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O'CON NOR & HAN NAN ' ATTORNEYS AT LAW • Steve Sarkozy April 12, 1990 Page 4 As it began its dimension of study of community programming related to aggressive regulation versus. divestiture, the Commission employed its accounting firm, George M. Hansen, and a special telecommunications accounting consultant, Kevin Cattoor, to perform an extensive audit of the expenditures of the company related to community programming. The Commission' s study revealed that in the Commission' s opinion, the company had not spent the required resources on community programming. At the conclusion of the community programming expense audit over a year ago, the Commission determined that in fiscal years 1987 and 1988 the company had failed to provide approximately $366,000 of required funding for community programming. The company immediately disputed these allegations arguing that the Commission had failed to consider depreciation expenses and interest expenses on borrowed money for community programming on behalf of the company. The Commission failed to concur with the company and in a letter dated June 15, 1989 formally notified the company that the Commission had determined that the cable company was in violation of its Franchise by failing to provide required funding. The Commission further notified the company at its July 6, 1989 meeting, that it would levy fines both prospec- tively and retroactively for each of these alleged violations. This is the most aggressive regulatory option available to the Commission, short of termination of the Franchise. The company responded on June 26, 1989, with a ten page letter from John Eddy, Chief Operating Officer of Cable TV North Central, in which he clearly laid out a blueprint for legal action against the Commission should the Commission proceed with fines. Additionally, Mr. Eddy requested modification of the community programming functions pursuant to Section 625 of the Federal Cable Communications Policy Act of 1984 ( "Cable Act" ) . 47 U.S.C. § 545. While the Commission refused to base any decision on threatened litigation, it was faced with two major problems. First, it was clear that proceeding to fine the company would result in a Federal Court battle with the company. Such a court battle would have cost the Commission and its Member Cities over • $100,000. Additionally, the success of such an effort was not