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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-16789
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act
Name of each exchange
Title of each Class on which registered
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
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.
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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"). The general partner of Falcon Cablevision is Falcon Holding
Group, L.P. ("FHGLP"), which provides certain management services to the
Partnership. The general partner of FHGLP is Falcon Holding Group, Inc., a
California corporation ("FHGI"). See Item 13., "Certain Relationships and
Related Transactions." The General Partner, FHGLP and affiliated companies are
responsible for the day to day management of the Partnership and its
operations. See "Employees" below.
A cable television system receives television, radio and data signals
at the system's "headend" site by means of over-the-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and
other information services for distribution through the system. Cable
television systems generally are constructed and operated pursuant to
non-exclusive franchises or similar licenses granted by local governmental
authorities for a specified term of years.
The systems offer customers various levels (or "tiers") of cable
services consisting of broadcast television signals of local network,
independent and educational stations, a limited number of television signals
from so-called "super stations" originating from distant cities (such as WTBS
and WGN), various satellite-delivered, non-broadcast channels (such as Cable
News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"),
ESPN, Turner Network Television ("TNT") and The Disney Channel), programming
originated locally by the cable television system (such as public, educational
and governmental access programs) and informational displays featuring news,
weather, stock market and financial reports and public service announcements.
A number of the satellite services are also offered in certain packages. For an
extra monthly charge, the systems also offer "premium" television services to
their customers. These services (such as Home Box Office ("HBO"), Showtime and
selected regional sports networks) are satellite channels that consist
principally of feature films, live sporting events, concerts and other special
entertainment features, usually presented without commercial interruption. See
"Legislation and Regulation."
A customer generally pays an initial installation charge and fixed
monthly fees for basic, expanded basic, other tiers of satellite services and
premium programming services. Such monthly service fees constitute the primary
source of revenues for the systems. In addition to customer revenues, the
systems receive revenue from the sale of available advertising spots on
advertiser-supported programming. The systems also offer to their customers
home shopping services, which pay the systems a share of revenues from sales of
products in the systems' service areas, in addition to paying the systems a
separate fee in return for carrying their shopping service. Certain other new
channels have also recently offered the cable systems managed by FHGLP,
including those of the Partnership, fees in return for carrying their service.
Due to a lack of channel capacity available for adding new channels, the
Partnership's management cannot predict the impact of such potential payments
on the Partnership's business. See Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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All of the Partnership's cable television business operations are
conducted through its participation as a co-general partner 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 Tennessee 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, 1996, the Joint
Venture served approximately 17,100 homes subscribing to cable service in these
areas. In February 1993, the systems serving Noel, Missouri and Sulphur
Springs, Arkansas 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 27 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices
of the Partnership, the Corporate General Partner and FHGLP are located at
10900 Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and their
telephone number is (310) 824-9990. See Item 10, "Directors and Executive
Officers of the Registrant."
BUSINESS STRATEGY
Historically, the Joint 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 given a similar technical profile, its cable television
systems generally involve less risk of increased competition than systems in
large urban cities. In the Joint Venture's markets, consumers have access to
only a limited number of over-the-air broadcast television signals. In
addition, these markets typically offer fewer competing entertainment
alternatives than large cities. As a result, the Joint Venture's cable
television systems generally have a higher basic penetration rate (the number
of homes subscribing to cable service as a percentage of homes passed by cable)
with a more stable customer base than systems in large cities. Nonetheless,
the Joint Venture believes that all cable operators will face increased
competition in the future from alternative providers of multi-channel video
programming services. See "Competition."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") by the Federal Communications Commission (the "FCC") has had a negative
impact on the Joint 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"). See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Clustering
The Joint Venture has sought to acquire cable television operations in
communities that are proximate to other owned or affiliated systems in order to
achieve the economies of scale and operating efficiencies associated with
regional "clusters." The Joint 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 expansion of
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
incorporates a 750 MHz fiber to the feeder architecture for the majority of all
its systems that are to be rebuilt. A system built to a 750 MHz standard can
provide approximately 95 channels of analog service. Such a system will also
permit the introduction of high speed data transmission and telephony services
in the future after incurring incremental capital expenditures related to these
services.
The Joint 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 1994, 1995 and 1996 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
$662,100 on capital expenditures in 1996, primarily for equipment upgrades, and
has budgeted capital expenditures of approximately $688,700 in 1997, primarily
to upgrade additional 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 programming packages in its
systems. These packages combined services at a lower rate than the aggregate
rates for such services purchased individually on an "a la carte" basis. The
new rules require that charges for cable-related equipment (e.g., converter
boxes and remote control devices) and installation services be unbundled from
the provision of cable service and based upon actual costs plus a reasonable
profit. On November 10, 1994, the FCC announced the adoption of
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further significant amendments to its rules. One amendment allows cable
operators to create new tiers of program services which the FCC has chosen to
exclude from rate regulation, so long as the programming is new to the system.
However, in applying this new policy to packages such as those already offered
by the Joint Venture and numerous other cable operators, the FCC decided that
where only a few services were moved from regulated tiers to a non-premium "new
product tier" package, the package will be treated as if it were a tier of new
program services as discussed above. Substantially all of the new product tier
packages offered by the Joint Venture have received this desirable treatment.
In addition, the FCC decided that discounted packages of non-premium
programming services will be subject to rate regulation in the future. These
amendments to the FCC's rules have allowed the Joint 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 group of regulated services, additional
unregulated packages of satellite-delivered services and premium services on
either an a la carte or a discounted packaged basis. See "Legislation and
Regulation."
The Joint 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 ongoing basis, and a portion of
the regional managers' compensation is tied to achieving customer service
targets. FHGLP conducts an extensive customer survey on a periodic basis and
uses the information in its efforts to enhance service and better address the
needs of the Joint Venture's customers. In addition, the Joint Venture is
participating in the industry's Customer Service Initiative which emphasizes an
on-time guarantee program for service and installation appointments. FHGLP's
corporate executives and regional managers lead the Joint Venture's involvement
in a number of programs benefiting the communities the Joint Venture serves,
including, among others, Cable in the Classroom, Drug Awareness, Holiday Toy
Drive and the Cystic Fibrosis Foundation. Cable in the Classroom is the cable
television industry's public service initiative to enrich education through the
use of commercial-free cable programming. In addition, a monthly publication,
Cable in the Classroom magazine provides educational program listings by
curriculum area, as well as feature articles on how teachers across the country
use the programs.
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DESCRIPTION OF THE JOINT VENTURE'S SYSTEMS
The table below sets forth certain operating statistics for the
Joint Venture's cable systems as of December 31, 1996.
<TABLE>
<CAPTION>
Average
Monthly
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
System Passed(1) Service Penetration(2) Units(3) Penetration(4) Service(5) Subscribers(6)
------ ------ ------- ----------- ----- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Monticello, KY and
Jellico, TN 21,145 15,946 75.4% 3,154 19.8% $32.97 18,732
Pomme De Terre, MO 3,583 1,119 31.2% 207 18.5% $27.67 5,214
----- ----- --- -----
Total 24,728 17,065 69.0% 3,361 19.7% $32.62 23,946
====== ====== ===== ======
</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. Prior to July 1, 1996, The Disney Channel
was offered as a premium service. Effective July 1, 1996, it was offered as
part of an unregulated tier of services. As a result, the number of reported
premium service units was artificially reduced by this service offering
change. The number of Disney Channel premium service units at June 30, 1996
was 410.
(4) Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which
is counted as a separate premium service unit. This ratio may be greater
than 100% if the average customer subscribes for more than one premium
service.
(5) Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1996.
(6) The Joint 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 basic service rate within an operating
entity, adjusted to reflect the impact of regulation. Basic service
revenues include charges for basic programming, bulk and commercial
accounts and certain specialized "packaged programming" services, including
the appropriate components of new product tier revenue, and excluding premium
television and non-subscription services. Consistent with past practices,
Subscribers is an analytically derived number which is reported in order to
provide a basis of comparison to previously reported data. The computation
of Subscribers has been impacted by changes in service offerings made in
response to the 1992 Cable Act.
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CUSTOMER RATES AND SERVICES
The Joint Venture's cable television systems offer customers packages
of services that include the local area network, independent and educational
television stations, a limited number of television signals from distant
cities, numerous satellite-delivered, non-broadcast channels (such as CNN, MTV,
USA, ESPN, TNT and The Disney Channel) and certain information and public
access channels. For an extra monthly charge, the systems provide certain
premium television services, such as HBO, Showtime and regional sports
networks. The Joint 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 definition of effective competition provided for in the
1992 Cable Act, nearly all cable television systems in the United States have
become subject to local rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to include situations in which
a local telephone company, or anyone using its facilities, offers comparable
video service by any means except direct broadcast satellite ("DBS"). In
addition, the 1992 Cable Act eliminated the 5% annual basic rate increases
previously allowed by the 1984 Cable Act without local approval; allows the FCC
to review rates for non-basic service tiers other than premium services in
response to complaints filed by franchising authorities and/or cable customers;
prohibits cable television systems from requiring customers to purchase service
tiers above basic service in order to purchase premium services if the system
is technically capable of doing so; and adopted regulations to establish, on
the basis of actual costs, the price for installation of cable television
service, remote controls, converter boxes, and additional outlets. The FCC
implemented these rate regulation provisions on September 1, 1993, affecting
all of the Joint Venture's systems not deemed to be subject to effective
competition under the FCC's definition. The FCC substantially amended its rate
regulation rules on February 22, 1994 and again on November 10, 1994. The FCC
is in the process of conducting a number of additional rulemaking proceedings
in order to implement many of the provisions of the 1996 Telecom Act. See
"Legislation and Regulation."
At December 31, 1996, the Joint Venture's monthly rates for basic
cable service for residential customers, excluding special senior citizen
discount rates, ranged from $19.45 to $24.20 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. Substantially all the Joint
Venture's customers received a decrease in their monthly charges in July 1994
upon implementation of the FCC's amended rules. Commercial customers, such as
hotels, motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. Most multi-unit dwellings are offered a negotiated bulk rate in
exchange for single-point billing and basic service to all units. These rates
are also subject to regulation.
EMPLOYEES
The 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 and FHGLP. The cost of such employment is
allocated and charged to the Joint Venture for reimbursement pursuant to the
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partnership agreement and management agreement. Other personnel required to
operate the Joint Venture's business are employed by affiliates of the
Corporate General Partner. The cost of such employment is allocated and
charged to the Joint Venture. The amounts of these reimbursable costs are set
forth below in Item 11, "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of 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, 1996. 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, dependent in part on 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 is to utilize fiber
optic technology in substantially all rebuild projects which it undertakes.
The benefits of fiber optic technology over traditional coaxial cable
distribution plant include lower per mile rebuild costs due to a reduction in
the number of required amplifiers, the elimination of headends, lower ongoing
maintenance and power costs and improved picture quality and reliability.
DIGITAL COMPRESSION
The Joint Venture has been closely monitoring developments in the area
of digital compression, a technology which is expected to enable cable
operators to increase the channel capacity of cable television systems by
permitting a significantly increased number of video signals to fit in a cable
television system's existing bandwidth. The Joint Venture believes that the
utilization of digital compression technology in the future could enable its
systems to increase channel capacity in certain systems in a manner that could
be more cost efficient than rebuilding such systems with higher capacity
distribution plant. The use of digital compression in its systems also could
expand the number and types of services these systems offer and enhance the
development of current and future revenue sources. Equipment vendors are
beginning to market products to provide this technology, but the Joint
Venture's management has no plans to install it at this time based on the
current technological profile of its systems and its present understanding of
the costs as compared to the benefits of the digital equipment currently
available. This issue is under frequent management review.
PROGRAMMING
The Joint 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 Corporate General
Partner could negotiate for such services for the 15 partnerships managed by
the Corporate General Partner as a group (approximately 94,300 homes
subscribing to cable service at December 31, 1996), which is generally based on
a fixed fee per customer or a percentage of the gross receipts for the
particular service. Certain other new channels have also recently offered
Cablevision and the Joint Venture's systems fees in return for carrying their
service. Due to a lack of channel capacity available for adding new channels,
the Joint Venture's management cannot predict the impact of such potential
payments on its business. Falcon
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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 carry channels under
retransmission carriage agreements entered into with certain programming
sources, increased costs to produce or purchase cable programming generally,
inflationary increases and other factors. The 1996 retransmission carriage
agreement negotiations resulted in the Joint Venture agreeing to carry one new
service in its Monticello system, for which it will receive reimbursement of
certain costs related to launching the service. All other negotiations were
completed with essentially no change to the previous agreements. Under the FCC
rate regulations, increases in programming costs for regulated cable services
occurring after the earlier of March 1, 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, 1996, 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 re-negotiation and modification of franchise requirements if warranted by
changed circumstances.
The following table groups the franchises of the Joint Venture's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1996.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
-------------------- ----------- -------------- --------------
<S> <C> <C> <C>
Prior to 1998 4 5,849 34.3%
1998 - 2002 12 8,202 48.1%
2003 and after 3 2,118 12.4%
------ ------ ------
Total 19 16,169 94.8%
====== ====== ======
</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 896 customers, comprising
approximately 5.2% of the
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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 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
videodisk players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home Viewer Copyright Act of 1988, which became
effective January 1, 1989 for an initial six-year period. This Act establishes
a statutory compulsory license for certain transmissions made by satellite
owners to home satellite dishes, for which carriers are required to pay a
royalty fee to the Copyright Office. This Act has been extended by Congress
until December 31, 1999. The 1992 Cable Act enhances the right of cable
competitors to purchase nonbroadcast satellite-delivered programming. See
"Legislation and Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in
the same orbital position. Video compression technology may also be used by
cable operators in the future to similarly increase their channel capacity.
DBS service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna, and it is more
accessible than cable television service where cable
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plant has not been constructed or where it is not cost effective to construct
cable television facilities. DBS service is being heavily marketed on a
nationwide basis by several service providers.
Multichannel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS systems are less capital intensive,
are not required to obtain local franchises or to pay franchise fees, and are
subject to fewer regulatory requirements than cable television systems. To
date, the ability of these so-called "wireless" cable services to compete with
cable television systems has been limited by channel capacity and the need for
unobstructed line-of-sight over-the-air transmission. Although relatively few
MMDS systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the development of
MMDS and other wireless cable systems as alternative means of distributing
video programming, including reallocating certain frequencies to these services
and expanding the permissible use and eligibility requirements for certain
channels reserved for educational purposes. The FCC's actions enable a single
entity to develop an MMDS system with a potential of up to 35 channels that
could compete effectively with cable television. The use of digital
compression technology may enable MMDS systems to deliver even more channels.
MMDS systems qualify for the statutory compulsory copyright license for the
retransmission of television and radio broadcast stations. Several of the
Regional Bell Operating Companies have begun to enter the MMDS business as a
way of breaking into video programming delivery.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners' associations
which preclude franchised cable television operators from serving residents of
such private complexes. However, the 1984 Cable Act gives franchised cable
operators the right to use existing compatible easements within their franchise
areas upon nondiscriminatory terms and conditions. Accordingly, where there
are preexisting compatible easements, cable operators may not be unfairly
denied access or discriminated against with respect to the terms and conditions
of access to those easements. There have been conflicting judicial decisions
interpreting the scope of the access right granted by the 1984 Cable Act,
particularly with respect to easements located entirely on private property.
Further, while a franchised cable television system typically is obligated to
extend service to all areas of a community regardless of population density or
economic risk, a SMATV system may confine its operation to small areas that are
easy to serve and more likely to be profitable. Under the 1996 Telecom Act,
SMATV systems can interconnect non-commonly owned buildings without having to
comply with local, state and federal regulatory requirements that are imposed
upon cable systems providing similar services, as long as they do not use
public rights-of-way. In some cases, SMATV operators may be able to charge a
lower price than could a cable system providing comparable services and the
FCC's regulations implementing the 1992 Cable Act limit a cable operator's
ability to reduce its rates to meet this competition. Furthermore, the U.S.
Copyright Office has tentatively concluded that SMATV systems are "cable
systems" for purposes of qualifying for the compulsory copyright license
established for cable systems by federal law.
The FCC has initiated a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC also has a pending rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multichannel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on
the operations of cable television systems.
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The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems"
without obtaining a local cable franchise, although telephone companies
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Up to two-thirds of the channel
capacity on an "open video system" must be available to programmers
unaffiliated with the local telephone company. The open video system concept
replaces the FCC's video dialtone rules. The 1996 Telecom Act also includes
numerous provisions designed to make it easier for cable operators and others
to compete directly with local exchange telephone carriers. With certain
limited exceptions, neither a local exchange carrier nor a cable operator can
acquire more than 10% of the other entity operating within its own service
area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable industry. The ability of cable
systems to compete with present, emerging and future distribution media will
depend to a great extent on obtaining attractive programming. The availability
and exclusive use of a sufficient amount of quality programming may in turn be
affected by developments in regulation or copyright law. See "Legislation and
Regulation."
The cable television industry competes with radio, television and
print media for advertising revenues. As the cable television industry
continues to develop programming designed specifically for distribution by
cable, advertising revenues may increase. Premium programming provided by
cable systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services
may depend largely upon the continued availability of attractive programming at
competitive prices.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect the Partnership and the cable television industry.
The following is a summary of federal laws and regulations affecting the growth
and operation of the cable television industry and a description of certain
state and local laws. The Partnership believes that the regulation of its
industry remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on the
Partnership and Joint Venture.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984. This
federal statute, which amended the Communications Act of 1934 (the
"Communications Act"), created uniform national standards and guidelines for
the regulation of cable television systems. Violations by a cable television
system operator of provisions of the Communications Act, as well as of FCC
regulations, can subject the operator to substantial monetary penalties and
other sanctions. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable television systems from operating
without a franchise in such jurisdictions. In connection with new franchises,
the 1984 Cable Act provides that in granting or renewing franchises,
franchising authorities may establish requirements for cable-related facilities
and equipment, but may not establish or enforce requirements for video
programming or information services other than in broad categories. The 1984
Cable Act grandfathered, for the remaining term of existing franchises, many
but not all of the provisions in existing franchises which would not be
permitted in franchises entered into or renewed after the effective date of the
1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This
legislation has effected significant changes to the legislative and regulatory
environment in which the cable industry operates. It amends the 1984 Cable Act
in many respects. The 1992 Cable Act became effective on December 4, 1992,
although certain provisions, most notably those dealing with rate regulation
and retransmission consent, became effective at later dates. The legislation
required the FCC to conduct a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation of the cable industry with respect to, among other things:
(i) cable system rates for both basic and certain nonbasic services; (ii)
programming access and exclusivity arrangements; (iii) access to cable channels
by unaffiliated programming services; (iv) leased access terms and conditions;
(v) horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x) customer
privacy; (xi) consumer protection issues; (xii) cable equipment compatibility;
(xiii) obscene or indecent programming; and (xiv) requiring subscribers to
subscribe to tiers of service other than basic service as a condition of
purchasing premium services. Additionally, the legislation encourages
competition with existing cable television systems by allowing municipalities
to own and operate their own cable television systems without having to obtain
a franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area; and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precludes video programmers affiliated with cable television companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the 1992
Cable Act is still ongoing. On April 8, 1993, a three-judge district court
panel granted summary judgment for the government upholding the must-carry
provisions. That decision was appealed directly to the U.S. Supreme Court
which remanded
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the case back to the district court to determine whether there was adequate
evidence that the provisions were needed and whether the restrictions chosen
were the least intrusive. On December 12, 1995, the district court again
upheld the must-carry provisions. The Supreme Court is reviewing the district
court's decision.
On September 16, 1993, a constitutional challenge to the balance of
the 1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set-asides for DBS operators). On August 30, 1996, the U.S. Court of Appeals
for the District of Columbia Circuit sustained the constitutionality of all
provisions except for the multiple ownership limits and the limits on the
number of channels which can be occupied by programmers affiliated with the
cable operator, both of which are being challenged in a separate appeal.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the 1996 Telecom Act into
law. This statute substantially amended the Communications Act by, among other
things, removing barriers to competition in the cable television and telephone
markets and reducing the regulation of cable television rates. As it pertains
to cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain nonbasic programming services in 1999; (ii) expands the
definition of effective competition, the existence of which displaces rate
regulation; (iii) eliminates the restriction against the ownership and
operation of cable systems by telephone companies within their local exchange
service areas; and (iv) liberalizes certain of the FCC's cross-ownership
restrictions. The FCC is in the process of conducting a number of additional
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act. See "Business - Competition" and "Federal Regulation-Rate
Regulation."
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has heretofore promulgated regulations covering such
areas as the registration of cable television systems, cross-ownership between
cable television systems and other communications businesses, carriage of
television broadcast programming, consumer education and lockbox enforcement,
origination cablecasting and sponsorship identification, children's
programming, the regulation of basic cable service rates in areas where cable
television systems are not subject to effective competition, signal leakage and
frequency use, technical performance, maintenance of various records, equal
employment opportunity, and antenna structure notification, marking and
lighting. The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations. The 1992 Cable Act required the FCC to adopt
additional regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The 1996 Telecom Act requires certain changes to various of these
regulations. A brief summary of certain of these federal regulations as
adopted to date follows.
RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional nonbasic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the previous statutory and FCC rate regulation standards.
The 1992 Cable Act replaced 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
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becoming subject to local rate regulation of basic service. The 1996 Telecom
Act expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any
means except DBS. Satisfaction of this test deregulates both basic and
nonbasic tiers. Additionally, the 1992 Cable Act required the FCC to adopt a
formula, for franchising authorities to enforce, to assure that basic cable
rates are reasonable; allowed the FCC to review rates for nonbasic service
tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities and/or cable customers; prohibited
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium services if the system is
technically capable of doing so; required the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allows
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances. The 1996 Telecom Act limits the
class of complainants regarding nonbasic tier rates to franchising authorities
only and ends FCC regulation of nonbasic tier rates on March 31, 1999.
The FCC adopted rules designed to implement the 1992 Cable Act's rate
regulation provisions on April 1, 1993, and then significantly amended them on
February 22 and November 10, 1994. The FCC's regulations contain standards for
the regulation of basic and nonbasic cable service rates (other than
per-channel or per-program services). The rules have been further amended
several times. Local franchising authorities and/or the FCC are empowered to
order a reduction of existing rates which exceed the maximum permitted level
for either basic and/or nonbasic cable services and associated equipment, and
refunds can be required. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic service
rates. Alternatively, cable operators have the opportunity to make
cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment (e.g., converter boxes and remote control devices) and installation
services be unbundled from the provision of cable service and based upon actual
costs plus a reasonable profit. The regulations also provide that future rate
increases may not exceed an inflation-indexed amount, plus increases in certain
costs beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels. In
addition, new product tiers consisting of services new to the cable system can
be created free of rate regulation as long as certain conditions are met such
as not moving services from existing tiers to the new tier. These provisions
currently provide limited benefit to the Joint Venture's systems due to the
lack of channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the Joint Venture for basic cable service and for
associated basic cable service equipment.
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 three rulings, however, on such packages
offered by
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affiliated partnerships managed by FHGLP. In one case, the FCC's Cable
Services Bureau ruled that a nine-channel a la carte package was an evasion of
rate regulation and ordered this package to be treated as a regulated tier. In
the second case, a seven-channel a la carte package was ordered to be treated
as a regulated tier. In the third case, a six-channel package was held not to
be an evasion, but rather is to be considered an unregulated new product tier
under the FCC's November 10, 1994 rule amendments. The deciding factor in all
of the FCC's decisions related to a la carte tiers appears to be the number of
channels moved from regulated tiers, with six or fewer channels being deemed
not to be an evasion. Almost all of the Joint Venture's systems moved six or
fewer channels to a la carte packages. Under the November 10, 1994 amendments,
any new a la carte package created after that date will be treated as a
regulated tier, except for packages involving traditional premium services
(e.g., HBO).
On March 11, 1993, the FCC adopted regulations pursuant to the 1992
Act which require cable systems to permit customers to purchase video
programming on a per channel or a per program basis without the necessity of
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally, this
exemption from compliance with the statute for cable systems that do not have
such technical capability is available until a cable system obtains the
capability, but not later than December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contained new signal carriage requirements. These
rules allow commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B
contour (a measure of signal strength). Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable systems will have
to obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WTBS. The Joint Venture has
thus far not been required to pay cash compensation to broadcasters for
retransmission consent or been required by broadcasters to remove broadcast
stations from the cable television channel line-ups. The Joint Venture has,
however, agreed to carry some services in specified markets pursuant to
retransmission consent arrangements which it believes are comparable to those
entered into by most other large cable operators, and for which it pays monthly
fees to the service providers, as it does with other satellite providers. The
second election between must-carry and retransmission consent for local
commercial television broadcast stations was October 1, 1996, and the Joint
Venture has agreed to carry one new service in specified markets pursuant to
these retransmission consent arrangements. The next election between
must-carry and retransmission consent for local commercial television broadcast
stations will be October 1, 1999.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an exclusive
basis.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable system to delete or "black out" such programming from
other television stations which are carried by the cable system. The extent of
such 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.
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The FCC also has commenced a proceeding to determine whether to relax or
abolish the geographic limitations on program exclusivity contained in its
rules, which would allow parties to set the geographic scope of exclusive
distribution rights entirely by contract, and to determine whether such
exclusivity rights should be extended to noncommercial educational stations.
It is possible that the outcome of these proceedings will increase the amount
of programming that cable operators are requested to black out. Finally, the
FCC has declined to impose equivalent syndicated exclusivity rules on satellite
carriers who provide services to the owners of home satellite dishes similar to
those provided by cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide
cable-related facilities and equipment and to enforce compliance with voluntary
commitments. In the case of franchises in effect prior to the effective date
of the 1984 Cable Act, franchising authorities may enforce requirements
contained in the franchise relating to facilities, equipment and services,
whether or not cable-related. The 1984 Cable Act, under certain limited
circumstances, permits a cable operator to obtain modifications of franchise
obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even
if a franchise is renewed, a franchising authority may impose new and more
onerous requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier
in some cases for a franchising authority to deny renewal. While a cable
operator must still submit its request to commence renewal proceedings within
thirty to thirty-six months prior to franchise expiration to invoke the formal
renewal process, the request must be in writing and the franchising authority
must commence renewal proceedings not later than six months after receipt of
such notice. The four-month period for the franchising authority to grant or
deny the renewal now runs from the submission of the renewal proposal, not the
completion of the public proceeding. Franchising authorities may consider the
"level" of programming service provided by a cable operator in deciding whether
to renew. For alleged franchise violations occurring after December 29, 1984,
franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written
notice from the cable operator of its failure or inability to cure. Courts may
not reverse a denial of renewal based on procedural violations found to be
"harmless error."
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
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COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single
cable television franchise and to impose certain franchise restrictions upon
cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be uncertain. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable television systems and permits franchising
authorities to operate their own cable television systems without franchises.
OWNERSHIP
The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against
local exchange telephone companies ("LECs") providing video programming
directly to customers within their local telephone exchange service areas.
However, with certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecom Act also authorized LECs and others to operate "open
video systems" without obtaining a local cable franchise. See "Competition."
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's signal strength as defined by the FCC's rules) covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminates the
statutory ban and directs the FCC to review its rule within two years. Common
ownership or control has historically also been prohibited by the FCC (but not
by the 1984 Cable Act) between a cable system and a national television
network. The 1996 Telecom Act eliminated this prohibition. Finally, in order
to encourage competition in the provision of video programming, the FCC adopted
a rule prohibiting the common ownership, affiliation, control or interest in
cable television systems and MMDS facilities having overlapping service areas,
except in very limited circumstances. The 1992 Cable Act codified this
restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 are grandfathered. The 1996
Telecom Act exempts cable systems facing effective competition from the MMDS
and SMATV restriction. In addition, a cable operator can purchase a SMATV
system serving the same area and technically integrate it into the cable
system. The 1992 Cable Act permits states or local franchising authorities to
adopt certain additional restrictions on the ownership of cable television
systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these
purposes include voting interests of 5% or more (unless there is another single
holder of more than 50% of the voting stock), officerships, directorships and
general partnership interests. The FCC has stayed the effectiveness of these
rules pending the outcome of the appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which
owns the cable system has an attributable interest. The limit is 40% of the
first 75 activated channels.
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
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<PAGE> 19
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual EEO reporting requirements on cable operators and
has expanded those requirements to all multichannel video service distributors.
Failure to comply with the EEO requirements can result in the imposition of
fines and/or other administrative sanctions, or may, in certain circumstances,
be cited by a franchising authority as a reason for denying a franchisee's
renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a
cable operator is found to have violated the customer privacy provisions of the
1984 Cable Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are strengthened to
require that cable operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to
the cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has revised such
standards and made them applicable to all classes of channels which carry
downstream National Television System Committee (NTSC) video programming. The
FCC also has adopted additional standards applicable to cable television
systems using frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to
prevent harmful interference with aeronautical navigation and safety radio
services and has also established limits on cable system signal leakage.
Periodic testing by cable operators for compliance with the technical standards
and signal leakage limits is required and an annual filing of the results of
these measurements is required. The 1992 Cable Act requires the FCC to
periodically update its technical standards to take into account changes in
technology. Under the 1996 Telecom Act, local franchising authorities may not
prohibit, condition or restrict a cable system's use of any type of subscriber
equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. These 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
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<PAGE> 20
premises equipment, such as converters, used to access the services offered by
cable systems and other multichannel video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they regulate the rates,
terms and conditions for pole attachments. In the absence of state regulation,
the FCC administers such pole attachment rates through use of a formula which
it has devised. The 1996 Telecom Act directs the FCC to adopt a new rate
formula for any attaching party, including cable systems, which offer
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems which choose to offer such services.
OTHER MATTERS
FCC regulation pursuant to the Communications Act, as amended, also
includes matters regarding a cable system's carriage of local sports
programming; restrictions on origination and cablecasting by cable system
operators; application of the fairness doctrine and rules governing political
broadcasts; customer service; obscenity and indecency; home wiring and
limitations on advertising contained in nonbroadcast children's programming.
The 1996 Telecom Act establishes a process for the creation and
implementation of a "voluntary" system of ratings for video programming
containing sexual, violent or other "indecent" material and directs the FCC to
adopt rules requiring most television sets manufactured in the United States or
shipped in interstate commerce to be technologically capable of blocking the
display of programs with a common rating. The 1996 Telecom Act also requires
video programming distributors to employ technology to restrict the reception
of programming by persons not subscribing to those channels. In the case of
channels primarily dedicated to sexually-oriented programming, the distributor
must fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide
such programming during a "safe harbor" period when children are not likely to
be in the audience, as determined by the FCC. This provision has been
temporarily stayed while certain programmers seek Supreme Court review on
constitutional grounds. With respect to other kinds of channels, the 1996
Telecom Act only requires that the audio and video portions of the channel be
fully blocked, at no charge, upon request of the person not subscribing to the
channel.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried,
and the location of the cable system with respect to over-the-air television
stations. Any future adjustment to the copyright royalty rates will be done
through an arbitration process supervised by the U.S. Copyright Office.
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
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<PAGE> 21
outcome of this proceeding, any changes adopted by the Copyright Office in its
current policies may have the effect of reducing the copyright impact of
certain transactions involving cable company mergers and cable television
system acquisitions.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators would have to negotiate rights
from the copyright owners for all of the programming on the broadcast stations
carried by cable systems. Such negotiated agreements would likely increase the
cost to cable operators of carrying broadcast signals. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission consent
agreements between television broadcast stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks (such as HBO) and basic cable networks
(such as USA Network) is licensed by the networks through private agreements
with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc.
("BMI"), the two major performing rights organizations in the United States.
As a result of extensive litigation, both ASCAP and BMI now offer "through to
the viewer" licenses to the cable networks which cover the retransmission of
the cable networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves on local
origination channels, in advertisements inserted locally on cable networks, et
cetera, must also be licensed. A blanket license is available from BMI. Cable
industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. State and/or
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. Although the 1984 Cable Act provides for
certain procedural protections, there can be no assurance that renewals will be
granted or that renewals will be made on similar terms and conditions.
Franchises usually call for the payment of fees, often based on a percentage of
the system's gross customer revenues, to the granting authority. Upon receipt
of a franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same state,
historically ranging from reasonable to highly restrictive or burdensome. The
1984 Cable Act places certain limitations on a franchising authority's ability
to control the operation of a cable system operator and the courts have from
time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially
in 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
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<PAGE> 22
provisions governing charges for basic cable television services, fees to be
paid to the franchising authority, length of the franchise term, renewal, sale
or transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable services provided. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
ITEM 2. PROPERTIES
The Joint 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.
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<PAGE> 23
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 1,611 as of December 31, 1996. In addition to restrictions on the
transferability of units contained in the partnership agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended Partnership Agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital
Payback"). The Partnership Agreement also provides that all Partnership
profits, gains, operational losses, and credits (all as defined) be allocated
1% to the general partners and 99% to the limited partners until the limited
partners have been allocated net profits equal to the amount of cash flow
required for Capital Payback. After the limited partners have received cash
flow equal to their initial investments, the general partners will only receive
a 1% allocation of cash flow from sale or liquidation of a system until the
limited partners have received an annual simple interest return of at least 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 1994, 1995 or 1996.
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<PAGE> 24
The Partnership's ability to pay distributions in the future, the
actual level of any such distributions and the continuance of distributions if
commenced, will depend on a number of factors, including the amount of cash
flow from operations, projected capital expenditures, provision for contingent
liabilities, availability of bank refinancing, regulatory or legislative
developments governing the cable television industry, and growth in customers.
Some of these factors are beyond the control of the Partnership, and
consequently, no assurances can be given regarding the level or timing of
future distributions, if any. See Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and of
the Joint Venture for the five years ended December 31, 1996. This data should
be read in conjunction with the Partnership's and Joint Venture's financial
statements included in Item 8 hereof and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7.
I. THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Costs and expenses $ (75,100) $ (43,200) $ (51,700) $ (28,200) $ (29,700)
Depreciation and amortization (12,700) - - - -
---------- ---------- ---------- ---------- ----------
Operating loss (87,800) (43,200) (51,700) (28,200) (29,700)
Interest expense (2,500) (2,300) (2,200) (600) (600)
Equity in net loss of joint venture (664,000) (601,600) (642,500) (555,100) (311,000)
---------- ---------- ---------- ---------- ----------
Net loss $ (754,300) $ (647,100) $ (696,400) $ (583,900) $ (341,300)
========== ========== ========== ========== ==========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net loss $ (12.48) $ (10.71) $ (11.52) $ (9.66) $ (5.65)
========== ========== ========== ========== ==========
As of December 31,
---------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
Total assets $ 6,661,500 $ 5,926,800 $ 5,249,900 $ 4,641,500 $ 4,301,400
General partners' deficit (58,500) (65,000) (72,000) (77,800) (81,200)
Limited partners' capital 6,612,600 5,972,000 5,282,600 4,704,500 4,366,600
</TABLE>
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<PAGE> 26
II. ENSTAR CABLE OF CUMBERLAND VALLEY
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,917,800 $ 6,243,400 $ 6,173,900 $ 6,241,700 $ 6,728,900
Cost and expenses (3,446,400) (3,471,600) (3,657,600) (3,526,300) (3,881,000)
Depreciation and amortization (3,227,300) (3,012,700) (3,158,600) (3,104,900) (2,841,600)
----------- ----------- ----------- ----------- -----------
Operating income (loss) (755,900) (240,900) (642,300) (389,500) 6,300
Interest expense (587,000) (439,100) (664,800) (779,300) (699,400)
Interest income 14,900 15,700 22,100 58,600 71,100
Loss on sale of cable television
system - (538,900) - - -
----------- ----------- ----------- ----------- -----------
Net loss $(1,328,000) $(1,203,200) $(1,285,000) $(1,110,200) $ (622,000)
=========== =========== =========== =========== ===========
Distributions paid to venturers $ 176,000 $ 264,000 $ 158,200 $ 18,000 $ 63,000
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash provided by
operating activities $ 1,544,800 $ 1,884,800 $ 1,882,400 $ 2,045,900 $ 2,750,200
EBITDA(1) 2,471,400 2,771,800 2,516,300 2,715,400 2,847,900
EBITDA to revenues 41.8% 44.4% 40.8% 43.5% 42.3%
Total debt to EBITDA 3.5x 2.4x 2.7x 2.5x 2.1x
Capital expenditures $ 546,600 $ 532,900 $ 763,400 $ 1,975,800 $ 662,100
</TABLE>
<TABLE>
<CAPTION>
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $23,245,100 $19,406,000 $18,232,200 $17,049,700 $15,832,600
Total debt 8,681,500 6,767,200 6,767,200 6,767,200 6,067,200
Venturers' capital 13,311,600 11,844,400 10,401,200 9,273,000 8,588,000
</TABLE>
___________________________
(1) Operating income before depreciation and amortization. The Joint
Venture measures its financial performance by its EBITDA, among other items.
Based on its experience in the cable television industry, the General Partner
believes that EBITDA and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television companies
in several areas, such as liquidity, operating performance and leverage. This
is evidenced by the covenants in the primary debt instruments of the Joint
Venture, in which EBITDA-derived calculations are used as a measure of
financial performance. EBITDA should not be considered by the reader as an
alternative to net income, as an indicator of the Joint Venture's financial
performance or as an alternative to cash flows as a measure of liquidity.
-26-
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the 1996 Telecom
Act. This statute substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act, including certain of the rate regulation provisions
previously imposed by the 1992 Cable Act. Compliance with those rate
regulations has had a negative impact on the Joint Venture's revenues and cash
flow. However, in accordance with the FCC's regulations, the Joint Venture will
be able to increase regulated service rates in the future in response to
inflation and specified historical and anticipated cost increases, although
certain costs may continue to rise at a rate in excess of that which the Joint
Venture will be permitted to pass on to its customers. The 1996 Telecom Act
provides that certain of the rate regulations will be phased-out altogether in
1999. Further, the regulatory environment will continue to change pending, among
other things, the outcome of legal challenges and FCC rulemaking and enforcement
activity in respect of the 1992 Cable Act and the 1996 Telecom Act. There can be
no assurance as to what, if any, future action may be taken by the FCC, Congress
or any other regulatory authority or court, or the effect thereof on the Joint
Venture's business. Accordingly, the Joint Venture's historical financial
results as described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership and the Joint Venture. Such forward looking statements involve
risks and uncertainties including, without limitation, the uncertainty of
legislative and regulatory changes and the rapid developments in the competitive
environment facing cable television operators such as the Joint Venture, as
discussed more fully elsewhere in this Report.
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 $79,100,
$9,000 and $31,500 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 1994, 1995 and 1996, respectively. The Partnership did not
pay distributions to its partners during 1994, 1995 or 1996.
THE JOINT VENTURE
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $6,241,700 to $6,728,900,
or by 7.8%, for the year ended December 31, 1996 as compared to 1995. Of the
$487,200 increase in revenues for the year ended December 31, 1996 as compared
to 1995, $406,900 was due to increases in regulated service rates that were
implemented by the Joint Venture in the second, third and fourth quarters of
1996, $108,400 was due to the restructuring of The Disney Channel from a
premium channel to a tier channel effective July 1, 1996 and
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<PAGE> 28
$76,100 was due to increases in other revenue producing items including rebates
from programmers, charges for franchise fees the Joint Venture passed through
to its customers and installation revenues. These increases were partially
offset by a decrease of $104,200 due to decreases in the number of
subscriptions for services. As of December 31, 1996, the Joint Venture had
approximately 17,100 homes subscribing to cable service and 3,400 premium
service units.
Service costs increased from $2,177,600 to $2,394,700, or by 10.0%,
for the year ended December 31, 1996 as compared to 1995. Service costs
represent costs directly attributable to providing cable services to customers.
Of the $217,100 increase in service costs for the year ended December 31, 1996
as compared to 1995, $120,800 was due to increased programming fees charged by
program suppliers (including primary satellite fees), $58,300 was due to an
increase in personnel costs, $41,900 was due to an increase in franchise fees,
$19,500 was due to an increase in copyright fees, $15,200 was due to an
increase in repair and maintenance expense, $11,300 was due to a decrease in
capitalization of labor and overhead expense due to fewer capital projects
during 1996 and $10,100 was due to an increase in pole rent expense. These
increases were partially offset by a $52,400 decrease in property taxes as the
result of an adjustment to expense in 1995 for additional tax assessments
related to 1994. The increase in programming fees included a $35,600 increase
related to the restructuring of The Disney Channel discussed above.
General and administrative expenses increased from $786,100 to
$877,700, or by 11.7%, for the year ended December 31, 1996 as compared to
1995. Of the $91,600 increase for the year ended December 31, 1996 as compared
to 1995, $70,100 was due to higher insurance premiums, $38,900 was due to a
decrease in capitalization of labor and overhead expense, $15,300 was due to an
increase in personnel costs and $8,300 was due to an increase in marketing
expense. These increases were partially offset by a $29,100 decrease in bad
debt expense and by an $8,500 decrease in customer billing expense.
Management fees and reimbursed expenses increased from $562,600 to
$608,600, or by 8.2%, for the year ended December 31, 1996 as compared to 1995.
Management fees increased by $24,300 for the year ended December 31, 1996 as
compared to 1995 in direct relation to increased revenues as described above.
Reimbursable expenses increased by $21,700 for the year ended December 31, 1996
as compared to 1995, primarily due to higher allocated personnel costs, rent
expense, dues and subscription expense, professional service fees and
compliance costs associated with reregulation by the FCC.
Depreciation and amortization expense decreased from $3,104,900 to
$2,841,600, or by 8.5%, for the year ended December 31, 1996 as compared to
1995, due to the effect of certain tangible assets becoming fully depreciated
and certain intangible assets becoming fully amortized.
The Joint Venture generated operating income of $6,300 for the year
ended December 31, 1996 as compared to an operating loss of $389,500 in 1995,
primarily due to increases in revenues and decreases in depreciation and
amortization expense as described above.
Interest expense decreased from $779,300 to $699,400, or by 10.3%, for
the year ended December 31, 1996 as compared to 1995, due to lower average
interest rates (9.8% in 1996 versus 10.3% in 1995) and a decrease in average
borrowings from $6,767,200 in 1995 to $6,396,200 in 1996.
Interest income increased from $58,600 to $71,100, or by 21.3%, for
the year ended December 31, 1996 as compared to 1995, due to higher cash
balances available for investment.
Due to the factors described above, the Joint Venture's net loss
decreased from $1,110,200 to $622,000, or by 44.0%, for the year ended December
31, 1996 as compared to 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 43.5% during 1995 to 42.3% in 1996. The
decrease was primarily due to increases in programming fees, insurance premiums
and personnel costs as discussed above. EBITDA increased from $2,715,400 to
$2,847,900, or by 4.9%, for the year ended December 31, 1996 as compared with
1995.
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<PAGE> 29
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $6,173,900 to $6,241,700,
or by 1.1%, during 1995 compared to 1994. Of the $67,800 increase in revenues,
$184,900 was due to increases in regulated service rates permitted under the
1992 Cable Act that were implemented in April 1995, $76,500 was due to greater
numbers of subscriptions for cable service and $53,800 was due to increases in
unregulated rates charged for premium services implemented during the fourth
quarter of 1994. These increases were partially offset by rate decreases
implemented in 1994 to comply with the 1992 Cable Act, estimated by the Joint
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 approximately
17,300 homes subscribing to cable service and 4,300 premium service units.
Service costs for the Joint Venture increased from $2,133,400 to
$2,177,600, or by 2.1%, during 1995 compared with 1994. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$44,200 increase, $99,200 was due to increases in property taxes and $65,300
was due to increases in programming fees (including primary satellite fees).
These increases were partially offset by a $48,300 increase in the
capitalization of labor and overhead expense due to increased capital
expenditure activity in 1995, a decrease of $44,200 in repair and maintenance
expense, a decrease of $14,000 in personnel costs and a decrease of $10,900 in
pole rent expense. The increase in programming fees was due to a combination of
higher rates charged by program suppliers and expanded programming usage
relating to channel line-up restructuring and retransmission consent
arrangements implemented to comply with the 1992 Cable Act.
General and administrative expenses decreased from $931,300 to
$786,100, or by 15.6%, during 1995 compared with 1994. Of the $145,200
decrease, $77,500 was due to a decrease in bad debt expense, $26,300 was due to
an increase in the capitalization of labor and overhead expense, $22,600 was
due to lower marketing expenses and $11,900 was due to lower customer billing
costs.
Management fees and reimbursed expenses decreased from $592,900 to
$562,600, or by 5.1%, during 1995 compared with 1994. Of the $30,300 decrease,
$33,700 was due to decreased reimbursable expenses resulting from lower
allocated personnel costs and compliance costs associated with reregulation by
the FCC 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 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 versus
8.6% in 1994).
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.
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 increased revenues and lower general and
administrative expenses as discussed above. EBITDA increased from $2,516,300
to $2,715,400, or by 7.9%, during 1995 compared to 1994.
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DISTRIBUTIONS MADE BY THE CUMBERLAND VALLEY JOINT VENTURE
The Joint Venture distributed $158,200, $18,000 and $63,000 equally
between its two partners during 1994, 1995 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in the Joint Venture, is to distribute to its partners distributions
of cash flow received from the Joint Venture's operations and proceeds from the
sale of the Joint Venture's cable systems, if any, after providing for
expenses, debt service and capital requirements relating to the expansion,
improvement and upgrade of such cable systems. The Joint Venture relies upon
the availability of cash generated from operations and possible borrowings to
fund its ongoing expenses, debt service and capital requirements. In general,
these requirements involve expansion, improvement and upgrade of the Joint
Venture's existing cable television systems. The Joint Venture spent $662,100
on capital expenditures in 1996, primarily for equipment upgrades, and has
budgeted capital expenditures of approximately $688,700 in 1997 to upgrade
additional equipment.
Management believes that cash generated by operations of the Joint
Venture, together with available cash and proceeds from borrowings, will be
adequate to fund capital expenditures, debt service and other liquidity
requirements in 1997. 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 1997.
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 re-borrow 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, 1996. The Joint Venture's maximum commitment
of $6,850,000 at December 31, 1996 will decrease by $1,850,000 in 1997 to
$5,000,000, by $2,100,000 in 1998 to $2,900,000 and by $1,100,000 through June
30, 1999 with a final installment of $1,800,000 due on September 30, 1999.
The outstanding balance under the Facility at December 31, 1996 was $6,067,200.
On March 7, 1997, the Joint Venture elected to prepay $2,000,000 of its note
payable balance, which reduced its outstanding borrowings from $6,067,200 to
$4,067,200.
1996 VS. 1995
The Partnership used $29,900 less cash in operating activities during
1996 as compared with 1995, primarily due to timing of collections of
receivables ($5,700 cash increase) and the payment of recurring liabilities to
the Corporate General Partner and third party creditors ($25,700 cash
increase). Partnership expenses used $1,500 more cash in 1996 than in 1995
after adding back non-cash equity in net loss of Joint Venture.
Cash provided by financing activities increased by $22,500 during 1996
as compared with 1995 due to increased distributions from the Cumberland Valley
Joint Venture.
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1995 VS. 1994
The Partnership used $23,200 more cash in operating activities during
1995 as compared with 1994, primarily due to the timing of collections of
receivables ($4,300 cash decrease) and the payment of recurring liabilities to
the Corporate General Partner and third party creditors ($44,000 cash
decrease). 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Joint Venture adopted Statement 121 in the
first quarter of 1996, the effects of which were not material.
INFLATION
Certain of the Partnership's and Joint Venture's expenses, such as
those for equipment repair and replacement, billing and marketing, generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that the Joint Venture is able to increase its service
rates periodically, of which there can be no assurance. See "Legislation and
Regulation".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 32
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, 1996, the Corporate General Partner managed cable television
systems with approximately 125,000 Subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP
currently operates cable systems through a series of subsidiaries and also
controls the general partners of 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:
NAME POSITION
Marc B. Nathanson Director, Chairman of the Board and Chief Executive
Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General
Counsel
Michael K. Menerey Director, Chief Financial Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Jon W. Lunsford Vice President - Finance and Corporate Development
Abel C. Crespo Controller
MARC B. NATHANSON, 51, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19,
1995 also served as President. He has been Chairman of the Board and Chief
Executive Officer of Enstar Communications Corporation since October 1988, and
also served as its President prior to September 1995. Prior to 1975, Mr.
Nathanson was Vice President of Marketing for Teleprompter Corporation, at that
time the largest multiple-system cable operator in the United States. He also
held executive positions with Warner Cable and Cypress Communications
Corporation. He is a former President of the California Cable Television
Association and a member of Cable Pioneers. He is currently a Director of the
National Cable Television Association ("NCTA") and serves on its Executive
Committee. At the 1986 NCTA convention, Mr. Nathanson was honored by being
named the recipient of the Vanguard Award for outstanding contributions to the
growth and development of the cable television industry. Mr. Nathanson is a
27-year veteran of the cable television industry. He is a founder of the Cable
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<PAGE> 33
Television Administration and Marketing Society ("CTAM") and the Southern
California Cable Television Association. Mr. Nathanson is also a Director of
TV Por Cable Nacional, S.A. de C.V. Mr. Nathanson is also Chairman of the
Board and Chief Executive Officer of Falcon International Communications, LLC
("FIC"). Mr. Nathanson was appointed by President Clinton and confirmed by the
U.S. Senate for a three year term on the Board of Governors of International
Broadcasting of the United States Information Agency.
FRANK J. INTISO, 50, was appointed President and Chief Operating Officer of
FHGI in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. He has been President
and Chief Operating Officer of Enstar Communications Corporation since
September 1995, and between October 1988 and September 1995 held the positions
of Executive Vice President and Chief Operating Officer. Mr. Intiso is
responsible for the day-to-day operations of all cable television systems under
the management of FHGI. Mr. Intiso has a Masters Degree in Business
Administration from the University of California, Los Angeles, and is a
Certified Public Accountant. He serves as chair of the California Cable
Television Association, and is on the boards of Cable Advertising Bureau, Cable
In The Classroom, Community Antenna Television Association and California Cable
Television Association. He is a member of the American Institute of Certified
Public Accountants, the American Marketing Association, the American Management
Association, and the Southern California Cable Television Association.
STANLEY S. ITSKOWITCH, 58, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been Executive Vice President and General Counsel of Enstar Communications
Corporation since October 1988. He has been President and Chief Executive
Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a
marketer of chemical products, since 1980. He is a Certified Public Accountant
and a former tax partner in the New York office of Touche Ross & Co. (now
Deloitte & Touche). He has a J.D. Degree and an L.L.M. Degree in Tax from New
York University School of Law. Mr. Itskowitch is also Executive Vice President
and General Counsel of FIC.
MICHAEL K. MENEREY, 45, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984. He has been Chief Financial Officer and
Secretary of Enstar Communications Corporation since October 1988. Mr. Menerey
is a Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants.
JOE A. JOHNSON, 52, has been Executive Vice President - Operations of FHGI
since September 1995, and between January 1992 and that date was Senior Vice
President. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. He was a Divisional Vice
President of FHGI between 1989 and 1992. From 1982 to 1989, he held the
positions of Vice President and Director of Operations for Sacramento Cable
Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr.
Johnson held cable system and regional manager positions with Warner Amex and
Teleprompter.
JON W. LUNSFORD, 37, has been Vice President - Finance and Corporate
Development FHGI since September 1994. He has been Vice President-Finance and
Corporate Development of Enstar Communications Corporation since January 1996.
From 1991 to 1994 he served as Director of Corporate Finance at Continental
Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice President with
Crestar Bank.
ABEL C. CRESPO, 37, has been Controller of FHGI since January 1997. Mr. Crespo
joined Falcon in December 1984, and has held various accounting positions
during that time, most recently that of Senior Assistant Controller. Mr.
Crespo holds a Bachelor of Science degree in Business Administration from
California State University, Los Angeles.
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CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1996, biographical
information about certain officers of FHGI and Falcon Cable Group, a division of
FHGLP, who share certain responsibilities with the officers of the Corporate
General Partner with respect to the operation and management of the Partnership.
LYNNE A. BUENING, 43, has been Vice President of Programming of Falcon Cable
Group since November 1993. From 1989 to 1993, she served as Director of
Programming for Viacom Cable, a division of Viacom International Inc. Prior to
that, Ms. Buening held programming and marketing positions in the cable,
broadcast, and newspaper industries.
OVANDO COWLES, 43, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
HOWARD J. GAN, 50, has been Vice President of Regulatory Affairs of FHGI and
its predecessors since 1988 and Vice President of Regulatory Affairs of Falcon
Cable Group since its inception. He was General Counsel at Malarkey-Taylor
Associates, a Washington, DC based telecommunications consulting firm, from
1986 to 1988. He was Vice President and General Counsel at the Cable
Television Information Center from 1978 to 1983. In addition, he was an
attorney and an acting Branch Chief of the Federal Communications Commission's
Cable Television Bureau from 1975 to 1978.
R.W. ("SKIP") HARRIS, 49, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television Committee.
Mr. Harris was National Director of Affiliate Marketing for The Disney Channel
from 1985 to 1991. He was also a sales manager, regional marketing manager and
director of marketing for Cox Cable Communications from 1978 to 1985.
JOAN SCULLY, 61, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources of Falcon
Cable Group since its inception. From 1987 to May 1988, she was self-employed
as a Management Consultant to cable and transportation companies. She served
as Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree
in Human Resources Management from Pepperdine University.
MICHAEL D. SINGPIEL, 49, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992, Mr.
Singpiel was Vice President of C-Tec Cable Systems in Michigan. Mr. Singpiel
held various positions with Comcast in New Jersey and Michigan from 1980 to
1990.
RAYMOND J. TYNDALL, 49, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various
technical positions with Choice TV and its predecessors. From 1967 to 1975, he
held various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer in
lightwave, microwave, satellite and broadband.
In addition, Falcon Cable Group has six Divisional Vice Presidents who
are based in the field. They are Ron L. Hall, Michael E. Kemph, Nicholas A.
Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
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<PAGE> 35
Each director of the Corporate General Partner is elected to a
one-year term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected
and qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership 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 4% of gross revenues,
excluding revenues from the sale of cable television systems or franchises,
calculated and paid monthly. In addition, the Joint Venture is required to
distribute 1% of its gross revenues to the Corporate General Partner in respect
of its interest as the Corporate General Partner of the Partnership. 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 Joint Venture
and pays FHGLP a portion of the management fees it receives in consideration of
such services and reimburses FHGLP for expenses incurred by FHGLP on its
behalf. Additionally, the Joint Venture receives certain system operating
management services from affiliates of the Manager in lieu of directly
employing personnel to perform such services. The Joint Venture reimburses the
affiliates for its allocable share of their operating costs. 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, 1996, the Manager charged the
Joint Venture management fees of approximately $269,100 and reimbursed expenses
of $272,200. In addition, the Joint Venture paid the Corporate General Partner
approximately $67,300 in respect of its 1% special interest. The Joint Venture
also reimbursed affiliates approximately $580,100 for system operating
management services. Certain programming services are purchased through Falcon
Cablevision. The Joint Venture paid Falcon Cablevision approximately
$1,257,300 for these programming services for fiscal year 1996.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5, "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1997, the common stock of FHGI was owned as follows:
78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In 1989, FHGI issued to Hellman &
Friedman Capital Partners, A California Limited Partnership ("H&F"), a
$1,293,357 convertible debenture due 1999 convertible under certain
circumstances into 10% of the common stock of FHGI and entitling H&F to elect
one director to the board of directors of FHGI. H&F elected Marc B. Nathanson
pursuant to such right. In 1991 FHGI issued to Hellman & Friedman Capital
Partners II, A California Limited Partnership ("H&FII"), additional convertible
debentures due 1999 in the aggregate amount of $2,006,198 convertible under
certain circumstances into approximately 6.3% of the common stock of FHGI and
entitling H&FII to elect one director to the board of directors of FHGI. As of
March 3, 1997, H&FII had not exercised this right. FHGLP also held 12.1% of
the interests in the General Partner, and Falcon Cable Trust, Frank Intiso and
H&FII held 58.9%, 12.1% and 16.3% of the General Partner, respectively. Such
interests entitle the holders thereof to an allocable share of cash
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<PAGE> 36
distributions and profits and losses of the General Partner in proportion to
their ownership. Greg A. Nathanson is Marc B. Nathanson's brother.
As of March 3, 1997, Marc B. Nathanson and members of his family
owned, directly or indirectly, outstanding partnership interests (comprising
both general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P. and 2.58%
of Falcon Video Communications. In accordance with the respective partnership
agreements of these two partnerships, after the return of capital to and the
receipt of certain preferred returns by the limited partners of such
partnerships, FHGLP and certain of its officers and directors had rights to
future profits greater than their ownership interests of capital in such
partnerships.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Classic Cable Income
Properties, L.P., Falcon Video Communications, L.P., and, through its
management of the operation of Falcon Cablevision (a subsidiary of FHGLP), the
partnerships of which Enstar Communications Corporation is the Corporate
General Partner, including the Partnership. On September 30, 1988, Falcon
Cablevision acquired all of the outstanding stock of Enstar Communications
Corporation. Certain members of management of the Corporate General Partner
have also been involved in the management of other cable ventures. FHGLP
contemplates entering into other cable ventures, including ventures similar to
the Partnership.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the Corporate General Partner and
their management to certain conflicts of interest. Such conflicts of interest
relate to the time and services management will devote to the Partnership's
affairs and to the acquisition and disposition of cable television systems.
Management or its affiliates may establish and manage other entities which
could impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that
a limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of
the partnership (a partnership derivative action) to recover damages from third
parties. Section 14-9-1001 of the Georgia Revised Uniform Limited Partnership
Act also allows a partner to maintain a partnership derivative action if
general partners with authority to do so have refused to bring the action or if
an effort to cause those general partners to bring the action is not likely to
succeed. Certain cases decided by federal courts have recognized the right of
a limited partner to bring such actions under the Securities and Exchange
Commission's Rule 10b-5 for recovery of damages resulting from a breach of
fiduciary duty by a general partner
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<PAGE> 37
involving fraud, deception or manipulation in connection with the limited
partner's purchase or sale of partnership units.
The Partnership Agreement provides that the General Partners will be
indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partner (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that its conduct was negligent. In addition, the
Partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited
partners will have a more limited right of action than they would have absent
such provisions. In addition, the Partnership maintains, at its expense and in
such reasonable amounts and at such reasonable prices as the Corporate General
Partner shall determine, a liability insurance policy which insures the
Corporate General Partner, FHGI and its affiliates (which includes FHGLP),
officers and directors and such other persons as the Corporate General Partner
shall determine against liabilities which they may incur with respect to claims
made against them for certain wrongful or allegedly wrongful acts, including
certain errors, misstatements, misleading statements, omissions, neglect or
breaches of duty. To the extent that the exculpatory provisions purport to
include indemnification for liabilities arising under the Securities Act of
1933, it is the opinion of the Securities and Exchange Commission that such
indemnification is contrary to public policy and therefore unenforceable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial
Statements on page F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial
Statements on page F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits
on Page E-1.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated November 11,
1996, in which it reported under Item 5 that an
unsolicited offer to purchase partnership units had
been made without the consent of the Corporate
General Partner.
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<PAGE> 39
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, 1997.
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
---------------------------------
Marc B. Nathanson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 25th day of March 1997.
<TABLE>
<CAPTION>
Signatures Title(*)
----------------------------- -------------------------------------------------
<S> <C>
/s/ Marc B. Nathanson Chairman of the Board and Chief Executive Officer
----------------------------- (Principal Executive Officer)
Marc B. Nathanson
/s/ Michael K. Menerey Chief Financial Officer, Secretary and Director
----------------------------- (Principal Financial and Accounting Officer)
Michael K. Menerey
/s/ Frank J. Intiso President, Chief Operating Officer
----------------------------- and Director
Frank J. Intiso
/s/ Stanley S. Itskowitch Executive Vice President, General Counsel
----------------------------- and Director
Stanley S. Itskowitch
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the Registrant.
-39-
<PAGE> 40
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------------------------------------------------------
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, 1995
and 1996 F-3 F-11
Financial Statements for each of
the three years in the period
ended December 31, 1996:
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
Notes to Financial Statements F-7 F-15
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Five-B, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income/Growth Program
Five-B, L.P. (A Georgia Limited Partnership) as of December 31, 1995 and 1996,
and the related statements of operations, partnership capital (deficit), and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income/Growth Program
Five-B, L.P. at December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-2
<PAGE> 42
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
BALANCE SHEETS
=========================================
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS:
Cash $ 700 $ 4,500
Due from affiliates 4,300 2,900
Equity in net assets of joint venture 4,636,500 4,294,000
------------- -------------
$ 4,641,500 $ 4,301,400
============= =============
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 14,800 $ 16,000
------------- -------------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (77,800) (81,200)
Limited partners 4,704,500 4,366,600
------------- -------------
TOTAL PARTNERSHIP CAPITAL 4,626,700 4,285,400
------------- -------------
$ 4,641,500 $ 4,301,400
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 43
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF OPERATIONS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative expenses $ 28,200 $ 28,200 $ 29,700
General Partner reimbursed expenses 23,500 - -
---------- ---------- ----------
Operating loss (51,700) (28,200) (29,700)
INTEREST EXPENSE (2,200) (600) (600)
---------- ---------- ----------
Loss before equity in net loss of joint venture (53,900) (28,800) (30,300)
EQUITY IN NET LOSS OF JOINT VENTURE (642,500) (555,100) (311,000)
---------- ---------- ----------
NET LOSS $ (696,400) $ (583,900) $ (341,300)
========== ========== ===========
NET LOSS PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (11.52) $ (9.66) $ (5.65)
========== ========== ==========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 59,830 59,830 59,830
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 44
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, 1994 $(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
Net loss for year (3,400) (337,900) (341,300)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 $(81,200) $4,366,600 $4,285,400
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 45
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF CASH FLOWS
=========================================
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(696,400) $(583,900) $(341,300)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of joint venture 642,500 555,100 311,000
Increase (decrease) from changes in:
Due from affiliates - (4,300) 1,400
Accounts payable and due to affiliates 19,500 (24,500) 1,200
--------- --------- ---------
Net cash used in operating activities (34,400) (57,600) (27,700)
--------- --------- ---------
Cash flows from investing activities:
Distributions from joint venture 79,100 9,000 31,500
--------- --------- ---------
Net increase (decrease) in cash 44,700 (48,600) 3,800
Cash at beginning of year 4,600 49,300 700
--------- --------- ---------
Cash at end of year $ 49,300 $ 700 $ 4,500
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 46
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income/Growth Program Five-B, L.P. is a Georgia limited
partnership (the "Partnership") whose principal business is derived from its 50%
ownership interest in the operations of Enstar Cable of Cumberland Valley, a
Georgia general partnership (the "Joint Venture"). The financial statements
include the operations of the Partnership and its equity ownership interest in
the Joint Venture. The separate financial statements of the Joint Venture are
included on pages F-10 to F-20 of this report on Form 10-K, and should be read
in conjunction with these financial statements.
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.
INCOME TAXES
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,
1996, the book basis of the Partnership's net assets exceeds its tax basis by
$1,456,800.
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.
NOTE 2 - 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.
F-7
<PAGE> 47
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
(Continued)
=========================================
NOTE 2 - PARTNERSHIP MATTERS (Concluded)
The Partnership was formed with an initial capital contribution of
$1,100 comprising $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
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 amended partnership agreement also provides that all partnership
profits, gains, operational losses, and credits (all as defined) be allocated
1% to the general partners and 99% to the limited partners until the limited
partners have been allocated net profits equal to the amount of cash flow
required for Capital Payback. After the limited partners have received cash
flow equal to their initial investments, the general partners will only receive
a 1% allocation of cash flow from sale or liquidation of a system until the
limited partners have received an annual simple interest return of at least 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.
The amended partnership agreement limits the amount of debt the
Partnership may incur.
NOTE 3 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and an affiliate partnership, Enstar Income/Growth
Program Five-A, L.P., (collectively, the "Venturers") each own 50% of 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 $1,285,000, $1,110,200, and $622,000 in 1994, 1995 and 1996,
respectively, of which $642,500, $555,100 and $311,000 were allocated to the
Partnership.
F-8
<PAGE> 48
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
(Concluded)
=========================================
NOTE 4 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 5% of gross receipts, as
defined, from the operations of the Partnership. The Partnership did not own or
operate any cable television operations in 1994, 1995 or 1996 other than through
its investment in the Joint Venture. No management fees were paid by the
Partnership during 1994, 1995 and 1996.
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 $23,500 in
1994. No reimbursed expenses were incurred on behalf of the Partnership during
1995 or 1996.
NOTE 5 - COMMITMENTS
The Partnership, together with Enstar Income/Growth Program Five-A,
L.P., pledged its Joint Venture interest as collateral against the debt of the
Joint Venture.
F-9
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Cumberland Valley (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Cumberland
Valley (A Georgia General Partnership) as of December 31, 1995 and 1996, and
the related statements of operations, venturers' capital, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Joint Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Cumberland
Valley at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-10
<PAGE> 50
ENSTAR CABLE OF CUMBERLAND VALLEY
BALANCE SHEETS
=================================
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,110,900 $ 2,425,100
Accounts receivable, less allowance of $28,500 and
$23,600 for possible losses 147,700 149,500
Insurance claim receivable 353,800 15,600
Prepaid expenses 59,700 85,600
Cable materials, equipment and supplies 196,300 196,300
Property, plant and equipment, less accumulated
depreciation and amortization 10,498,900 9,743,900
Franchise cost, net of accumulated
amortization of $12,989,000 and $12,173,600 4,477,000 3,063,200
Deferred loan costs and other, net 205,400 153,400
----------- -----------
$17,049,700 $15,832,600
=========== ===========
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
LIABILITIES:
Accounts payable $ 966,000 $ 839,600
Due to affiliates 43,500 337,800
Note payable 6,767,200 6,067,200
----------- -----------
TOTAL LIABILITIES 7,776,700 7,244,600
----------- -----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income/Growth Program Five-A, L.P. 4,636,500 4,294,000
Enstar Income/Growth Program Five-B, L.P. 4,636,500 4,294,000
----------- -----------
TOTAL VENTURERS' CAPITAL 9,273,000 8,588,000
----------- -----------
$17,049,700 $15,832,600
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE> 51
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF OPERATIONS
=================================
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 6,173,900 $ 6,241,700 $ 6,728,900
----------- ----------- -----------
OPERATING EXPENSES:
Service costs 2,133,400 2,177,600 2,394,700
General and administrative expenses 931,300 786,100 877,700
General Partner management fees
and reimbursed expenses 592,900 562,600 608,600
Depreciation and amortization 3,158,600 3,104,900 2,841,600
----------- ----------- -----------
6,816,200 6,631,200 6,722,600
----------- ----------- -----------
Operating income (loss) (642,300) (389,500) 6,300
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (664,800) (779,300) (699,400)
Interest income 22,100 58,600 71,100
----------- ----------- -----------
(642,700) (720,700) (628,300)
----------- ----------- -----------
NET LOSS $(1,285,000) $(1,110,200) $ (622,000)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE> 52
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, 1994 $ 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
Distributions to venturers (31,500) (31,500) (63,000)
Net loss for year (311,000) (311,000) (622,000)
-------------- -------------- --------------
BALANCE, December 31, 1996 $ 4,294,000 $ 4,294,000 $ 8,588,000
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE> 53
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF CASH FLOWS
=================================
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,285,000) $ (1,110,200) $ (622,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 3,158,600 3,104,900 2,841,600
Amortization of deferred loan costs 52,200 52,200 52,200
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses,
cable materials and other assets (312,800) 53,300 310,500
Accounts payable and due to affiliates 269,400 (54,300) 167,900
------------ ------------ ------------
Net cash provided by operating activities 1,882,400 2,045,900 2,750,200
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (763,400) (1,975,800) (662,100)
Increase in intangible assets (9,900) (21,000) (10,900)
------------ ------------ ------------
Net cash used in investing activities (773,300) (1,996,800) (673,000)
------------ ------------ ------------
Cash flows from financing activities:
Distributions to venturers (158,200) (18,000) (63,000)
Repayment of debt - - (700,000)
Deferred loan costs (47,400) - -
------------ ------------ ------------
Net cash used in financing activities (205,600) (18,000) (763,000)
------------ ------------ ------------
Net increase in cash and cash equivalents 903,500 31,100 1,314,200
Cash and cash equivalents at beginning of year 176,300 1,079,800 1,110,900
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,079,800 $ 1,110,900 $ 2,425,100
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 54
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Cumberland Valley, a Georgia general partnership (the
"Joint Venture"), owns and operates cable systems in rural areas of Kentucky,
Tennessee and Missouri.
The financial statements do not give effect to any assets that Enstar
Income/Growth Program Five-A, L.P. and Enstar Income/Growth Program Five-B,
L.P. (the "Venturers") may have outside of their interest in the Joint Venture,
nor to any obligations, including income taxes, of the 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.
Cash equivalents at December 31, 1996 include $2,311,000 of short-term
investments in commercial paper.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold 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 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 years.
F-15
<PAGE> 55
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
RECOVERABILITY OF ASSETS
The Joint Venture assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Joint Venture also evaluates the amortization periods of
assets to determine whether events or circumstances warrant revised estimates
of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the 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 differs
for financial and tax reporting purposes. At December 31, 1996, the book basis
of the Joint Venture's net assets exceeds its tax basis by $2,913,600.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1996 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - 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., 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.
F-16
<PAGE> 56
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=================================
NOTE 3 - INSURANCE CLAIM RECEIVABLE
Insurance claim receivable at December 31, 1995 consisted of an
uncollected insurance claim arising from storm related system damage incurred
in 1994. The claim was largely collected in 1996. The Joint Venture believes
the remaining $15,600 balance due at December 31, 1996 is fully collectible in
1997.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Cable television systems $ 18,374,800 $ 18,928,500
Vehicles, furniture and
equipment and leasehold
improvements 518,800 574,700
------------- -------------
18,893,600 19,503,200
Less accumulated depreciation
and amortization (8,394,700) (9,759,300)
------------- -------------
$ 10,498,900 $ 9,743,900
============= =============
</TABLE>
NOTE 5 - 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.
Note Payable
The carrying amount approximates fair value due to the variable rate
nature of the note payable.
NOTE 6 - 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 $425,000
through June 30, 1997, $500,000 through June 30, 1998, $550,000 through June
30, 1999, with a final payment of $1,800,000 due on September 30, 1999.
Repayment of principal is required to the extent the loan balance then
outstanding exceeds the reduced maximum commitment.
F-17
<PAGE> 57
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=================================
NOTE 6 - NOTE PAYABLE (CONCLUDED)
The Joint Venture is permitted to prepay amounts outstanding under the
Credit Agreement at any time without penalty, and is able to re- borrow
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 (8.25% at December
31, 1996), 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 Joint Venture was in compliance with all loan covenants at
December 31, 1996.
Principal maturities of the note payable as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------------
<S> <C>
1997 $ 1,067,200
1998 2,100,000
1999 2,900,000
-----------------
$ 6,067,200
=================
</TABLE>
On March 7, 1997, (subsequent to the date of report of independent
auditors) the Joint Venture elected to prepay $2,000,000 of its note payable
balance, which reduced its outstanding borrowings from $6,067,200 to $4,067,200.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Joint Venture leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2002.
F-18
<PAGE> 58
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
=================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Future minimum rental payments under non-cancelable leases that have
remaining terms in excess of one year as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- -------------
<S> <C>
1997 $ 13,600
1998 13,600
1999 13,600
2000 13,100
2001 13,000
Thereafter 5,300
-------------
$ 72,200
=============
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$49,200, $48,400 and $49,400, in 1994, 1995 and 1996, respectively, while pole
rental expense approximated $106,700, $95,800 and $105,900 in 1994, 1995 and
1996, 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 non-basic
programming services in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. The FCC is in
the process of conducting a number of additional rulemaking proceedings in
order to implement many of the provisions of the 1996 Telecom Act.
F-19
<PAGE> 59
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
=================================
NOTE 8 - 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 fee expense
approximated $247,000, $249,700, and $269,100 in 1994, 1995 and 1996,
respectively. In addition, the Joint Venture is required to distribute 1% of
its gross revenues to the Corporate General Partner in respect of its interest
as the Corporate General Partner of the Partnership. This fee approximated
$61,700, $62,400 and $67,300 in 1994, 1995 and 1996, 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
$284,200, $250,500 and $272,200 during 1994, 1995 and 1996, respectively.
The Joint Venture also receives certain system operating management
services from affiliates of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
the Joint Venture. The Joint Venture reimburses the affiliates for the Joint
Venture's allocable share of the affiliates' operational costs. The total
amount charged to the Joint Venture for these costs approximated $581,900,
$532,800 and $580,100 in 1994, 1995 and 1996, respectively. No management fee
is payable to the affiliates by the Joint Venture and there is no duplication of
reimbursed expenses and costs paid to the Manager.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Joint Venture for these
costs based on an estimate of what the Corporate General Partner could negotiate
for such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Joint Venture recorded programming fee expense
of $1,071,200, $1,136,500 and $1,257,300 in 1994, 1995 and 1996, respectively.
Programming fees are included in service costs in the statements of operations.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $662,500, $777,400 and $703,400 in
1994, 1995 and 1996, respectively.
F-20
<PAGE> 60
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)
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)
</TABLE>
E-1
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.(9)
16.1 Report of change in accountants.(7)
21.1 Subsidiaries: Enstar Cable of Cumberland Valley.
</TABLE>
FOOTNOTE REFERENCES
<TABLE>
<S> <C>
(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.
(9) 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, 1995.
</TABLE>
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1996 AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,500
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,301,400
<CURRENT-LIABILITIES> 16,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,301,400
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 29,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600
<INCOME-PRETAX> (341,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (341,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (341,300)
<EPS-PRIMARY> (5.65)
<EPS-DILUTED> 0
</TABLE>
