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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, 1998
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: 0-14508
ENSTAR INCOME PROGRAM II-1, L.P.
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1628877
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
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 29,936 units of
limited partnership interests, its only class of equity securities, are held
by non-affiliates. There is no public trading market for the units, and
transfers of units are subject to certain restrictions; accordingly, the
registrant is unable to state the market value of the units held by
non-affiliates.
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The Exhibit Index is located at Page E-1.
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program II-1, 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 July 3, 1984.
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 was Falcon Holding Group, L.P., a Delaware limited
partnership ("FHGLP"), until September 1998. On September 30, 1998, FHGLP
acquired ownership of the Corporate General Partner from Falcon Cablevision.
Simultaneously with the closing of that transaction, FHGLP contributed all of
its existing cable television system operations to Falcon Communications, L.P.
("FCLP"), a California limited partnership and successor to FHGLP. FHGLP serves
as the managing partner of FCLP, and the general partner of FHGLP is Falcon
Holding Group, Inc., a California corporation ("FHGI"). The Corporate General
Partner has contracted with FCLP to provide corporate management services for
the Partnership. See Item 13., "Certain Relationships and Related Transactions".
The General Partner, FCLP and affiliated companies are responsible for the day
to day management of the Partnership and its operations. See "Employees" below.
Based on its belief that the market for cable systems has generally
improved, the Corporate General Partner is evaluating strategies for liquidating
the Partnership. These strategies include the potential sale of substantially
all of the Partnership's assets to third parties and/or affiliates of the
Corporate General Partner, and the subsequent liquidation of the Partnership.
The Corporate General Partner expects to complete its evaluation within the next
several months and intends to advise unitholders promptly if it believes that
commencing a liquidating transaction would be in the best interests of
unitholders.
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 Partnership's cable television systems (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 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") and Showtime) 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."
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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
channels have also offered the cable systems managed by FCLP, including those of
the Partnership, fees in return for carrying their service. Due to a general
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."
The Partnership owns and operates two cable television systems that
provide service to customers in the cities of Taylorville, Litchfield and
Gillespie, Illinois and portions of unincorporated Christian County, Illinois.
As of December 31, 1998, the Partnership served approximately 7,100 basic
subscribers in these areas. The Partnership does not expect to make any
additional material acquisitions during the remaining term of the Partnership.
FCLP 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 FHGI is Marc B. Nathanson. Mr.
Nathanson has managed FCLP or its predecessors since 1975. Mr. Nathanson is a
veteran of more than 30 years in the cable industry and, prior to forming FCLP'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 FCLP 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 Partnership 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 Partnership's business
strategy has focused on serving small to medium-sized communities. The
Partnership believes that given a similar rate, technical, and channel
capacity/utilization profile, its cable television systems generally involve
less risk of increased competition than systems in large urban cities. In the
Partnership's market, consumers have access to only a limited number of
over-the-air broadcast television signals. In addition, this market typically
offers fewer competing entertainment alternatives than large cities.
Nonetheless, the Partnership believes that all cable operators will face
increased competition in the future from alternative providers of multi-channel
video programming services. See "Competition."
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 Partnership'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"). Among other changes, the 1996 Telecom Act provides that the
regulation of certain cable programming service tier ("CPST") rates will
terminate on March 31, 1999. There can be no assurance as to what, if any,
further action may be taken by the FCC, Congress or any other regulatory
authority or court, or the effect thereof on the Partnership's business. 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 Partnership 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 Partnership believes clustering can reduce marketing
and personnel costs and can also reduce capital expenditures in cases where
cable service can be delivered through a central headend reception facility.
CAPITAL EXPENDITURES
As noted in "Technological Developments," the Partnership's systems
have 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 Partnership's management has selected a technical standard that
incorporates the use of fiber optic technology where applicable in its
engineering design for the majority of its systems that are to be rebuilt. A
system built with this type of architecture can provide for future channels of
analog service as well as new digital services. Such a system will also permit
the introduction of high speed data transmission/Internet access and telephony
services in the future after incurring incremental capital expenditures related
to these services. The Partnership is also evaluating the use of digital
compression technology in its systems. See "Technological Developments" and
"Digital Compression."
The Partnership is rebuilding its cable system in Taylorville,
Illinois and neighboring communities at an estimated total cost of approximately
$3,332,600, including approximately $300,000 to complete the project in 1999.
Other capital expenditures budgeted for 1999 consist of approximately $423,000
for the improvement and upgrade of other assets including approximately $96,000
to introduce digital services in one franchise area. The Partnership is required
to upgrade its system in the community of Gillespie, Illinois by December 1999
under a provision of its franchise agreement. Expenditures for an upgrade,
scheduled for 1999, are budgeted at a total estimated cost of approximately
$650,000. Additionally, the Partnership expects to begin an upgrade of its cable
plant in Litchfield, Illinois in 1999 at a total estimated cost of approximately
$1,100,000, the start of which is dependent upon renewal of the franchise
agreement. The franchise agreement is expected to require completion of the
upgrade within 24 to 36 months. 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 Partnership'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 Partnership's marketing strategy is to provide added value to
increasing levels of subscription services through "packaging." 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. The
Partnership has employed a variety of
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targeted marketing techniques to attract new customers by focusing on
delivering value, choice, convenience and quality. The Partnership 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 Partnership offers
discounts to customers who purchase premium services on a limited trial basis
in order to encourage a higher level of service subscription. The Partnership
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 Partnership places a strong emphasis on customer service and
community relations and believes that success in these areas is critical to
its business. The Partnership has developed and implemented a wide range of
monthly internal training programs for its employees, including its regional
managers, that focus on the Partnership's operations and employee interaction
with customers. The effectiveness of the Partnership's training program as it
relates to the employees' interaction with customers is monitored on an
ongoing basis, and a portion of the regional manager's compensation is tied
to achieving customer service targets. The Partnership 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 its customers. A quarterly
newsletter keeps customers up to date on new service offerings, special
events and company information. In addition, the Partnership is participating
in the industry's Customer Service Initiative which emphasizes an on-time
guarantee program for service and installation appointments. The
Partnership's corporate executives and regional manager lead the
Partnership's involvement in a number of programs benefiting the communities
the Partnership 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 PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's cable systems as of December 31, 1998.
<TABLE>
<CAPTION>
Average
Monthly
Premium Revenue
Homes Basic Basic Service Premium Per Basic
System Passed(1) Subscribers Penetration(2) Units(3) Penetration(4) Subscriber(5)
- ------ --------- ----------- -------------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Taylorville, IL 5,481 4,266 77.8% 903 21.2% $34.89
Litchfield, IL 5,199 2,865 55.1% 527 18.4% $33.38
------- ----- ------
Total 10,680 7,131 66.8% 1,430 20.1% $37.58
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------- ----- ------
</TABLE>
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(1) Homes passed refers to estimates by the Partnership 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) Basic subscribers as a percentage of homes passed by cable.
(3) Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as
a package for a single monthly fee.
(4) Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which
is counted as a separate premium service unit. This ratio may be greater than
100% if the average customer subscribes for more than one premium service.
(5) Average monthly revenue per basic subscriber has been computed based
on revenue for the year ended December 31, 1998.
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CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offers 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 informational and public access
channels. For an extra monthly charge, the systems provide certain premium
television services, such as HBO and Showtime. The Partnership also offers other
cable television services to its customers. For additional charges, the
Partnership 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 Partnership depend upon channel
capacity and viewer interests. Rates for services are based upon the type of
services selected.
Pursuant to the 1992 Cable Act, most cable television systems are
subject to rate regulation of the basic service tier, the non-basic service
tiers other than premium (per channel or program) services, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of the Partnership's systems not deemed to be
subject to effective competition under the FCC's definition. Currently, none of
the Partnership's systems are subject to effective competition. See "Legislation
and Regulation."
At December 31, 1998, the Partnership's monthly rates for basic cable
service for residential customers, including certain discounted rates, ranged
from $20.84 to $25.51 and its premium service rate was $11.95, excluding special
promotions offered periodically in conjunction with the Partnership's marketing
programs. A one-time installation fee, which the Partnership may wholly or
partially waive during a promotional period, is usually charged to new
customers. 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 various personnel required to operate the Partnership's business
are employed by the Partnership, the Corporate General Partner, its subsidiary
corporation and FCLP. As of February 12, 1999, the Partnership had two
employees, the cost of which is charged directly to the Partnership. The
employment costs incurred by the Corporate General Partner, its subsidiary
corporation and FCLP are allocated and charged to the Partnership for
reimbursement pursuant to the partnership agreement and management agreement.
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 Partnership
emphasizes high technical standards and prudently seeks to apply technological
advances in the cable television industry to its systems on the basis of cost
effectiveness, capital availability, enhancement of product quality and service
delivery and industry-wide acceptance. The Partnership's present plan is to
upgrade the technical quality of its systems' cable plant and to increase
channel capacity for the delivery of additional programming and new services.
Currently, the Partnership's systems have an average channel capacity of 44,
substantially all of which is presently utilized. The Partnership believes that
system upgrades will 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
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compression. 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
Partnership's current policy is to utilize fiber optic technology where
applicable in rebuild projects which it undertakes. The benefits of fiber optic
technology over traditional coaxial cable distribution plant include lower
ongoing maintenance and power costs and improved picture quality and
reliability.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the
area of digital compression, a technology that will 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. Depending on the technical characteristics of
the existing system, the Partnership believes that the utilization of digital
compression technology will enable its systems to increase channel capacity
in certain systems in a manner that could, in the short term, be more cost
efficient than rebuilding such systems with higher capacity distribution
plant. However, the Partnership believes that unless the system has
sufficient unused channel capacity and bandwidth, the use of digital
compression to increase channel offerings is not a substitute for the rebuild
of the system, which will improve picture quality, system reliability and
quality of service. The use of digital compression will expand the number and
types of services these systems offer and enhance the development of current
and future revenue sources. The Partnership expects to make digital service
available to customers in one of its franchise areas during 1999. This
technology is under frequent management review.
PROGRAMMING
The Partnership purchases basic and premium programming for its
systems from FCLP. In turn, FCLP charges the Partnership 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 91,000 basic subscribers at December 31, 1998), which is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Certain other channels have also offered
FCLP and the Partnership's systems 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
its business. In addition, the FCC may require that such payments from
programmers be offset against the programming fee increases which can be passed
through to subscribers under the FCC's rate regulations. FCLP's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. FCLP 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 Partnership's, programming costs will not
continue to increase substantially in the near future, or that other materially
adverse terms will not be added to FCLP's programming contracts. Management
believes, however, that FCLP's relations with its programming suppliers
generally are good.
The Partnership'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
(including sports programming), inflationary increases and other factors. The
1996 retransmission carriage agreement negotiations were completed with
essentially no change to the previous agreements. Under the FCC's rate
regulations, increases in programming costs for regulated cable services
occurring after the earlier of March 1, 1994, or the date a
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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 Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and
Regulation."
As of December 31, 1998, the Partnership held 6 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 Partnership systems
range up to 5% of the gross revenues generated by a system. The 1984 Cable Act
prohibits franchising authorities from imposing franchise fees in excess of 5%
of gross revenues and also permits the cable system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
The following table groups the franchises of the Partnership'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, 1998.
<TABLE>
<CAPTION>
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
- -------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Prior to 2000 1 1,910 26.8%
2000 - 2004 2 3,862 54.2%
2005 and after 3 1,222 17.1%
- ----- ----
Total 6 6,994 98.1%
- ----- ----
- ----- ----
</TABLE>
The Partnership operates cable television systems which serve multiple
communities and, in some circumstances, portions of such systems extend into
jurisdictions for which the Partnership believes no franchise is necessary. In
the aggregate, approximately 137 customers, representing approximately 1.9% of
the Partnership's customers, are served by unfranchised portions of such
systems. In certain instances, 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 Partnership's clustering
strategy. The Partnership 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 denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise, but no value may be attributed to the franchise
itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act,
establishes comprehensive renewal procedures which require that an incumbent
franchisee's renewal
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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. 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 videodisc 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.
Individuals presently have the option to purchase home satellite
dishes, which allow the direct reception of satellite-delivered broadcast and
nonbroadcast 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. 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, as is the case with DIRECTV,
multiple satellites are placed in the same orbital position. Unlike cable
television systems, however, DBS satellites are limited by law in their
ability to deliver local broadcast signals. One DBS provider, EchoStar, has
announced plans to deliver a limited number of local broadcast signals in a
limited number of markets and has initiated efforts to have the practice
legalized. Legislation has been introduced in Congress which would permit DBS
operators to elect to provide local broadcast signals to their customers
under the Copyright Act. If DBS providers are ultimately permitted to deliver
local broadcast signals, cable television systems would lose a significant
competitive advantage. DBS service can be received virtually anywhere in the
continental United States through the installation of a small rooftop or
side-mounted antenna, and it is more accessible than cable television service
where cable plant has not been constructed or where it is not cost effective
to construct cable television facilities. DBS service is being heavily
marketed on a nationwide basis by several service providers. In addition,
medium-power fixed-service satellites can be used to deliver direct-to-home
satellite services over small home satellite dishes, and one provider,
PrimeStar, currently provides service to subscribers using such a satellite.
DIRECTV has recently agreed to purchase PrimeStar.
Multichannel multipoint distribution systems ("wireless cable")
deliver programming services over microwave channels licensed by the FCC and
received by subscribers with special antennas. Wireless cable 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 wireless cable services to compete
with cable television systems has been limited by channel capacity (35-channel
maximum) and the need for unobstructed line-of-sight over-the-air transmission.
Although relatively few wireless cable systems in the United States are
currently in operation or under construction, virtually all markets have been
licensed or tentatively licensed. The use of digital compression technology, and
the FCC's
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recent amendment to its rules, which permits reverse path or two-way
transmission over wireless facilities, may enable wireless cable systems to
deliver more channels and additional services.
Private cable television systems compete to service 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.
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.
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, which
can be used by DBS systems, television stations and other video programming
distributors (including cable television systems), is an alternative
technology for the delivery of interactive video services. It does not appear
at the present time that this service will have a material impact on the
operations of cable television systems.
The FCC has allocated spectrum in the 28 GHz range for a new
multichannel wireless service that can be used to provide video and
telecommunications services. The FCC recently completed the process of
awarding licenses to use this spectrum via a market-by-market auction. It
cannot be predicted at this time whether such a service will have a material
impact on the operations of cable television systems.
Cable systems generally operate pursuant to franchises granted on a
non-exclusive basis. In addition, the 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to build and operate their own cable systems.
Municipally-owned cable systems enjoy certain competitive advantages such as
lower-cost financing and exemption from the payment of franchise fees.
The 1996 Telecom Act eliminates the restriction against ownership
(subject to certain exceptions) 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, wireless cable, SMATV or as traditional
franchised cable system operators. Alternatively, the 1996 Telecom Act
authorizes local telephone companies to operate "open video systems" (a
facilities-based distribution system, like a cable system, but which is
"open," i.e., also available for use by programmers other than the owner of
the facility) 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. As a result of the foregoing
changes, well financed businesses from outside the cable television industry
(such as public utilities that own the poles to which cable is attached) may
become competitors for franchises or providers of competing services. The
1996 Telecom Act, however, also includes numerous provisions designed to make
it easier for cable operators and others to compete directly with local
exchange telephone carriers in the provision of traditional telephone service
and other telecommunications services.
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Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996
Telecom Act directed the FCC to establish, and the FCC has adopted, regulations
and policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as data
transfer or subscription video. The FCC also has authorized television broadcast
stations to transmit textual and graphic information useful both to consumers
and businesses. The FCC also permits commercial and noncommercial FM stations to
use their subcarrier frequencies to provide nonbroadcast services including data
transmission. The cable television industry competes with radio, television,
print media and the Internet for advertising revenues. As the cable television
industry continues to offer more of its own programming channels, e.g.,
Discovery and USA Network, income from advertising revenues can be expected to
increase.
Recently a number of Internet service providers, commonly known as
ISPs, have requested local authorities and the FCC to provide rights of access
to cable television systems' broadband infrastructure in order that they be
permitted to deliver their services directly to cable television systems'
customers. In a recent report, the FCC declined to institute a proceeding to
examine this issue, and concluded that alternative means of access are or soon
will be made to a broad range of ISPs. The FCC declined to take action on ISP
access to broadband cable facilities, and the FCC indicated that it would
continue to monitor this issue. Several local jurisdictions also are reviewing
this issue.
Telephone companies are accelerating the deployment of Asymmetric
Digital Subscriber Line technology, known as ADSL. These companies report that
ADSL technology will allow Internet access to subscribers at peak data
transmission speeds equal or greater than that of modems over conventional
telephone lines. Several of the Regional Bell Operating Companies have requested
the FCC to fully deregulate packet-switched networks (a type of data
communication in which small blocks of data are independently transmitted and
reassembled at their destination) to allow them to provide high-speed broadband
services, including interactive online services, without regard to present
service boundaries and other regulatory restrictions. The Partnership cannot
predict the likelihood of success of the online services offered by these
competitors, (ISP attempts to gain access to the cable industry's broadband
facilities), or the impact on the Partnership's business.
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.
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 competitive effect that
ongoing or future developments might have on the cable industry. See
"Legislation and Regulation."
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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
Congress and various federal agencies have in the past materially affected, 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.
FEDERAL REGULATION
The primary federal statute dealing with the regulation of the cable
television industry is the Communications Act of 1934 (the "Communications
Act"), as amended. The three principal amendments to the Communications Act that
shaped the existing regulatory framework for the cable television industry were
the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act.
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. 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. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
The 1992 Cable Act replaced the FCC's previous standard for
determining "effective competition," under which most cable systems were not
subject to local rate regulation, with a statutory provision that resulted in
nearly all cable television systems becoming subject to local rate regulation of
basic service. The 1996 Telecom Act, however, expanded the definition of
effective competition to include situations where a local telephone company or
an affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DBS. A finding
of effective competition exempts both basic and nonbasic tiers from regulation.
Additionally, the 1992 Cable Act required the FCC to adopt a formula,
enforceable by franchising authorities, 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 allowed 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's regulations contain standards for the regulation of basic
and nonbasic cable service rates (other than per-channel or per-program
services). 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
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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 Partnership's systems due to the lack of
channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the Partnership for basic cable service and for
installation charges and equipment rental. The Partnership has had to bring its
rates and charges into compliance with the applicable benchmark or equipment and
installation cost levels in its service areas. This has had a negative impact on
the Partnership's revenues and cash flow.
FCC regulations adopted pursuant to the 1992 Cable Act 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, an exemption from compliance with this
requirement 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. At the present time, the Partnership's service areas are unable
to comply with this requirement.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act adopted new television station 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 must 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 WGN. The Partnership 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 Partnership 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. The Partnership was once again able to reach agreements
with broadcasters who elected retransmission consent or to negotiate
extensions to the December 31, 1996 deadline and has therefore continued not
to have been required to pay cash compensation to broadcasters for
retransmission consent or been required by broadcasters to remove broadcast
stations from the cable television line-ups. The next election between
must-carry and retransmission consent for local commercial television
broadcast stations will be October 1, 1999.
The FCC is currently conducting a rulemaking proceeding regarding
the carriage responsibilities of cable television systems during the
transition of broadcast television from analog to digital transmission.
Specifically, the FCC is exploring whether to amend the signal carriage rules
to accommodate the carriage of digital broadcast television signals. The
Partnership is unable to predict the ultimate outcome of this proceeding or
the impact of new carriage requirements on the operations of its cable
systems.
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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 certain lower priority
distant stations affiliated with the same network as the local station.
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 certain 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.
PROGRAM ACCESS
The 1992 Cable Act contains provisions that are intended to foster the
development of competition to traditional cable systems by regulating the access
of competing multichannel video providers to vertically integrated,
satellite-distributed cable programming services. Consequently, with certain
limitations, the federal law generally precludes any satellite distributed
programming service affiliated with a cable company from favoring an affiliated
company over competitors; requires such programmers to sell their programming to
other multichannel video providers; and limits the ability of such satellite
program services to offer exclusive programming arrangements to their
affiliates.
FRANCHISE FEES
Franchising authorities may impose franchise fees, but 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.
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,
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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.
COMPETING FRANCHISES
The 1992 Cable Act 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". A recent judicial decision overturned
various parts of the FCC's open video rules, including the FCC's restriction
preventing local governmental authorities from requiring open video system
operators to obtain a franchise. The Partnership expects the FCC to modify
its open video rules to comply with the federal court's decision, but is
unable to predict the impact any rule modifications may have on the
Partnership's business and operations. See "Business-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. Such a
review is presently pending. 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
wireless cable 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 wireless cable 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, general partnership interests and limited partnership
interests (unless the limited partners have no material involvement in the
limited partnership's business). These rules are under review by the
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FCC. The FCC has stayed the effectiveness of these rules pending the outcome
of the appeal from a 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.
The FCC also recently commenced a rulemaking proceeding to examine,
among other issues, whether any limitations on cable-DBS cross-ownership are
warranted in order to prevent anticompetitive conduct in the video services
market.
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.
TECHNICAL REQUIREMENTS
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 are in conflict with or
more restrictive than those established by the FCC. Those standards are
applicable to all classes of channels which carry downstream National
Television System Committee (the "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. Among other things, these regulations
generally prohibit cable operators from scrambling their basic service tier.
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
marketplace competition to best determine which features, functions,
protocols, and product and service options meet the needs of consumers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure
the competitive availability to consumers of customers premises equipment,
such as converters, used to access the services offered by cable television
systems and other multichannel video programming distributions ("MVPD").
Pursuant to those rules, consumers are given the right to attach compatible
equipment to the facilities of their MVPD so long as the equipment does not
harm the network, does not interfere with the services purchased by other
customers, and is not used to receive unauthorized services. As of July 1,
2000, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using
component security modules obtained from the MVPD with set-top units
purchased or leased from retail outlets. As of January 1, 2005, MVPDs will be
prohibited from distributing new set -top equipment integrating both security
and non-security functions to their customers.
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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. The state of Illinois, in
which the Partnership operates its cable system, has certified to the FCC
that it regulates 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 amendments to
the Communications Act modified the FCC's pole attachment regulatory scheme
by requiring the FCC to adopt new regulations. These regulations become
effective in 2001 and govern the charges for pole attachments used by
companies, including cable operators, that provide telecommunications
services by immediately permitting certain providers of telecommunications
services to rely upon the protections of the current law until the new rate
formula becomes effective in 2001, and by requiring that utilities provide
cable systems and telecommunications carriers with nondiscriminatory access
to any pole, conduit or right-of-way controlled by the utility. In adopting
its new attachment regulations, the FCC concluded, in part, that a cable
operator providing Internet service on its cable system is not providing a
telecommunications service for purposes of the new rules.
The new rate formula adopted by the FCC and which is applicable for
any party, including cable systems, which offer telecommunications services
will result in significantly higher attachment rates for cable systems which
choose to offer such services. Any resulting increase in attachment rates as
a result of the FCC's new rate formula will be phased in over a five-year
period in equal annual increments, beginning in February 2001. Several
parties have requested the FCC to reconsider its new regulations and several
parties have challenged the new rules in court. A federal district court
recently upheld the constitutionality of the new statutory provision, and the
utilities involved in that litigation have appealed the lower court's
decision. The FCC also has initiated a proceeding to determine whether it
should adjust certain elements of the current rate formula. If adopted, these
adjustments could increase rates for pole attachments and conduit space. The
Partnership is unable to predict the outcome of this current litigation or
the ultimate impact of any revised FCC rate formula or of any new pole
attachment rate regulations on its business and operations.
OTHER MATTERS
Other matters subject to FCC regulation include certain
restrictions on a cable system's carriage of local sports programming; rules
governing political broadcasts; customer service standards; obscenity and
indecency; home wiring; equal employment opportunity; privacy; closed
captioning; sponsorship identification; system registration; and limitations
on advertising contained in nonbroadcast children's programming.
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.
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"),
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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. Payment for
music performed in programming offered on a per program basis remains
unsettled. The Partnership recently participated in a settlement with BMI for
payment of fees in connection with the Request pay-per-view network. Industry
litigation of this issue with ASCAP is likely.
Copyrighted music transmitted by cable systems themselves, E.G., on
local origination channels or in advertisements inserted locally on cable
networks, must also be licensed. Cable industry negotiations with ASCAP, BMI and
SESAC, Inc. (a third and smaller performing rights organization) are in
progress.
LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, 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. 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 specific terms
and conditions of a franchise and the laws and regulations under which it was
granted directly affect the profitability of the cable television system. Cable
franchises generally contain provisions governing charges for basic cable
television services, fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy of
public streets and the 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.
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.
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.
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 Partnership 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 Partnership
believes that its properties, both owned and leased, are in good condition
and are suitable and adequate for the Partnership's business operations.
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The Partnership owns substantially all of the assets related to its
cable television operations, including its program production equipment, headend
(towers, antennas, 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 periodically 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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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.
The approximate number of equity security holders of record was 1,614 as of
December 31, 1998. 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 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 18% of their initial
investments less any distributions from previous system sales and cash
distributions from operations after Capital Payback. Thereafter, the respective
allocations will be made 15% to the general partners and 85% 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,
gain 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 Partnership
operations. The amount of such distributions, if any, will vary from quarter to
quarter depending upon the Partnership's results of operations and the Corporate
General Partner's determination of whether otherwise available funds are needed
for the Partnership's ongoing working capital and other liquidity requirements.
However, on February 22, 1995, the FCC announced significant amendments to its
rules implementing certain provisions of the 1992 Cable Act. Compliance with
these rules has had a negative impact on the Partnership's revenues and cash
flow.
The Partnership began making periodic cash distributions to limited
partners from operations during 1986, and distributed an aggregate of $374,200
($12.50 per unit) to limited partners in each year
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during 1996, 1997 and 1998. The Partnership will continue to determine the
Partnership's ability to pay distributions on a quarter-by-quarter basis.
The Partnership's ability to pay distributions, the actual level of
distributions and the continuance of distributions will depend on a number of
factors, including the amount of cash flow from operations, projected capital
expenditures, provision for contingent liabilities, 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership for
the five years ended December 31, 1998. This data should be read in
conjunction with the Partnership'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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1994 1995 1996 1997 1998
-------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,574,000 $ 2,603,700 $ 2,797,500 $ 2,994,500 $ 3,158,400
Costs and expenses (1,418,500) (1,390,900) (1,525,400) (1,567,100) (1,743,300)
Depreciation and amortization (368,000) (694,200) (310,600) (326,000) (466,700)
-------------- ------------- -------------- ------------- --------------
Operating income 787,500 518,600 961,500 1,101,400 948,400
Interest expense (6,100) (9,000) (9,100) (1,600) (15,100)
Interest income 66,400 109,000 118,000 128,800 81,900
Gain on sale of cable assets - - 2,700 - -
-------------- ------------- -------------- ------------- --------------
Net income $ 847,800 $ 618,600 $ 1,073,100 $ 1,228,600 $ 1,015,200
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Distributions to partners $ 378,000 $ 378,000 $ 378,000 $ 378,000 $ 378,000
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income $ 28.04 $ 20.46 $ 35.49 $ 40.63 $ 33.57
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
OTHER OPERATING DATA
Net cash provided by operating
activities $ 1,221,800 $ 1,173,000 $ 1,446,400 $ 1,505,100 $ 1,397,200
Net cash used in investing activities (515,700) (465,200) (876,100) (2,198,400) (806,800)
Net cash used in financing activities (378,000) (378,000) (378,000) (378,000) (378,000)
EBITDA1 1,155,500 1,212,800 1,272,100 1,427,400 1,415,100
EBITDA to revenues 44.9% 46.6% 45.5% 47.7% 44.8%
Capital expenditures $ 503,000 $ 408,200 $ 869,300 $ 2,182,700 $ 794,100
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998
-------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Total assets $ 3,979,800 $ 4,118,200 $ 4,918,400 $ 6,015,100 $ 6,555,700
General partners' deficit (38,100) (35,700) (28,800) (20,300) (13,900)
Limited partners' capital 3,617,100 3,855,300 4,543,500 5,385,600 6,016,400
</TABLE>
- ------------------------
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry, the
Partnership 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. EBITDA is not a measurement determined under GAAP and does not
represent cash generated from operating activities in accordance with GAAP.
EBITDA should not be considered by the reader as an alternative to net income as
an indicator of the Partnership's financial performance or as an alternative to
cash flows as a measure of liquidity. In addition, the Partnership's definition
of EBITDA may not be identical to similarly titled measures used by other
companies.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The 1992 Cable Act required the FCC to, among other things, implement
extensive regulation of the rates charged by cable television systems for basic
and programming service tiers, installation, and customer premises equipment
leasing. Compliance with those rate regulations has had a negative impact on the
Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will terminate on March 31, 1999.
There can be no assurance as to what, if any, further action may be taken by the
FCC, Congress or any other regulatory authority or court, or the effect thereof
on the Partnership's business. Accordingly, the Partnership'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. 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 Partnership, as discussed more fully elsewhere
in this Report.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Partnership's revenues increased from $2,994,500 to $3,158,400, or
by 5.5%, for the year ended December 31, 1998 compared to 1997. Of the $163,900
increase, $112,500 was due to increases in regulated service rates that were
implemented by the Partnership in 1997, $48,100 was due to increases in other
revenue producing items, including charges for franchise fees that the
Partnership is permitted to pass through to its customers, and $3,300 was due to
increases in the number of subscriptions for basic service. As of December 31,
1998, the Partnership had approximately 7,100 basic subscribers and 1,400
premium service units.
Service costs increased from $846,300 to $902,700, or by 6.7%, for the
year ended December 31, 1998 compared to 1997. Service costs represent costs
directly attributable to providing cable services to customers. The increase was
primarily due to increases in programming fees. Programming expense increased
primarily due to increases in rates charged by program suppliers.
General and administrative expenses increased from $248,000 to
$343,300, or by 38.4%, for the year ended December 31, 1998 compared to 1997,
primarily due to increases in marketing costs, audit fees and bad debt expense.
Management fees and reimbursed expenses increased from $472,800 to
$497,300, or by 5.2%, for the year ended December 31, 1998 compared to 1997.
Management fees increased in direct relation to increased revenues as described
above. Reimbursed expenses increased due to higher allocated personnel costs
resulting from staff additions.
Depreciation and amortization expense increased from $326,000 to
$466,700, or by 43.2%, for the year ended December 31, 1998 compared to 1997,
primarily due to the rebuild of the Partnership's
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plant in Taylorville, Illinois. Depreciation expense increased as portions of
the system rebuild were placed into service.
Operating income decreased from $1,101,400 to $948,400, or by 13.9%,
for the year ended December 31, 1998 compared to 1997, principally due to
increases in depreciation expense and programming fees as described above.
Interest income, net of interest expense, decreased from $127,200 to
$66,800, or by 47.5%, for the year ended December 31, 1998 compared to 1997,
primarily due to lower average cash balances available for investment.
Due to the factors described above, the Partnership's net income
decreased from $1,228,600 to $1,015,200, or by 17.4%, for the year ended
December 31, 1998 compared to 1997.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 47.7% during 1997 to 44.8% in 1998. The
decrease was primarily caused by higher programming fees and marketing expenses
as described above. EBITDA decreased from $1,427,400 to $1,415,100, or by less
than 1.0%, as a result.
1997 COMPARED TO 1996
The Partnership's revenues increased from $2,797,500 to $2,994,500, or
by 7.0%, for the year ended December 31, 1997 compared to 1996. Of the $197,000
increase, $180,400 was due to increases in regulated service rates that were
implemented by the Partnership in the second and fourth quarters of 1996 and the
fourth quarter of 1997, $45,500 was due to the July 1, 1996 restructuring of The
Disney Channel from a premium channel to a tier channel and $13,000 was due to
an increase in the number of subscriptions, primarily for basic service. These
increases were partially offset by a $41,900 decrease in other revenue producing
items. As of December 31, 1997, the Partnership had approximately 6,900 basic
subscribers and 1,500 premium service units.
Service costs increased from $786,500 to $846,300, or by 7.6%, for the
year ended December 31, 1997 compared to 1996. Service costs represent costs
directly attributable to providing cable services to customers. Programming fees
accounted for the majority of the increase. Programming expense increased
primarily due to increases in rates charged by program suppliers and due to the
restructuring of The Disney Channel discussed above.
General and administrative expenses decreased from $317,500 to
$248,000, or by 21.9%, for the year ended December 31, 1997 compared to 1996,
primarily due to decreases in personnel costs, insurance premiums and marketing
expense.
Management fees and reimbursed expenses increased from $421,400 to
$472,800, or by 12.2%, for the year ended December 31, 1997 compared to 1996.
Management fees increased in direct relation to increased revenues as described
above. Reimbursed expenses increased due to higher allocated personnel costs
resulting from staff additions and wage increases.
Depreciation and amortization expense increased from $310,600 to
$326,000, or by 5.0%, for the year ended December 31, 1997 compared to 1996,
primarily due to the rebuild of the Partnership's plant. Depreciation expense
will continue to increase significantly in future periods as remaining portions
of the system rebuild are placed into service.
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<PAGE>
Operating income increased from $961,500 to $1,101,400, or by 14.6%,
for the year ended December 31, 1997 compared to 1996, principally due to
increases in revenues and decreases in personnel, insurance and marketing costs
as described above.
Interest income increased from $118,000 to $128,800, or by 9.2%, for
the year ended December 31, 1997 compared to 1996, due to a change in investment
policy that yielded a greater return on invested cash.
Due to the factors described above, the Partnership's net income
increased from $1,073,100 to $1,228,600, or by 14.5%, for the year ended
December 31, 1997 compared to 1996.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 45.5% during 1996 to 47.7% in 1997. The
increase was primarily caused by increased revenues and lower personnel,
insurance and marketing costs. EBITDA increased from $1,272,100 to $1,427,400,
or by 12.2%, as a result.
DISTRIBUTIONS TO PARTNERS
Partnership operations generated income exclusive of depreciation and
amortization of $1,383,700, $1,554,600 and $1,481,900 in 1996, 1997 and 1998,
respectively. As provided in the partnership agreement, distributions to
partners are funded from such amounts after providing for working capital and
other liquidity requirements, including debt service and capital expenditures
not otherwise funded by borrowings. In each of 1996, 1997 and 1998, the
Partnership paid distributions of $378,000 to its partners.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, is to distribute to its partners all available cash
flow from operations and proceeds from the sale of cable systems, if any, after
providing for expenses and capital requirements relating to the expansion,
improvement and upgrade of its cable systems.
Based on its belief that the market for cable systems has generally
improved, the Corporate General Partner is evaluating strategies for liquidating
the Partnership. These strategies include the potential sale of substantially
all of the Partnership's assets to third parties and/or affiliates of the
Corporate General Partner, and the subsequent liquidation of the Partnership.
The Corporate General Partner expects to complete its evaluation within the next
several months and intends to advise unitholders promptly if it believes that
commencing a liquidating transaction would be in the best interests of
unitholders.
At December 31, 1998, the Partnership had no debt outstanding. The
Partnership relies upon cash flow from operations to meet operating requirements
and fund necessary capital expenditures. Although the Partnership currently has
a significant cash balance, there can be no assurance that the Partnership's
cash flow will be adequate to meet its future liquidity requirements. The
Partnership is required to rebuild its Taylorville, Illinois cable system at an
estimated total cost of $2,640,700 under a provision of its franchise agreement
and is also rebuilding portions of its cable systems in surrounding communities
at an estimated additional cost of approximately $691,900. Rebuild construction
costs approximated $392,500 during the year ended December 31, 1998 and amounted
to approximately $3,177,000 from inception to December 31, 1998. The Partnership
has budgeted expenditures of approximately $300,000 in 1999 to complete the
rebuild. Other capital expenditures in the year ended December 31, 1998 included
approximately $401,600 for the improvement and upgrade of other assets. The
Partnership is required to upgrade its system in the community of Gillespie,
Illinois under a provision of its franchise agreement. Expenditures for the
upgrade, scheduled for 1999, are projected to total approximately $650,000. The
Partnership expects to complete the project by the required deadline of December
31, 1999. Additionally, the Partnership is planning to upgrade its cable
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<PAGE>
system in Litchfield, Illinois at an estimated cost of approximately
$1,100,000 provided a franchise renewal is obtained. Although the franchise
agreement is still under negotiation, the Partnership anticipates that the
agreement will require completion of the upgrade within 24 to 36 months.
Other capital expenditures budgeted for 1999 total approximately $423,000 for
the improvement and upgrade of other assets including approximately $96,000
to introduce digital services in one franchise area. As a result of these
planned capital expenditures, the Partnership intends, if possible, to
maintain cash reserves. In the future, the Partnership may also need to
borrow.
On September 30, 1997, Enstar Finance Company, LLC ("EFC"), a
subsidiary of the Corporate General Partner, obtained a secured bank facility of
$35 million from two agent banks in order to obtain funds that would in turn be
advanced to the Partnership and certain of the other partnerships managed by the
Corporate General Partner. The Partnership's maximum loan commitment is
approximately $799,600, which it will become eligible to borrow at such time as
the Partnership enters into a loan agreement with EFC. The partnership agreement
requires borrowings from an affiliate to be repaid within 12 months. Such funds
would be used to provide capital to fund future rebuild and upgrade
requirements.
Borrowings, if any, will bear interest at the lender's base rate
(7.75% at December 31, 1998) plus 0.625%, or at an offshore rate plus 1.875%.
The Partnership will be permitted to prepay amounts outstanding under the
facility at any time without penalty, and will be able to reborrow throughout
the term of the facility up to the maximum commitment then available so long as
no event of default exists.
The facility will contain certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sale of assets, acquisitions and other covenants, defaults and
conditions. The facility will not restrict the payment of distributions to
partners unless an event of default exists thereunder.
The Partnership paid distributions totaling $378,000 during the year
ended December 31, 1998, and expects to continue to pay distributions at this
level during 1999. There can, however, be no assurances regarding the level,
timing or continuation of future distributions.
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Partnership's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
In October 1998, FCLP reinstated third party insurance coverage for
all of the cable television properties owned or managed by FCLP to cover damage
to cable distribution plant and subscriber connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties owned or managed by FCLP.
All of the Partnership's subscribers are served by its system in
Taylorville, Illinois and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Partnership's liquidity and cash flows. The Partnership
continues to purchase insurance coverage in amounts its management views as
appropriate for all other property, liability, automobile, workers' compensation
and other types of insurable risks.
During the fourth quarter of 1998, FCLP, on behalf of the Corporate
General Partner, continued its identification and evaluation of the
Partnership's Year 2000 business risks and its exposure to computer systems, to
operating equipment which is date sensitive and to the interface systems of its
vendors and service providers. The evaluation has focused on identification and
assessment of systems and equipment
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<PAGE>
that may fail to distinguish between the year 1900 and the year 2000 and, as
a result, may cease to operate or may operate improperly when dates after
December 31, 1999 are introduced.
Based on a study conducted in 1997, FCLP concluded that certain of the
Partnership's information systems were not Year 2000 compliant and elected to
replace such software and hardware with applications and equipment certified by
the vendors as Year 2000 compliant. FCLP installed a number of the new systems
in January 1999. The remaining systems are expected to be installed by mid-1999.
The total anticipated cost, including replacement software and hardware, will be
borne by FCLP. FCLP is utilizing internal and external resources to install the
new systems. FCLP does not believe that any other significant information
technology ("IT") projects affecting the Partnership have been delayed due to
efforts to identify and address Year 2000 issues.
Additionally, FCLP has continued to inventory the Partnership's
operating and revenue generating equipment to identify items that need to be
upgraded or replaced and has surveyed cable equipment manufacturers to determine
which of their models require upgrade or replacement to become Year 2000
compliant. Identification and evaluation, while ongoing, are substantially
completed and a plan is being developed to remediate non-compliant equipment
prior to January 1, 2000. FCLP expects to complete its planning process by the
end of May 1999. Upgrade or replacement, testing and implementation will be
performed thereafter. The cost of such replacement or remediation, currently
estimated at $60,000, is not expected to have a material effect on the
Partnership's financial position or results of operations. The Partnership had
not incurred any costs related to the Year 2000 project as of December 31, 1998.
FCLP plans to inventory, assess, replace and test equipment with embedded
computer chips in a separate segment of its project, presently scheduled for the
second half of 1999.
FCLP has continued to survey the Partnership's significant third party
vendors and service suppliers to determine the extent to which the Partnership's
interface systems are vulnerable should those third parties fail to solve their
own Year 2000 problems on a timely basis. Among the most significant service
providers upon which the Partnership relies are programming suppliers, power and
telephone companies, various banking institutions and the Partnership's customer
billing service. A majority of these service suppliers either have not responded
to FCLP's inquiries regarding their Year 2000 compliance programs or have
responded that they are unsure if they will become compliant on a timely basis.
Consequently, there can be no assurance that the systems of other companies on
which the Partnership must rely will be Year 2000 compliant on a timely basis.
FCLP expects to develop a contingency plan in 1999 to address possible
situations in which various systems of the Partnership, or of third parties with
which the Partnership does business, are not compliant prior to January 1, 2000.
Considerable effort will be directed toward distinguishing between those
contingencies with a greater probability of occurring from those whose
occurrence is considered remote. Moreover, such a plan will necessarily focus on
systems whose failure poses a material risk to the Partnership's results of
operations and financial condition.
The Partnership's most significant Year 2000 risk is an interruption
of service to subscribers, resulting in a potentially material loss of revenues.
Other risks include impairment of the Partnership's ability to bill and/or
collect payment from its customers, which could negatively impact its liquidity
and cash flows. Such risks exist primarily due to technological operations
dependent upon third parties and to a much lesser extent to those under the
control of the Partnership. Failure to achieve Year 2000 readiness in either
area could have a material adverse impact on the Partnership. The Partnership is
unable to estimate the possible effect on its results of operations, liquidity
and financial condition should its significant service suppliers fail to
complete their readiness programs prior to the Year 2000. Depending on the
supplier, equipment malfunction or type of service provided, as well as the
location and duration of the problem, the effect could be material. For example,
if a cable programming supplier encounters an interruption of its signal due to
a Year 2000 satellite malfunction, the Partnership will be unable to provide the
signal to its cable subscribers,
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which could result in a loss of revenues, although the Partnership would
attempt to provide its customers with alternative program services for the
period during which it could not provide the original signal. Due to the
number of individually owned and operated channels the Partnership carries
for its subscribers, and the packaging of those channels, the Partnership is
unable to estimate any reasonable dollar impact of such interruption.
1998 VS. 1997
Operating activities provided $107,900 less cash in 1998 than in
1997. The Partnership used $342,700 more cash to pay liabilities owed to
affiliates and third party creditors in 1998 than in 1997 due to differences
in the timing of payments. Changes in receivables, prepaid expenses and other
assets used $307,500 less cash in 1998 due to differences in the timing of
receivable collections and in the payment of prepaid expenses.
The Partnership used $1,391,600 less cash in investing activities
during 1998 than in 1997, due to a $1,388,600 decrease in expenditures for
tangible assets and a $3,000 decrease in spending for intangible assets.
1997 VS. 1996
Cash provided by operating activities increased by $58,700 in
1997 as compared with 1996. The Partnership used $141,000 less cash to pay
liabilities owed to affiliates and third party creditors in 1997 than in
1996. Changes in receivables, prepaid expenses and other assets used $255,900
more cash in 1997 due to differences in the timing of receivable collections
and the payment of prepaid expenses.
The Partnership used $1,322,300 more cash in investing activities
during 1997 than in 1996, due to a $1,313,400 increase in expenditures for
tangible assets, partially offset by a $2,100 decrease in spending for
intangible assets. The Partnership received proceeds from the sale of property,
plant and equipment of $11,000 in the first half of 1996.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Partnership on
January 1, 1999, requires costs of start-up activities to be expensed as
incurred. The Partnership believes that adoption of this standard will not
have an impact on the Partnership's financial position or results of
operations.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that the Partnership is able to increase its service
rates periodically, of which there can be no assurance. See "Legislation and
Regulation."
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is not currently exposed to material market risks
associated with its financial instruments, although the Partnership would be
subject to interest rate risk upon entering into a loan agreement with EFC and
borrowing thereunder.
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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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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 had been previously 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, 1998, the
Corporate General Partner managed cable television systems serving
approximately 91,000 basic subscribers.
On September 30, 1998, FHGLP acquired ownership of the Corporate
General Partner from Falcon Cablevision. FHGI is the sole general partner of
FHGLP. FHGLP 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:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
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, Executive Vice President, Chief Financial Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Thomas J. Hatchell Executive Vice President - Operations
Abel C. Crespo Vice President, Corporate Controller
</TABLE>
MARC B. NATHANSON, 53, 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, then the largest 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
will Chair its 1999 National Convention. 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 30-year veteran of the cable television industry.
He is a founder of the Cable Television Administration and Marketing Society
("CTAM") and the Southern California Cable Television Association. Mr. Nathanson
is an Advisory Board member of
-31-
<PAGE>
TVA, (Brazil) and also Chairman of the Board and Chief Executive Officer of
Falcon International Communications, LLC. Mr. Nathanson was appointed by
President Clinton on November 1, 1998 as Chair of the Board of Governors for
the International Bureau of Broadcasting which oversees Voice of America,
Radio/TV Marti, Radio Free Asia, Radio Free Europe and Radio Liberty. Mr.
Nathanson is a trustee of the Annenburg School of Communications at the
University of Southern California and a member of the Board of Visitors of
the Anderson School of Management at UCLA. In addition, he serves on the
Board of the UCLA Foundation and the UCLA Center for Communications Policy
and is on the Board of Governors of AIDS Project Los Angeles and Cable
Positive.
FRANK J. INTISO, 52, was appointed President and Chief Operating Officer of
FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso held the
positions of Executive Vice President and Chief Operating Officer, with
responsibility for the day-to-day operations of all cable television systems
under the management of Falcon. 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 has a Masters Degree in
Business Administration from UCLA and is a Certified Public Accountant. He
currently serves as Immediate Past Chair of the California Cable Television
Association and is on the boards of the Cable Advertising Bureau, Cable in
the Classroom, and the 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, 60, has been a Director of FHGI and its predecessors
since 1975. He served as Senior Vice President and General Counsel of FHGI
from 1987 to 1990 and has been Executive Vice President and General Counsel
since February 1990. Mr. Itskowitch 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 LLP). 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
Falcon International Communications, LLC.
MICHAEL K. MENEREY, 47, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI and Enstar Communications Corporation since
February 1998 and was Chief Financial Officer and Secretary of FHGI and its
predecessors between 1984 and 1998 and 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, and he was formerly
associated with BDO Seidman.
JOE A. JOHNSON, 54, has been Executive Vice President of Operations of FHGI
since September 1995, and was a Divisional Vice President of FHGI between
1989 and 1992. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. 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. Mr. Johnson is also a member of the Cable Pioneers.
THOMAS J. HATCHELL, 49, has been Executive Vice President of Operations of
FHGI and Enstar Communications Corporation since February 1998. From October
1995 to February 1998, he was Senior Vice President of Operations of Falcon
International Communications, L.P. and its predecessor company and was a
Senior Vice President of FHGI from January 1992 to September 1995. Mr.
Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From
1981 to 1989, he served as Vice President and Regional Manager for the San
Luis Obispo, California region owned by an affiliate of FHGI. He was Vice
President of Construction of an affiliate of FHGI from June 1980 to June 1981.
-32-
<PAGE>
ABEL C. CRESPO, 39, has been Vice President, Corporate Controller of FHGI and
Enstar Communications Corporation since March 1999. He previously had served as
Controller since January 1997. Mr. Crespo joined Falcon in December 1984, and
has held various accounting positions during that time. Mr. Crespo holds a
Bachelor of Science degree in Business Administration from California State
University, Los Angeles.
OTHER OFFICERS OF FALCON
The following sets forth certain biographical information with
respect to certain additional members of FHGI management.
LYNNE A. BUENING, 45, has been Vice President of Programming of FHGI 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, 45, has been Vice President of Advertising Sales and
Production of FHGI since January 1992. From 1988 to 1991, he served as
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. From 1985 to 1988, he was an Advertising Sales Account
Executive at Choice TV, an affiliate of FHGI.
HOWARD J. GAN, 52, has been Vice President of Regulatory Affairs of FHGI and
its predecessors since 1988. Prior to joining FHGI, he was General Counsel at
Malarkey-Taylor Associates, a Washington, D.C.-based telecommunications
consulting firm, from 1986 to 1988, and was Vice President and General
Counsel at CTIC Associates 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 1973 to 1978.
R.W. ("SKIP") HARRIS, 51, has been Vice President of Marketing of FHGI since
June 1991. 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.
MARTIN B. SCHWARTZ, 39, has been Vice President of Corporate Development of
FHGI since March 1999. Mr. Schwartz joined Falcon in November 1989 and has
held various finance, planning and corporate development positions during
that time, most recently that of Director of Corporate Development. Mr.
Schwartz has a Masters Degree in Business Administration from UCLA.
JOAN SCULLY, 63, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. 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.
RAYMOND J. TYNDALL, 51, has been Vice President of Engineering of FHGI 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 and is a member of the Cable
Pioneers.
In addition, FHGI has six Divisional Vice Presidents who are based
in the field. They are G. William Booher, Daniel H. DeLaney, Ron L. Hall,
Ronald S. Hren, Michael E. Kemph and Michael D. Singpiel.
-33-
<PAGE>
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 Partnership's systems and provides all operational
support for the activities of the Partnership. For these services, the
Manager receives a management fee of 5% of the Partnership's gross revenues,
excluding revenues from the sale of cable television systems or franchises,
calculated and paid monthly. In addition, the Partnership reimburses the
Manager for certain operating expenses incurred by the Manager in the
day-to-day operation of the Partnership's cable systems. The Management
Agreement also requires the Partnership to indemnify the Manager (including
its officers, employees, agents and shareholders) against loss or expense,
absent negligence or deliberate breach by the Manager of the Management
Agreement. The Management Agreement is terminable by the Partnership upon
sixty (60) days written notice to the Manager. The Manager has engaged FCLP
to provide certain management services for the Partnership and pays FCLP a
portion of the management fees it receives in consideration of such services
and reimburses FCLP for expenses incurred by FCLP on its behalf. The
Corporate General Partner also performs certain supervisory and
administrative services for the Partnership, for which it is reimbursed.
For the fiscal year ended December 31, 1998, the Manager charged
the Partnership management fees of approximately $157,900 and reimbursed
expenses of $339,400. In addition, certain programming services are purchased
through FCLP. The Partnership paid FCLP approximately $687,600 for these
programming services for fiscal year 1998.
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."
-34-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 1999, the only persons known by the Partnership to
own beneficially or that may be deemed to own beneficially more than 5% of
the units were:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------- ------------------------------------- --------------------------- -----------
<S> <C> <C> <C>
Units of Limited Partnership Interest Everest Cable Investors LLC 1,545.5(1) 5.2%
199 South Los Robles Ave.,
Suite 440
Pasadena, CA 91101
</TABLE>
(1) As reported to the Partnership by its transfer agent, Gemisys Corporation.
The Corporate General Partner is a wholly-owned subsidiary of
FHGLP. FHGI owns a 10.6% interest in, and is the general partner of, FHGLP.
As of March 3, 1999, 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. Greg A. Nathanson is Marc B. Nathanson's
brother.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
On September 30, 1998, FHGLP acquired ownership of Enstar
Communications Corporation from Falcon Cablevision and FCLP assumed the
management services operations of FHGLP. FCLP now manages the operations of
the partnerships of which Enstar Communications Corporation is the Corporate
General Partner, including the Partnership. FCLP began receiving management
fees and reimbursed expenses which had previously been paid by the
Partnership, as well as other affiliated entities, to FHGLP. The day-to-day
management of FCLP is substantially the same as that of FHGLP, which serves
as the managing partner of FCLP.
Certain members of management of the Corporate General Partner have
also been involved in the management of other cable ventures. FCLP may enter
into other cable ventures, including ventures similar to the Partnership.
The Partnership relies upon the Corporate General Partner and
certain of its affiliates to provide general management services, system
operating services, supervisory and administrative services and programming.
See Item 11., "Executive Compensation."
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 entities.
These affiliations subject FCLP, 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
-35-
<PAGE>
systems. Management or its affiliates may establish and manage other entities
which could impose additional conflicts of interest.
FCLP, 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 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 partners (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 their 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 as the Corporate General Partner shall determine, a liability
insurance policy which insures the Corporate General Partner, FHGI and its
affiliates (which include FCLP), 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.
-36-
<PAGE>
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 December 10, 1998, 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.
-37-
<PAGE>
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 29,
1999.
ENSTAR INCOME PROGRAM II-1, 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 29th day of March 1999.
<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 Executive Vice President, 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.
-38-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors F-2
Balance Sheets - December 31, 1997 and 1998 F-3
Financial Statements for each of the three years in the period ended
December 31, 1998:
Statements of Operations F-4
Statements of Partnership Capital (Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program II-1, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income Program II-1,
L.P. (A Georgia Limited Partnership) as of December 31, 1997 and 1998, and the
related statements of operations, partnership capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1998. 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 Program II-1,
L.P. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 12, 1999
F-2
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
BALANCE SHEETS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,778,300 $ 1,990,700
Accounts receivable, less allowance of $11,000 and
$5,100 for possible losses 48,800 59,800
Prepaid expenses and other assets 351,000 328,100
Property, plant and equipment, less accumulated
depreciation and amortization 3,765,500 4,110,300
Franchise cost, less accumulated
amortization of $26,800 and $37,000 64,700 61,300
Deferred charges, net 6,800 5,500
----------------- ----------------
$ 6,015,100 $ 6,555,700
----------------- ----------------
----------------- ----------------
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 457,600 $ 283,300
Due to affiliates 192,200 269,900
----------------- ----------------
TOTAL LIABILITIES 649,800 553,200
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (20,300) (13,900)
Limited partners 5,385,600 6,016,400
----------------- ----------------
TOTAL PARTNERSHIP CAPITAL 5,365,300 6,002,500
----------------- ----------------
$ 6,015,100 $ 6,555,700
----------------- ----------------
----------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF OPERATIONS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
REVENUES $ 2,797,500 $ 2,994,500 $ 3,158,400
------------- -------------- --------------
OPERATING EXPENSES:
Service costs 786,500 846,300 902,700
General and administrative expenses 317,500 248,000 343,300
General Partner management fees
and reimbursed expenses 421,400 472,800 497,300
Depreciation and amortization 310,600 326,000 466,700
------------- -------------- --------------
1,836,000 1,893,100 2,210,000
------------- -------------- --------------
Operating income 961,500 1,101,400 948,400
------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (9,100) (1,600) (15,100)
Interest income 118,000 128,800 81,900
Gain on sale of cable assets 2,700 - -
------------- -------------- --------------
111,600 127,200 66,800
------------- -------------- --------------
NET INCOME $ 1,073,100 $ 1,228,600 $ 1,015,200
------------- -------------- --------------
------------- -------------- --------------
Net income allocated to General Partners $ 10,700 $ 12,300 $ 10,200
------------- -------------- --------------
------------- -------------- --------------
Net income allocated to Limited Partners $ 1,062,400 $ 1,216,300 $ 1,005,000
------------- -------------- --------------
------------- -------------- --------------
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 35.49 $ 40.63 $ 33.57
------------- -------------- --------------
------------- -------------- --------------
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,936 29,936 29,936
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
-------------------------------------------
-------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------- ------------- -------------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1996 $ (35,700) $ 3,855,300 $ 3,819,600
Distributions to partners (3,800) (374,200) (378,000)
Net income for year 10,700 1,062,400 1,073,100
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 (28,800) 4,543,500 4,514,700
Distributions to partners (3,800) (374,200) (378,000)
Net income for year 12,300 1,216,300 1,228,600
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 (20,300) 5,385,600 5,365,300
Distributions to partners (3,800) (374,200) (378,000)
Net income for year 10,200 1,005,000 1,015,200
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1998 $ (13,900) $ 6,016,400 $ 6,002,500
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF CASH FLOWS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,073,100 $ 1,228,600 $ 1,015,200
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 310,600 326,000 466,700
Gain on sale of cable assets (2,700) - -
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets (39,700) (295,600) 11,900
Accounts payable and due to affiliates 105,100 246,100 (96,600)
--------------- -------------- --------------
Net cash provided by operating activities 1,446,400 1,505,100 1,397,200
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (869,300) (2,182,700) (794,100)
Increase in intangible assets (17,800) (15,700) (12,700)
Proceeds from sale of property, plant and equipment 11,000 - -
--------------- -------------- --------------
Net cash used in investing activities (876,100) (2,198,400) (806,800)
--------------- -------------- --------------
Cash flows from financing activities:
Distributions to partners (378,000) (378,000) (378,000)
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 192,300 (1,071,300) 212,400
Cash and cash equivalents at beginning of year 2,657,300 2,849,600 1,778,300
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 2,849,600 $ 1,778,300 $ 1,990,700
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program II-1, L.P., a Georgia limited partnership (the
"Partnership"), owns and operates cable television systems in rural areas of
Illinois.
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.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of these
instruments.
Cash equivalents at December 31, 1996 include $2,782,000 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:
<TABLE>
<S> <C>
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
</TABLE>
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and the renewal of existing franchises. These costs are
amortized using the straight-line method over the lives of the franchises,
ranging up to 15 years. The Partnership 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. The Partnership is in
the process of negotiating the renewal of one of its expired franchise
agreements.
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method over
two years.
F-7
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF ASSETS
The Partnership 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 Partnership also evaluates the amortization periods of
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system.
INCOME TAXES
As a partnership, Enstar Income Program II-1, L.P. pays no income
taxes. All of the income, gains, losses, deductions and credits of the
Partnership are passed through to its partners. The basis in the Partnership's
assets and liabilities differs for financial and tax reporting purposes. At
December 31, 1998, the book basis of the Partnership's net assets exceeded its
tax basis by $1,299,300.
The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differ from the
financial statements prepared for tax purposes due to the different treatment of
various items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for 1998 in the financial statements
is $557,300 more than tax income of the Partnership for the same period, caused
principally by timing differences in depreciation expense.
COSTS OF START-UP ACTIVITIES
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on Costs of Start-Up Activities." The new
standard, which becomes effective for the Partnership on January 1, 1999,
requires costs of start-up activities to be expensed as incurred. The
Partnership believes that adoption of this standard will not have an impact on
the Partnership's financial position or results of operations.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
F-8
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses have been allocated 99% to the limited partners
and 1% to the general partners. Earnings and losses per unit of limited
partnership interest is based on the weighted average number of units
outstanding during the year. The General Partners do not own units of
partnership interest in the Partnership, but rather hold a participation
interest in the income, losses and distributions of the Partnership.
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 in 1984 to acquire, construct, improve,
develop and operate cable television systems. 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. The Partnership
raised capital of $7,500,000 (the maximum) during 1985.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner. On September 30, 1998, Falcon Holding Group, L.P., a Delaware
limited partnership ("FHGLP"), acquired ownership of the Corporate General
Partner from Falcon Cablevision. Simultaneously with the closing of that
transaction, FHGLP contributed all of its existing cable television system
operations to Falcon Communications, L.P. ("FCLP"), a California limited
partnership and successor to FHGLP. FHGLP serves as the managing partner of
FCLP. The Corporate General Partner has contracted with FCLP to provide
corporate management services for the Partnership.
The 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 Capital Payback, the general partners will 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
18% of their initial investments less any distributions from previous system
sales and cash distributions from operations after Capital Payback.
Thereafter, allocations will be made 15% to the general partners and 85% to
the limited partners. Any losses from system sales or exchanges shall be
allocated first to all partners having positive capital account balances
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.
F-9
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
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 agreement limits the amount of debt the Partnership
may incur.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Cable television systems $ 7,914,100 $ 6,695,400
Vehicles, furniture and equipment,
and leasehold improvements 270,700 338,900
---------------- ----------------
8,184,800 7,034,300
Less accumulated depreciation
and amortization (4,419,300) (2,924,000)
---------------- ----------------
$ 3,765,500 $ 4,110,300
---------------- ----------------
---------------- ----------------
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Pole rentals amounted to $14,900, $26,200 and $32,600 in 1996, 1997
and 1998, respectively. Rentals, other than pole rentals, charged to operations
amounted to $7,700, $4,200 and $4,300 in 1996, 1997 and 1998, respectively. The
Partnership is not individually committed under any lease agreement for building
space. A wholly-owned subsidiary of the Corporate General Partner (the
"Manager") provides management services to the Partnership and has signed lease
agreements for regional office space for which the Partnership is charged its
allocable portion.
Other commitments include approximately $227,900 at December 31,
1998 to complete a rebuild of the Partnership's Taylorville cable system. The
Partnership is also rebuilding portions of its other cable systems in
surrounding communities and anticipates additional costs of approximately
$72,200 in 1999 to complete the project. The Partnership is required to
upgrade its system in the community of Gillespie, Illinois under a provision
of its franchise agreement by December 31, 1999. Expenditures for the upgrade
are budgeted for 1999 at a total estimated cost of approximately $650,000.
The Partnership expects to complete the project by the required deadline of
December 31, 1999.
F-10
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Partnership 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 service tiers ("CPSTs") 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 Partnership's cable services. The
Partnership 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. As it pertains to
cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain CPSTs 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.
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Partnership's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
In October 1998, FCLP reinstated third party insurance coverage for
all of the cable television properties owned or managed by FCLP to cover damage
to cable distribution plant and subscriber connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties owned or managed by FCLP.
All of the Partnership's subscribers are served by its system in
Taylorville, Illinois and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Partnership's liquidity and cash flows. The Partnership
continues to purchase insurance coverage in amounts its management views as
appropriate for all other property, liability, automobile, workers' compensation
and other types of insurable risks.
NOTE 5 - EMPLOYEE BENEFIT PLAN
The Partnership has a cash or deferred profit sharing plan (the
"Profit Sharing Plan") covering substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. The Partnership's
contribution to the Profit Sharing Plan, as determined by management, is
discretionary but may not exceed 15% of the annual aggregate compensation (as
defined) paid to all participating employees. There were no contributions
charged against operations for the Profit Sharing Plan in 1996, 1997 or 1998.
F-11
<PAGE>
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
--------------------------------
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with the
Manager for a monthly management fee of 5% of gross receipts, as defined,
from the operations of the Partnership. Management fee expense was $139,900,
$149,700 and $157,900 during 1996, 1997 and 1998, respectively.
In addition to the monthly management fee, the Partnership
reimburses 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. All cable television
properties managed by the Corporate General Partner and its subsidiaries are
charged a proportionate share of these expenses. The Corporate General
Partner has contracted with FCLP to provide corporate management services for
the Partnership. 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 amount charged to the
Partnership for these services was $281,500, $323,100 and $339,400 during
1996, 1997 and 1998, respectively.
Substantially all programming services have been purchased through
FCLP. FCLP, in the normal course of business, purchases cable programming
services from certain program suppliers owned in whole or in part by
affiliates of an entity that became a general partner of FCLP on September
30, 1998. Such purchases of programming services are made on behalf of the
Partnership and the other partnerships managed by the Corporate General
Partner as well as for FCLP's own cable television operations. FCLP charges
the Partnership 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
Partnership recorded programming fee expense of $543,200, $609,400 and
$687,600 in 1996, 1997 and 1998, respectively. Programming fees are included
in service costs in the statements of operations.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1996, 1997 and 1998, cash paid
for interest amounted to $9,100, $1,600 and $15,100, respectively.
F-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3 Second Amended and Restated Agreement of Limited Partnership of Enstar
Income Program II-1, L.P., dated as of August 1, 1988.(3)
10.1 Management Agreement between Enstar Income Program II-1 and Enstar Cable
Corporation.(1)
10.2 Revolving Credit and Term Loan Agreement dated February 28, 1986 between
Enstar Income Program II-1 and Rhode Island Hospital Trust National
Bank.(2)
10.3 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Taylorville, IL.(2)
10.4 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Litchfield, IL.(2)
10.5 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Gillespie, IL.(2)
10.6 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the County of
Christian, IL.(2)
10.7 Service agreement between Enstar Communications Corporation, Enstar Cable
Corporation and Falcon Holding Group, Inc. dated as of October 1,
1988.(4)
10.8 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated
February 28, 1986 between Enstar Income Program 1984-1 and Rhode Island
Hospital Trust National Bank, dated October 15, 1990.(5)
10.9 A resolution of the City Council of Taylorville, Illinois extending the
Cable Television Franchise of Enstar Income Program II-1. Passed and
adopted January 4, 1993.(6)
10.10 Ordinance No. 92-9 of the City Council of Gillespie, Illinois authorizing
an extension of the Cable Television Franchise between the City of
Gillespie and Enstar Cable Corporation. Passed and approved November 9,
1992.(6)
10.11 Ordinance No. 2497 of the City of Taylorville, Illinois extending the
Cable Television Franchise of Enstar Income Program II-1. Passed and
adopted June 14, 1993.(7)
10.12 A resolution of the County Board of Christian County extending the Cable
Television Franchise of Enstar Income Program II-1. Passed and adopted
November 15, 1994.(8)
10.13 A resolution of the City Council of Litchfield, Illinois extending the
Cable Television Franchise of Enstar Income Program II-1. Passed and
adopted December 8, 1994.(8)
10.14 Ordinance No. 94-16 of the City of Gillespie, Illinois granting a
non-exclusive community antenna television system franchise to Enstar
Income Program II-1. Passed and adopted December 12, 1994.(8)
10.15 Franchise agreement between Enstar Income Program II-1, L.P. and the City
of Taylorville, IL.(9)
10.16 Agreement with Respect to Franchise Fees and Reimbursable Fees between
Enstar Income Program II-1, L.P. and the City of Taylorville, IL. (9)
E-1
<PAGE>
EXHIBIT INDEX
10.17 Franchise ordinance granting a non-exclusive community antenna television
franchise for the City of Taylorville, IL. (9)
10.18 Franchise agreement between Enstar Communications Corporation and County
of Christian, Illinois. (10)
21.1 Subsidiaries: None
</TABLE>
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1986.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1987.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1988.
(4) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1989.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1990.
(6) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1991.
(7) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended
September 30, 1993.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 dated December 31, 1994.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended
September 30, 1995.
(10) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended
September 30, 1997.
E-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,990,700
<SECURITIES> 0
<RECEIVABLES> 64,900
<ALLOWANCES> 5,100
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,034,300
<DEPRECIATION> 2,924,000
<TOTAL-ASSETS> 6,555,700
<CURRENT-LIABILITIES> 553,200
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,555,700
<SALES> 0
<TOTAL-REVENUES> 3,158,400
<CGS> 0
<TOTAL-COSTS> 2,210,000
<OTHER-EXPENSES> (81,900)
<LOSS-PROVISION> 42,800
<INTEREST-EXPENSE> 15,100
<INCOME-PRETAX> 1,015,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,015,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,015,200
<EPS-PRIMARY> 33.57
<EPS-DILUTED> 0
</TABLE>
