Mr. DANIELSON. In addition to your own current company, which was formed in 1973, Becker Communications Associates, that is a successor to a previous organization, A. G. Becker Co., Inc.

Mr. WICKS. No, sir. Warburg Paribas Becker is the successor to A. G. Becker. Becker Communications is a separate company which was formed by, in this case, Becker.

Mr. DANIELSON. Well, I guess I inferred incorrectly from your statement. You mentioned the predecessor A. G. Becker, and of course you are talking about Warburg Paribas Becker, Inc.

Mr. WICKS. That is correct.

Mr. DANIELSON. You have had 2 years with this later organization. How long a time were you affiliated with the prior organization? Mr. Wicks. Well, I have been with A. G. Becker for 7 years; and prior to that I was in the financial community, a commercial bank. Mr. DANIELSON. At that time, were you involved in providing financing for CATV operations?

Mr. WICKS. Not as a specialty, no, sir.

Mr. DANIELSON. Your experience, then, in that field goes back 7 years?

Mr. WICKS. Well, my general financing goes back approximately 12 years.

Mr. DANIELSON. I am talking about cable.

Mr. WICKS. Cable 3 years.

Mr. DANIELSON. In that time, has there come to your attention any instance of a cable company becoming insolvent, having to close down for financial reasons?

Mr. WICKS. I can't answer your question specifically in terms of the real nature of insolvency and bankruptcy. To the best of my knowledge there has not been a loss to a debt holder. I think there have been instances in which the lender has had to take action which may, or may not have impacted on the equity holder; but that the debt at some point was repaid, or the loan was put back on a current basis. Mr. DANIELSON. In the general term of financial failure, they have survived.

Mr. WICKS. Yes, sir. But I am not a lawyer, so I want to be a little careful. I think there have been instances in which companies have filed under the bankruptcy law, or other similar such things for protection of various interests.

I don't know of any outright absolute failure in which everybody lost their total investment.

Mr. DANIELSON. But, as a counterpart to that, it is my understanding of your statement that many of the CATV companies are operating on a rather thin profit margin.

Mr. WICKS. Yes, sir. I would say that most of the lenders that I know in this industry are watching these companies on a monthly basis; and as far as the ability to cover interest and principal, some of them are very tight, especially as we came through last year.

Mr. DANIELSON. The potential impact of copyright royalty liability and the determination of the liability rate is something, then, which you feel must be considered most carefully by this committee.

Mr. WICKS. Yes, sir.

Mr. DANIELSON. You have a comment on page 6 that there seems to be a reluctance by local franchising agencies to grant increases in rates on a timely basis. Have you observed that in your experience?

Mr. WICKS. Yes, sir. I think the best way to describe that is that the cable operators today that we have worked with have said that costs have soared over the last 4 to 5 years. Over a long period of time, the increases have been coming along. And then, when they got to the point where it was necessary, they went before the local council. Because of the fact that these people do not see that kind of a request very often it requires a long time for them to go through the procedures and try and understand the implications. It seems to take a lot longer, perhaps, than with other regulatory units that might be more familiar with financial statements.

Mr. DANIELSON. And you cite two articles, indicating that there is resistance in the market to an increase in rates. That would be apart from the franchising board.

Mr. WICKS. Yes, sir.

Mr. DANIELSON. You have read those articles, I assume; I have not. Do they seem to be sound, or not?

Mr. WICKS. They seem to be sound from my point of view, watching my clients preparing their marketing plans; and also in terms of the projections that we work on together, as to what rate level you can assume these subscribers will be willing to pay over a period of time.

Mr. DANIELSON. I think we must keep that in mind. I am going to read that article. Before we impose the copyright liability here, there certainly has to be an adjustment in the compensation of the cable systems to make up for that cost.

Mr. WICKS. It seems to me, some of the resistance is, people reach a point beyond which they don't want to pay for something they believe they are already getting for free.

Mr. DANIELSON. Well, that may be inherent in the industry. I have no further questions, thank you very much.

Mr. KASTEN MEIER. The gentleman from California, Mr. Wiggins. Mr. WIGGINS. Well, I don't want to unduly belabor a rather straightforward statement-you make the position quite clear. But I would like to try to understand the importance of this factor of uncertainty as it may impact lenders and investors by asking several questions.

It seems to me that lenders and investors have already accepted a great many hazards in this industry. First of all, they have accepted the risk that technological changes will render the whole operation obsolete.

You have accepted the risk of a certain degree of FCC regulations which may affect profitability. I think if you accept the risk that the governmental unit granting the franchise may revoke it, placing your borrower out of business absolutely, you accept the risk of certain unregulated costs, labor, interest charges and normal operating expenses, which have been escalating. You accept the risk of taxation, and the uncertainty implicit in that.

And the question is, can you endure the risk of a regulated royalty schedule, or is that going to be the straw that breaks the camel's back. Now, do you think that is so important that it will be the unacceptable. risk that will cause lenders to reverse their traditional willingness to advance credit for cable operations?

Mr. WICKS. No, sir, we don't see that as the straw that breaks the camel's back. I think that the point is the industry is not in a strong position to go to the capital markets. And I think the added level of

uncertainty will have a negative impact on the industry's ability to continue with those lenders.

There are a great many insurance companies in this country who lend money to industrial concerns. Out of all those insurance companies-and I'm sorry I can't tell you what the number is, it must be in the thousands-there are only 13 who regularly review cable television proposals. And of those 13 today less than half will accept, or entertain a proposal from a cable company. I have been able to follow this market for some time and it is currently very, very thin.

And this kind of uncertainty gives the finance coinmitee, if you will, who reviews these loans, trouble in accepting that these loans can be made; they would much rather lend to something that is more certain. So, it is not the straw that breaks the camel's back, but it doesn't help.

Mr. KASTENMEIER. The gentleman from Massachusetts, Mr. Drinan. Mr. DRINAN. I wonder, Mr. Wicks, if you think we have the power to force the local authorities to make the new price-16 cents per month, as you mentioned-a passthrough which is automatically added to the royalty that they pay, or the fee that they pay every month.

In other words, if it's 16 cents per month, as you suggest, $1.92 per year, do you think we have the power to say that's a passthrough which would not, therefore, be adversely affecting the profits of the industry?

Mr. WICKS. I can't answer the question whether you have the power to do that. It may be that can be done, but then you get to the point of, will the consumer, who is currently paying $6, or $7, will he be willing to continue on this service. He may decide that that is the straw that broke the camel's back and unhook."

Mr. DRINAN. I'm advising that you overstate your case, in all candor, $1.92 a year, that is a very small rise, and something that is really inexpensive, $5, or $6.50 a month. If the passthrough were there, your argument would crumble, would it not, as to the adverse effect?

Mr. WICKS. Well, I agree the 16 cents doesn't seem that large. On the other hand, there are other fees that are being passed through, plus the fact that the $6.50 fee may have just been raised from $5, or $5.75. Mr. DRINAN. Do you think the 21% percent royalty rate is in the ball park, is something that would be acceptable, or do you think that's inevitable?

Mr. WICKS. I think the 21% percent is certainly easier for the industry to live with than the higher fees that I saw in earlier testimony, a few years ago, of 16 percent, or as we heard this morning, 20-some percent. Mr. DRINAN. Thank you very much for your testimony. I vield back. Mr. KASTENMEIFR. The gentleman from New York, Mr. Badillo. Mr. BADILLO. As I understand your statement, you say you take no position whether the copyright fee should apply, but you say that if the present schedule applies, it is beyond the ability of the industry to bear that is that correct?

Mr. Wicks. It does have a financial impact, yes sir. I don't say it is beyond the capability of the industry to survive.

Mr. BADILLO. What do you recommend, if anything?

Mr. WICKS. I don't think I'm in a position to represent a level that is livable. I have not analyzed the industry from that point of view.

Mr. BADILLO. Well, you have analyzed the industry from the point of view of its costs. I happen to be a certified public accountant, among

other things, and I am struck by the fact that the depreciation, according to your schedule, is 20 percent. Isn't that unusually high for an industry?

Mr. WICKS. I'm not sure I'm qualified to put that in perspective to other industries. I think it is a fairly consistent number for this industry.

Mr. BADILLO. What is the average life of the assets?

Mr. WICKS. Well, I think it is quite varied, sir. There may be others in a better position to answer that question. I know the accounting practice is, as one might read in the footnote, that there may be 10 different average lives defined.

Mr. BADILLO. But since you said you think they can't pay because you add up these items and get to a very small amount, I just wanted to know how you get to these amounts. Isn't the interest rate of 14 percent very high, and probably matched only by institutions such as New York City? [Laughter.]

Mr. WICKS. Yes, sir, it's high; but this is a very leveraged industry. Mr. BADILLO. But doesn't that depend on how much you want to invest? If you decide you want to put a certain amount of money into stock, and you want to borrow money, you can adjust the interest rate, depending upon how much of an equity you want to put in, and how much you want to borrow. If you put in a very small investment, and you borrow 95 percent, then you are going to have a very high interest rate. If you put in a different kind of investment, then you have a lower interest rate. Isn't that so?

Mr. WICKS. Yes, sir, that is accurate; but I don't think it would be fair to characterize this industry as having the ability to have that kind of choice. The average company in that industry is extremely small, and the equity

Mr. BADILLO. Closely held, too?

Mr. WICKS. Very closely held.

Mr. BADILLO. And they can also determine the administrative expenses more closely than one that is not closely held. For example, 62 percent for operating and administrating expenses may have a small profit, but that may include, if it is a closely held company, salaries and traveling expenses of the stockholders.

Mr. WICKS. I think in most cases, sir, the stockholders are the manager-owners, and probably don't pay themselves much of a salary. I would say that most of the expenses in there are fairly fixed.

Mr. BADILLO. Well, isn't that, then, the reason why-obviously we can't examine the books, and I'm not here to be a certified public accountant. If you cannot, as someone who is concerned with the industry, if you cannot even make a recommendation, isn't that the reason why maybe, instead of having a fee altogether, fee schedule altogether. the entire thing should be left with the tribunal, and let the tribunal examine the books and determine whether the 14 percent interest rate is proper, or is just really under-financing of the company; and determine how the life of the assets is to be spread out, so that the depreciation can be computed, and determine whether the salaries are proper.

Isn't really a tribunal which can study the financial condition of these companies the best form to reach a conclusion, since even you, who have been in the industry for such a long time, cannot make a recommendation to this Committee?

Mr. WICKS. Well, sir, I think from my point of view, there is more certainty setting up a number in a schedule, than there is leaving this to a tribunal.

Mr. BADILLO. But you can't make a recommendation, so, how are we supposed to get to an amount?

Mr. WICKS. Well, I don't think it would be proper for me to make that determination.

Mr. BADILLO. No further questions.

Mr. KASTENMEIR. The gentleman from New York, Mr. Pattison. Mr. PATTISON. I have no questions.

Mr. KASTEN MEIER. That concludes the questions. Mr. Wicks, we appreciate your appearance here this morning.

[The prepared statement of Mr. David Wicks and exhibits follow:]

STATEMENT OF DAVID O. WICKS, JR., BECKER COMMUNICATIONS ASSOCIATES My name is David Wicks. I am a Vice President of Warburg Paribas Becker Inc., headquartered in Chicago, Illinois. Our firm, and its predecessor, A. G. Becker and Co., Incorporated, has for a number of years rendered investment banking and other financial services to members of the CATV industry. During the last three years, Becker and its affiliates have been one of the principal sources of CATV financing. During this period, I have been primarily responsible for obtaining debt financing for the larger multiple system cable television operators.

In 1973, A. G. Becker organized Becker Communications Associates as a limited partnership for the purpose of lending to the cable television industry in partnership with insurance companies, banks and other institutional lenders, I was instrumental in the formation of Becker Communications Associates and have a partnership interest in the firm. I appear here today as a representative of Becker Communications Associates.

I will not address myself to the pros and cons of copyright legislation for the cable industry. However, I wish to make two points with respect to the impact of H.R. 2223 on cable television financing as we see it today. First, the copyright royalty schedule provided in section 111(d) of the Bill will have a substantial and adverse effect on the net income of CATV operators and on their ability to raise additional capital either in the debt or equity market. An increase in the level of these fees would have even more severe consequences.

Second, the provision in section 802 of the Bill for an adjustment in the royalty rates after July 1, 1977, and during calendar year 1984 and in each subsequent fifth calendar year thereafter, introduces a serious financing uncertainty which will impede the industry's ability to obtain both medium and long term capital investment. In our opinion, the combined effect of the liability imposed by the Bill for copyright royalty payments together with uncertainty as to the future level of these payments will operate to substantially reduce the availability of both debt and equity financing.

It is recognized that cable television is a capital intensive industry. In its report entitled, "Broadcasting and Cable Television: Policies for Diversity and Change," the Committee for Economic Development notes that the future development of cable television will be determined in great measure by the availability and cost of capital. Yet, the Report continues: "Because of the economie and regulatory climate, venture capital is presently in very short supply. These difficulties are compounded by the fact that the construction of the cable system requires a very heavy initial investment. Furthermore, the return in the early years is slow. It may be 10 years or more before an investor realizes substantial profit.”

Our findings confirm this point. Exhibit I presents data on the nine leading CATV companies for which such data is publicly available. This group had total revenues in 1974 of 8265,5 Million and outstanding long-term debt of $517 Million. By comparison, Dennis McAlpine of the investment banking firm of Tucker, Anthony & R. L. Day, in testimony on May 22, 1975, before the Senate Anti-Trust, Subcommittee chaired by Senator Hart, reported that the nine leading broadcasting companies generated revenues of $3.6 Billion, about 13 times as great, but had long-term debt outstanding of $573 Million, only slightly greater than that of the nine leading CATV companies, Stated another way, the CATV companies