or by specific waiver of FCC
rules. This restriction had been ruled unconstitutional in several court cases,
and was before the Supreme Court for review, when the 1996 Telecom Act was
passed. That statute repealed the rule in its entirety.
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. The 1996 Telecom Act
eliminates the statutory ban and directs the FCC to review its rule within two
years. Common ownership or control has historically also been prohibited by the
FCC (but not by the 1984 Cable Act) between a cable system and a national
television network. The 1996 Telecom Act eliminates this prohibition. Finally,
in order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and MDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act codified
this restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom
Act exempts cable systems facing effective competition from this restriction.
The 1992 Cable Act permits states or local franchising authorities to adopt
certain additional restrictions on the ownership of cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder of
more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness
-20-
<PAGE> 21
of these rules pending the outcome of the appeal from the U.S. District Court
decision holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which owns
the cable system has an attributable interest. The limit is 40% of all activated
channels.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and
women are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable system operators with more than five full-time
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual EEO reporting requirements on cable operators and
has expanded those requirements to all multichannel video service distributors.
Failure to comply with the EEO requirements can result in the imposition of
fines and/or other administrative sanctions, or may, in certain circumstances,
be cited by a franchising authority as a reason for denying a franchisee's
renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act precluded cable operators from selling or otherwise
transferring ownership of a cable television system within 36 months after
acquisition or initial construction, with certain exceptions. The 1996 Telecom
Act repealed this restriction. The 1992 Cable Act also requires franchising
authorities to act on any franchise transfer request submitted after December 4,
1992 within 120 days after receipt of all information required by FCC
regulations and by the franchising authority. Approval is deemed to be granted
if the franchising authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC. Cable operators who operate in certain frequency bands are
required on an annual basis to file the results of their periodic cumulative
leakage testing measurements. Operators who fail to make this filing or who
exceed the FCC's allowable cumulative leakage index risk being prohibited from
operating in those frequency bands in addition to other sanctions.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to the
cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards
-21-
<PAGE> 22
which were in conflict with or more restrictive than those established by the
FCC. The FCC has revised such standards and made them applicable to all classes
of channels which carry downstream National Television System Committee (NTSC)
video programming. The FCC also has adopted additional standards applicable to
cable television systems using frequencies in the 108-137 Mhz and 225-400 Mhz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable system signal
leakage. Periodic testing by cable operators for compliance with the technical
standards and signal leakage limits is required. The 1992 Cable Act requires the
FCC to periodically update its technical standards to take into account changes
in technology. Under the 1996 Telecom Act, local franchising authorities may not
prohibit, condition or restrict a cable system's use of any type of subscriber
equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. These regulations, inter alia, generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
This latter requirement could make it more difficult or costly for cable
operators to upgrade their customer premises equipment and the FCC has been
asked to reconsider its regulations. The 1996 Telecom Act directs the FCC to set
only minimal standards to assure compatibility between television sets, VCRs and
cable systems, and to rely on the marketplace. The FCC must adopt rules to
assure the competitive availability to consumers of customer premises equipment,
such as converters, used to access the services offered by cable systems and
other multichannel video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. A number of states and the District of
Columbia have certified to the FCC that they regulate the rates, terms and
conditions for pole attachments. In the absence of state regulation, the FCC
administers such pole attachment rates through use of a formula which it has
devised. The 1996 Telecom Act directs the FCC to adopt a new rate formula for
any attaching party, including cable systems, which offer telecommunications
services. This new formula will result in significantly higher attachment rates
for cable systems which choose to offer such services.
OTHER MATTERS
FCC regulation pursuant to the Communications Act, as amended, also
includes matters regarding a cable system's carriage of local sports
programming; restrictions on origination and cablecasting by cable system
operators; application of the fairness doctrine and rules governing political
broadcasts; customer service; obscenity and indecency; home wiring and
limitations on advertising contained in nonbroadcast children's programming.
The 1996 Telecom Act establishes a process for the creation and
implementation of a "voluntary" system of ratings for video programming
containing sexual, violent or other "indecent" material and directs the FCC to
adopt rules requiring most television sets manufactured in the United States or
shipped in interstate commerce to be technologically capable of blocking the
display of programs with a common rating. The 1996 Telecom Act also requires
video programming distributors to employ technology to restrict the reception of
programming by persons not subscribing to those channels. In the case of
channels primarily dedicated to sexually-oriented programming, the distributor
must fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide such
programming during a "safe harbor" period when children are not likely to be in
the audience, as determined by the FCC. With respect to other kinds of channels,
the 1996 Telecom Act only requires that the audio and video portions of the
channel be fully blocked, at no charge, upon request of the
-22-
<PAGE> 23
person not subscribing to the channel. The specific blocking requirements
applicable to sexually-oriented programming are being challenged in court on
constitutional grounds.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations. Originally, the Federal Copyright Royalty Tribunal was empowered to
make and, in fact, did make several adjustments in copyright royalty rates. This
tribunal was eliminated by Congress in 1993. Any future adjustment to the
copyright royalty rates will be done through an arbitration process to be
supervised by the U.S. Copyright Office. Requests to adjust the rates were made
in January, 1996 and are pending before the Copyright Office.
Cable operators are liable for interest on underpaid and unpaid royalty
fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television system
mergers and acquisitions. While it is not possible to predict the outcome of
this proceeding, any changes adopted by the Copyright Office in its current
policies may have the effect of reducing the copyright impact of certain
transactions involving cable company mergers and cable television system
acquisitions.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators would have to negotiate rights
from the copyright owners for all of the programming on the broadcast stations
carried by cable systems. Such negotiated agreements would likely increase the
cost to cable operators of carrying broadcast signals. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission consent
agreements between television broadcast stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves on local
origination channels, in advertisements inserted locally on cable networks, et
cetera, must also be licensed. A blanket license is available from BMI. Cable
industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and rights-of-way,
cable television systems are subject to state and local regulation, typically
imposed through the franchising process. State and/or
-23-
<PAGE> 24
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchise operator fails to comply
with material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be granted
or that renewals will be made on similar terms and conditions. Franchises
usually call for the payment of fees, often based on a percentage of the
system's gross customer revenues, to the granting authority. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome. The 1984 Cable Act
places certain limitations on a franchising authority's ability to control the
operation of a cable system operator and the courts have from time to time
reviewed the constitutionality of several general franchise requirements,
including franchise fees and access channel requirements, often with
inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise and permits states or local franchising authorities
to adopt certain restrictions on the ownership of cable television systems.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided. The 1996 Telecom Act prohibits a franchising authority from
either requiring or limiting a cable operator's provision of telecommunications
services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
-24-
<PAGE> 25
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.
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
-25-
<PAGE> 26
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
1,662 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 Joint Venture'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.
-26-
<PAGE> 27
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."
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and of
Enstar Cable of Cumberland Valley 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 $ (64,800) $ (75,100) $ (43,200) $ (51,700) $ (28,200)
Depreciation and amortization (19,000) (12,700) -- -- --
----------- --------- --------- --------- ---------
Operating loss (83,800) (87,800) (43,200) (51,700) (28,200)
Interest expense (1,800) (2,500) (2,300) (2,200) (600)
Equity in net loss of joint venture (993,900) (664,000) (601,600) (642,500) (555,100)
----------- --------- --------- --------- ---------
Net loss $(1,079,500) $(754,300) $(647,100) $(696,400) $(583,900)
=========== ========= ========= ========= =========
PER UNIT OF LIMITED PARTNERSHIP INTEREST
Net loss $ (17.86) $ (12.48) $ (10.71) $ (11.52) $ (9.66)
=========== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $ 7,424,400 $ 6,661,500 $ 5,926,800 $ 5,249,900 $ 4,641,500
General partners' deficit (51,000) (58,500) (65,000) (72,000) (77,800)
Limited partners' capital 7,359,400 6,612,600 5,972,000 5,282,600 4,704,500
</TABLE>
-27-
<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 Joint Venture
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.
-28-
<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-A, 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
-29-
<PAGE> 30
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 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 charged by program suppliers (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.
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.
-30-
<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).
-31-
<PAGE> 32
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.
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 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 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,
-32-
<PAGE> 33
1995. The Joint Venture's maximum commitment of $8,200,000 at December 31, 1995
will decrease by $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 $23,200 more cash in operating activities during
1995 as compared with 1994, primarily due to a $44,000 increase in the payment
of liabilities owed to the Corporate General Partner and third party creditors,
and a $4,300 increase in receivable balances. Partnership expenses used $25,100
less cash in 1995 than in 1994 after adding back non-cash equity in net loss of
Joint Venture.
Cash provided by financing activities decreased by $70,100 during 1995
as compared with 1994 due to decreased distributions from the Cumberland Valley
Joint Venture.
1994 VS. 1993
The Partnership used $98,700 less cash in operating activities during
1994 than in 1993, primarily due to a decrease of $107,100 in the payment of
liabilities owed to the Corporate General Partner and third party creditors.
Partnership expenses used $8,400 more cash during 1994 than in 1993 after adding
back non-cash equity in net loss of Joint Venture.
Cash provided by financing activities decreased by $52,900 during 1994
as compared with 1993 due to decreased 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.
-33-
<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
Communications, 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 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
-34-
<PAGE> 35
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.
-35-
<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.
-36-
<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, 1995, 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.
-37-
<PAGE> 38
As of March 3, 1996, Marc B. Nathanson and members of his family owned,
directly or indirectly, outstanding partnership interests (comprising both
general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P., 2.58% of
Falcon Video Communications and 30.0% of Falcon Cable Systems Company. In
accordance with the respective partnership agreements of the partnerships
mentioned above, after the return of capital to and the receipt of certain
preferred returns by the limited partners of such partnerships, FHGLP and
certain of its officers and directors had rights to future profits greater than
their ownership interests of capital in such partnerships.
On March 29, 1993, FHGLP was organized to effect the consolidation of
certain cable television businesses, including Falcon Cablevision, Falcon
Telecable, Falcon Cable Media and Falcon Community Cable, into FHGLP. At the
same time FHGLP assumed the cable system management operations of FHGI. On
December 28, 1995, FHGLP acquired the remaining 72.3% of outstanding shares of
common stock of 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.
-38-
<PAGE> 39
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that a
limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of the
partnership (a partnership derivative action) to recover damages from third
parties. 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 insurance on behalf of the
General Partner, and such other persons as the General Partner shall determine
against any liability that may be asserted against or expense that may be
incurred by such person and against which the Partnership would be entitled to
indemnify such person pursuant to the Partnership Agreement. 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-B, 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-B, 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-B, L.P. (A Georgia Limited Partnership)
We have audited the balance sheets of Enstar Income Program Five-B, 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-B, 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-B,
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-B, L.P.
BALANCE SHEETS
==============================
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS:
Cash $ 49,300 $ 700
Due from affiliates - 4,300
Equity in net assets of joint venture 5,200,600 4,636,500
---------- ----------
$5,249,900 $4,641,500
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 10,500 $ 14,800
Due to affiliates 28,800 -
---------- ----------
TOTAL LIABILITIES 39,300 14,800
---------- ----------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (72,000) (77,800)
Limited partners 5,282,600 4,704,500
---------- ----------
TOTAL PARTNERSHIP CAPITAL 5,210,600 4,626,700
---------- ----------
$5,249,900 $4,641,500
========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-3
<PAGE> 45
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF OPERATIONS
==============================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative expenses $ 19,500 $ 28,200 $ 28,200
General Partner reimbursed expenses 23,700 23,500 -
--------- --------- ---------
Operating loss (43,200) (51,700) (28,200)
INTEREST EXPENSE (2,300) (2,200) (600)
--------- --------- ---------
Loss before equity in net loss of joint venture (45,500) (53,900) (28,800)
EQUITY IN NET LOSS OF JOINT VENTURE (601,600) (642,500) (555,100)
--------- --------- ---------
NET LOSS $(647,100) $(696,400) $(583,900)
========= ========= =========
NET LOSS PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (10.71) $ (11.52) $ (9.66)
========= ========= =========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 59,830 59,830 59,830
========= ========= =========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-4
<PAGE> 46
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
==============================
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1993 $(58,500) $6,612,600 $6,554,100
Net loss for year (6,500) (640,600) (647,100)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1993 (65,000) 5,972,000 5,907,000
Net loss for year (7,000) (689,400) (696,400)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1994 (72,000) 5,282,600 5,210,600
Net loss for year (5,800) (578,100) (583,900)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 $(77,800) $4,704,500 $4,626,700
======== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-5
<PAGE> 47
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, 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 $(647,100) $(696,400) $(583,900)
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 - - (4,300)
Accounts payable and due to affiliates (87,600) 19,500 (24,500)
--------- --------- ---------
Net cash used in operating activities (133,100) (34,400) (57,600)
--------- --------- ---------
Cash flows from investing activities:
Distributions from joint venture 132,000 79,100 9,000
--------- --------- ---------
Net increase (decrease) in cash (1,100) 44,700 (48,600)
Cash at beginning of year 5,700 4,600 49,300
--------- --------- ---------
Cash at end of year $ 4,600 $ 49,300 $ 700
========== ========= =========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-6
<PAGE> 48
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
SUMMARY OF ACCOUNTING POLICIES
==============================
FORM OF PRESENTATION
Enstar Income/Growth Program Five-B, 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
the 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-B, 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-B, 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-A, 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 and should be reviewed in conjunction with these
financial statements. Reference is made to the accompanying financial statements
of the Joint Venture on pages F-11 to F-20 of this 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 service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 5% of gross receipts, as
defined, from the operations of the Partnership. The Partnership did not own or
operate any cable television operations in 1993, 1994 or 1995 other than through
its investment in the Joint 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 reimbursed expenses were incurred on behalf of the
Partnership during 1995.
NOTE 4 - COMMITMENTS
The Partnership, together with Enstar 5-A, L.P., 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:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvement Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises. In
addition, franchise cost includes capitalized costs incurred in obtaining new,
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-B, 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-B,
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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 dated October 17, 1994.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16789 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
- --------------------------------------------------------------------------------
Kansallis-Osake-Pankki
Incorporated in Finland 575 Fifth Avenue Telephone (212) 972-4545
with Limited Liability New York, NY 10017 Telex 424843
<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> 700
<SECURITIES> 0
<RECEIVABLES> 4,300
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,641,500
<CURRENT-LIABILITIES> 14,800
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,641,500
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 28,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600
<INCOME-PRETAX> (583,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (583,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (583,900)
<EPS-PRIMARY> (9.66)
<EPS-DILUTED> 0
</TABLE>
