<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 0-15686
-----------
Enstar Income Program IV-3, L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1648320
- --------------------------------- -------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
- ------------------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (310) 824-9990
--------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED BALANCE SHEETS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1997* 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 788,300 $ 653,200
Accounts receivable, less allowance of $5,100 and
$3,500 for possible losses 26,100 22,600
Prepaid expenses and other assets 155,100 160,600
Equity in net assets of Joint Venture 708,600 847,900
Property, plant and equipment, less accumulated
depreciation and amortization of $4,350,900 and $4,588,500 1,897,300 1,817,500
Franchise cost, net of accumulated
amortization of $2,039,000 and $2,180,600 533,000 391,400
Deferred charges, net 4,900 2,900
------------------ -----------------
$ 4,113,300 $ 3,896,100
------------------ -----------------
------------------ -----------------
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 543,400 $ 173,000
Due to affiliates 177,700 140,800
------------------ -----------------
TOTAL LIABILITIES 721,100 313,800
------------------ -----------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (49,300) (47,400)
Limited partners 3,441,500 3,629,700
------------------ -----------------
TOTAL PARTNERSHIP CAPITAL 3,392,200 3,582,300
------------------ -----------------
$ 4,113,300 $ 3,896,100
------------------ -----------------
------------------ -----------------
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
-2-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
Unaudited
--------------------------------------
Three months ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
REVENUES $ 662,700 $ 659,900
----------------- -----------------
OPERATING EXPENSES:
Service costs 230,600 232,600
General and administrative expenses 91,600 68,700
General Partner management fees
and reimbursed expenses 81,900 91,600
Depreciation and amortization 119,100 134,300
----------------- -----------------
523,200 527,200
----------------- -----------------
OPERATING INCOME 139,500 132,700
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 9,600 7,500
Interest expense (3,800) (2,800)
----------------- -----------------
5,800 4,700
----------------- -----------------
INCOME BEFORE EQUITY IN NET INCOME
OF JOINT VENTURE 145,300 137,400
EQUITY IN NET INCOME OF JOINT VENTURE 34,800 52,800
----------------- -----------------
NET INCOME $ 180,100 $ 190,200
----------------- -----------------
----------------- -----------------
Net income allocated to General Partners $ 1,800 $ 1,900
----------------- -----------------
----------------- -----------------
Net income allocated to Limited Partners $ 178,300 $ 188,300
----------------- -----------------
----------------- -----------------
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 4.47 $ 4.72
----------------- -----------------
----------------- -----------------
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 39,900 39,900
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
Unaudited
--------------------------------------
Nine months ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
REVENUES $ 1,988,900 $ 1,998,800
----------------- -----------------
OPERATING EXPENSES:
Service costs 649,900 685,200
General and administrative expenses 274,100 233,400
General Partner management fees
and reimbursed expenses 245,600 273,200
Depreciation and amortization 370,400 402,100
----------------- -----------------
1,540,000 1,593,900
----------------- -----------------
OPERATING INCOME 448,900 404,900
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 23,800 20,600
Interest expense (9,100) (9,600)
Gain on sale of cable assets 45,000 200
----------------- -----------------
59,700 11,200
----------------- -----------------
INCOME BEFORE EQUITY IN NET INCOME
OF JOINT VENTURE 508,600 416,100
EQUITY IN NET INCOME OF JOINT VENTURE 93,500 151,800
----------------- -----------------
NET INCOME $ 602,100 $ 567,900
----------------- -----------------
----------------- -----------------
Net income allocated to General Partners $ 6,000 $ 5,700
----------------- -----------------
----------------- -----------------
Net income allocated to Limited Partners $ 596,100 $ 562,200
----------------- -----------------
----------------- -----------------
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 14.94 $ 14.09
----------------- -----------------
----------------- -----------------
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 39,900 39,900
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
--------------------------------
--------------------------------
<TABLE>
<CAPTION>
Unaudited
--------------------------------------
Nine months ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 602,100 $ 567,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of Joint Venture (93,500) (151,800)
Depreciation and amortization 370,400 402,100
Gain on sale of cable assets (45,000) (200)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets (97,500) (2,000)
Accounts payable and due to affiliates 55,100 (407,300)
----------------- -----------------
Net cash provided by operating activities 791,600 408,700
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (158,100) (175,500)
Proceeds from sale of property, plant and equipment 45,000 200
Increase in intangible assets (7,100) (3,200)
Distributions from Joint Venture 25,000 12,500
----------------- -----------------
Net cash used in investing activities (95,200) (166,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (377,800) (377,800)
----------------- -----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 318,600 (135,100)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 450,900 788,300
----------------- -----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 769,500 $ 653,200
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to condensed financial statements.
-5-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for the three and
nine months ended September 30, 1998 and 1997 are unaudited. These condensed
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Partnership's latest
Annual Report on Form 10-K. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The results of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of results for the entire year.
2. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with a
wholly-owned subsidiary of the Corporate General Partner (the "Manager") for a
monthly management fee of 5% of revenues, excluding revenues from the sale of
cable television systems or franchises. Management fee expense approximated
$33,000 and $99,900 for the three and nine months ended September 30, 1998.
In addition to the monthly management fees described above, 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 subsidiary are
charged a proportionate share of these expenses. The Corporate General Partner
has contracted with Falcon Communications, L.P. ("FCLP"), successor to Falcon
Holding Group, L.P. ("FHGLP"), an affiliated partnership, 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 subscribers or homes passed (dwelling units
within a system) within the designated service areas. The total amount charged
to the Partnership for these services approximated $58,600 and $173,300 for the
three and nine months ended September 30, 1998.
The Manager has entered into an identical agreement with Enstar Cable of
Macoupin County, a Georgia general partnership, of which the Partnership is a
co-partner (the "Joint Venture"), except that the Joint Venture pays the Manager
only a 4% management fee. However, the Joint Venture is required to distribute
to Enstar Communications Corporation (which is the Corporate General Partner of
the Joint Venture as well as of the Partnership) an amount equal to 1% of the
Joint Venture's gross revenues in respect of Enstar Communications Corporation's
interest as Corporate General Partner of the Joint Venture. No management fee is
payable by the Partnership in respect of any amounts received by the Partnership
from the Joint Venture, and there is no duplication of reimbursed expenses or
costs of the Manager. The Joint Venture paid the Manager management fees of
approximately $20,000 and $59,900 and reimbursement of expenses of approximately
$55,600 and $159,000 under its management agreement for the three and nine
months ended September 30, 1998. In addition, the Joint Venture paid the
Corporate General Partner approximately $5,000 and $15,000 in respect of its 1%
special interest during the three and nine months ended September 30, 1998.
Management fees and reimbursed expenses due the Corporate General Partner are
non-interest bearing.
-6-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
2. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONTINUED)
The Partnership and the Joint Venture also receive certain system
operating management services from an affiliate of the Corporate General Partner
in addition to the Manager, due to the fact that there are no such employees
directly employed by the Partnership's and Joint Venture's cable systems. The
Partnership and the Joint Venture reimburse the affiliate for their allocable
share of the affiliate's operational costs. The total amount charged to the
Partnership and the Joint Venture approximated $2,200 and $6,200 for the three
and nine months ended September 30, 1998. No management fee is payable to the
affiliate by the Partnership and the Joint Venture and there is no duplication
of reimbursed expenses and costs paid to the Manager.
Certain programming services have been purchased through an affiliate of
the Partnership and the Joint Venture. In turn, the affiliate charged the
Partnership and the Joint Venture for these costs based on an estimate of what
the Corporate General Partner could negotiate for such programming services for
the 15 partnerships managed by the Corporate General Partner as a group. The
Partnership and the Joint Venture recorded programming fee expense of $274,600
and $813,400 for the three and nine months ended September 30, 1998. Programming
fees are included in service costs in the statements of operations. In the
future, programming services will be purchased through another source, which may
include FHGLP or an affiliate of FHGLP. Programming rates may vary in the near
term as a result of the change.
3. EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest is based on
the average number of units outstanding during the periods presented. For this
purpose, earnings and losses have been allocated 99% to the Limited Partners and
1% to the General Partners. 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.
-7-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
4. EQUITY IN NET ASSETS OF JOINT VENTURE
Each of the Partnership and two affiliated partnerships (Enstar Income
Program IV-1, L.P. and Enstar Income Program IV-2, L.P.) owns one-third (1/3) of
the Joint Venture. Each of the co-partners shares equally in the profits and
losses of the Joint Venture. The investment in the Joint Venture is accounted
for on the equity method. Summarized financial information for the Joint Venture
as of September 30, 1998 and December 31, 1997, and the results of its
operations for the three and nine months ended September 30, 1998 and 1997, have
been included. The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of results for the entire
year.
<TABLE>
<CAPTION>
December 31, September 30,
1997* 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current assets $ 893,900 $ 1,214,000
Investment in cable television properties, net 1,667,100 1,577,400
Other assets 3,000 2,400
------------------ -----------------
$ 2,564,000 $ 2,793,800
------------------ -----------------
------------------ -----------------
Current liabilities $ 438,200 $ 250,200
Venturers' capital 2,125,800 2,543,600
------------------ -----------------
$ 2,564,000 $ 2,793,800
------------------ -----------------
------------------ -----------------
</TABLE>
*As presented in the audited financial statements.
-8-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
4. EQUITY IN NET ASSETS OF JOINT VENTURE (CONTINUED)
<TABLE>
<CAPTION>
Unaudited
--------------------------------------
Three months ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
REVENUES $ 501,100 $ 500,200
----------------- -----------------
OPERATING EXPENSES:
Service costs 141,600 162,900
General and administrative expenses 49,000 24,200
General Partner management fees and reimbursed expenses 74,300 80,600
Depreciation and amortization 136,900 82,200
----------------- -----------------
401,800 349,900
----------------- -----------------
OPERATING INCOME 99,300 150,300
OTHER INCOME (EXPENSE):
Interest income 8,400 11,200
Interest expense (3,300) (3,100)
----------------- -----------------
NET INCOME $ 104,400 $ 158,400
----------------- -----------------
----------------- -----------------
<CAPTION>
Unaudited
--------------------------------------
Nine months ended
September 30,
--------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
REVENUES $ 1,475,400 $ 1,497,700
----------------- -----------------
OPERATING EXPENSES:
Service costs 411,000 468,100
General and administrative expenses 108,200 96,800
General Partner management fees and reimbursed expenses 218,800 233,900
Depreciation and amortization 470,700 257,800
----------------- -----------------
1,208,700 1,056,600
----------------- -----------------
OPERATING INCOME 266,700 441,100
OTHER INCOME (EXPENSE):
Interest income 22,500 23,100
Interest expense (8,700) (8,900)
----------------- -----------------
NET INCOME $ 280,500 $ 455,300
----------------- -----------------
----------------- -----------------
</TABLE>
-9-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") required the Federal Communications Commission ("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
Telecommunications Act of 1996 (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 cable programming service tier ("CPST") rates
will be terminated on March 31, 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, it is
possible that Congress and the FCC will consider additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 termination of CPST rate regulation. 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. In addition to the information
provided herein, reference is made to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1997 for additional information regarding
such matters and the effect thereof on the Partnership's business.
The Partnership conducts its cable television business operations both
(i) through the direct ownership and operation of certain cable television
systems and (ii) through its participation as a partner with a one-third (1/3)
interest in the Joint Venture. The Partnership participates equally with its two
affiliated co-partners under the Joint Venture's partnership agreement with
respect to capital contributions, obligations and commitments and results of
operations. Accordingly, in considering the financial condition and results of
operations for the Partnership, consideration must also be made of those matters
as they relate to the Joint Venture. The following discussion reflects such
consideration, and with respect to results of operations, a separate discussion
is provided for each entity.
RESULTS OF OPERATIONS
THE PARTNERSHIP
The Partnership's revenues decreased from $662,700 to $659,900, or by
less than 1.0%, and increased from $1,988,900 to $1,998,800, or by less than
1.0%, for the three and nine months ended September 30, 1998 as compared to the
corresponding periods in 1997. Of the $2,800 decrease in revenues
-10-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
for the three months ended September 30, 1998 as compared to the corresponding
period in 1997, $22,200 was due to decreases in the number of subscriptions for
basic, premium, tier and equipment rental services. These decreases were
partially offset by an increase of $18,000 due to increases in regulated service
rates that were implemented by the Partnership in 1997 and $1,400 due to
increases in other revenue producing items. Of the $9,900 increase in revenues
for the nine months ended September 30, 1998 as compared to the corresponding
period in 1997, $58,200 was due to increases in regulated service rates that
were implemented by the Partnership in 1997 and $10,500 was due to increases in
other revenue producing items. These increases were partially offset by a
decrease of $58,800 due to decreases in the number of subscriptions for basic,
premium, tier and equipment rental services. As of September 30, 1998, the
Partnership had approximately 6,300 basic subscribers and 1,500 premium service
units.
Service costs increased from $230,600 to $232,600, or by less than 1.0%,
and from $649,900 to $685,200, or by 5.4%, for the three and nine months ended
September 30, 1998 as compared to the corresponding periods in 1997. Service
costs represent costs directly attributable to providing cable services to
customers. The three and nine month increases were primarily due to higher
franchise fees and programming fees. The increase for the nine months was also
due to higher property taxes resulting from additional tax assessments in the
Partnership's Kentucky system. Franchise fees increased due to 1997 expense
estimates that were increased in 1998. Programming fees increased as a result of
higher rates charged by program suppliers.
General and administrative expenses decreased from $91,600 to $68,700, or
by 25.0%, and from $274,100 to $233,400, or by 14.8%, for the three and nine
months ended September 30, 1998 as compared to the corresponding periods in
1997. The decreases were primarily due to decreases in certain insurance
premiums and bad debt expense. The three months' decrease was also due to
decreases in legal fees and investor services expense. The nine months' decrease
was also due to reductions in expenses allocated by an affiliate of the
Corporate General Partner that discontinued management of the Partnership's
Kentucky operations in the fourth quarter of 1997. Such services are now
provided by the Corporate General Partner.
Management fees and reimbursed expenses increased from $81,900 to
$91,600, or by 11.8%, and from $245,600 to $273,200, or by 11.2%, for the
three and nine months ended September 30, 1998 as compared to the
corresponding periods in 1997. Management fees decreased for the three months
and increased for the nine months in direct relation to changes in revenues as
described above. Reimbursed expenses increased for the three and nine months
ended September 30, 1998 as compared with the corresponding periods in 1997,
primarily due to the transfer of system operating management of the
Partnership's Kentucky system from an affiliate to the Corporate General
Partner.
Depreciation and amortization expense increased from $119,100 to
$134,300, or by 12.8%, and from $370,400 to $402,100, or by 8.6%, for the three
and nine months ended September 30, 1998 as compared to the corresponding
periods in 1997, due to depreciation of plant asset additions.
-11-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Operating income decreased from $139,500 to $132,700, or by 4.9%, and
from $448,900 to $404,900, or by 9.8%, for the three and nine months ended
September 30, 1998 as compared to the corresponding periods in 1997, primarily
due to higher reimbursed expenses and depreciation and amortization expense as
described above.
Interest income, net of interest expense, decreased from $5,800 to
$4,700, or by 19.0%, and from $14,700 to $11,000, or by 25.2%, for the three and
nine months ended September 30, 1998 as compared to the corresponding periods in
1997. The decreases were primarily due to lower average cash balances available
for investment in the 1998 periods.
Gain on sale of cable assets decreased from $45,000 to $200 for the nine
months ended September 30, 1998 as compared to the corresponding period in 1997.
The Partnership sold a building during the second quarter of 1997 and recognized
a gain of $45,000 in connection with the sale. In the second quarter of 1998,
the Partnership sold equipment and recognized a gain on that sale.
Due to the factors described above, the Partnership's net income
increased from $180,100 to $190,200, or by 5.6%, and decreased from $602,100 to
$567,900, or by 5.7%, for the three and nine months ended September 30, 1998 as
compared to the corresponding periods in 1997.
Based on its experience in the cable television industry, the Partnership
believes that operating income before depreciation and amortization ("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 generally accepted accounting principles ("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 financial performance or as an alternative to cash flows as a
measure of liquidity. In addition, the definition of EBITDA may not be identical
to similarly titled measures used by other companies. EBITDA as a percentage of
revenues increased from 39.0% to 40.5% and decreased from 41.2% to 40.4% for the
three and nine months ended September 30, 1998 as compared to the corresponding
periods in 1997. The three months' increase was primarily due to lower insurance
premiums, bad debt expense, legal fees and investor services expense. The nine
months' decrease was primarily due to higher reimbursed expenses and franchise
fees as described above. EBITDA increased from $258,600 to $267,000, or by 3.2%,
and decreased from $819,300 to $807,000, or by 1.5%, for the three and nine
months ended September 30, 1998 as compared to the corresponding periods in
1997.
DISTRIBUTIONS TO PARTNERS
The Partnership distributed $125,900 and $377,800 to its partners during
the three and nine months ended September 30, 1998. The Joint Venture
distributed $6,000 and $12,500 to the Partnership during the three and nine
months ended September 30, 1998.
-12-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
THE JOINT VENTURE
The Joint Venture's revenues decreased from $501,100 to $500,200, or by
less than one percent, and increased from $1,475,400 to $1,497,700, or by 1.5%,
for the three and nine months ended September 30, 1998 as compared to the
corresponding periods in 1997. Of the $900 decrease in revenues for the three
months ended September 30, 1998 as compared to the corresponding period in 1997,
$19,900 was due to decreases in the number of subscriptions for basic, premium,
tier and equipment rental and $3,400 was due to decreases in other revenue
producing items. These decreases were partially offset by an increase of $22,400
due to increases in regulated service rates that were implemented by the Joint
Venture in 1997. Of the $22,300 increase in revenues for the nine months ended
September 30, 1998 as compared to the corresponding period in 1997, $84,000 was
due to increases in regulated service rates that were implemented by the Joint
Venture in 1997. These increases were partially offset by a decrease of $59,100
due to decreases in the number of subscriptions for basic, premium, tier and
equipment rental services and $2,600 due to decreases in other revenue producing
items. As of September 30, 1998, the Joint Venture had approximately 4,500 basic
subscribers and 1,300 premium service units.
Service costs increased from $141,600 to $162,900, or by 15.0%, and from
$411,000 to $468,100, or by 13.9%, for the three and nine months ended September
30, 1998 as compared to the corresponding periods in 1997. Service costs
represent costs directly attributable to providing cable services to customers.
The increases were principally due to higher programming fees and lower
capitalization of labor and overhead costs resulting from reductions in 1998
construction activity in the Auburn, Illinois franchise area. Programming
expense increased as a result of higher rates charged by program suppliers.
General and administrative expenses decreased from $49,000 to $24,200, or
by 50.6%, and from $108,200 to $96,800, or by 10.5%, for the three and nine
months ended September 30, 1998 as compared to the corresponding periods in
1997. The decreases were principally due to lower insurance premiums.
Management fees and reimbursed expenses increased from $74,300 to
$80,600, or by 8.5%, and from $218,800 to $233,900, or by 6.9%, for the three
and nine months ended September 30, 1998 as compared to the corresponding
periods in 1997. Management fees decreased in the three months and increased in
the nine months ended September 30, 1998 in direct relation to changes in
revenues as described above. Reimbursed expenses increased primarily due to
higher allocated personnel costs resulting from staff additions and wage
increases in the 1998 periods.
Depreciation and amortization expense decreased from $136,900 to $82,200,
or by 40.0%, and from $470,700 to $257,800, or by 45.2%, for the three and nine
months ended September 30, 1998 as compared to the corresponding periods in
1997. The decreases were due to certain tangible assets becoming fully
depreciated and certain intangible assets becoming fully amortized.
Operating income increased from $99,300 to $150,300 and from $266,700 to
$441,100 for the three and nine months ended September 30, 1998 as compared to
the corresponding periods in 1997. The increases were primarily due to decreased
depreciation and amortization expense and lower insurance premiums as described
above.
-13-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Interest income, net of interest expense, increased from $5,100 to
$8,100, or by 58.8%, and from $13,800 to $14,200, or by 2.9%, for the three and
nine months ended September 30, 1998 as compared to the corresponding periods in
1997. The increases were due to higher average cash balances available for
investment in the 1998 periods.
Due to the factors described above, the Joint Venture's net income
increased from $104,400 to $158,400, or by 51.7% and from $280,500 to $455,300,
or by 62.3%, for the three and nine months ended September 30, 1998 as compared
to the corresponding periods in 1997.
EBITDA as a percentage of revenues decreased from 47.1% to 46.5% and from
50.0% to 46.7% for the three and nine months ended September 30, 1998 as
compared to the corresponding periods in 1997. The decreases were primarily due
to decreases in capitalization of labor and overhead costs and increases in
programming fees as described above. EBITDA decreased from $236,200 to $232,500,
or by 1.6%, and from $737,400 to $698,900, or by 5.2%, for the three and nine
months ended September 30, 1998 as compared to the corresponding periods in
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems and the Joint Venture, 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, debt service and capital
requirements relating to the expansion, improvement and upgrade of its cable
systems. The Partnership relies upon the availability of cash generated from
operations and possible borrowings to fund its ongoing expenses and capital
requirements. In general, these requirements involve expansion, improvement and
upgrade of the Partnership's and Joint Venture's existing cable television
systems.
In March 1997, the Partnership completed the initial construction phase
of the franchise-required rebuild of its Shelbyville, Illinois cable system and
the rebuild of its cable systems in surrounding communities. However, completion
of the entire project and the introduction of addressability will be delayed
until the 1999 completion of rebuild projects in other nearby communities that
involve consolidating the Shelbyville headend. Rebuild expenditures totaled
$426,100 in 1997. Project expenditures for the nine months ended September 30,
1998 were approximately $131,300. Total additional rebuild costs are expected to
approximate $60,000.
Additionally, the Joint Venture is required to rebuild its Auburn,
Illinois cable system at an estimated cost of $456,000 as a condition of its
franchise agreement. Capital expenditures related to the rebuild approximated
$430,900 as of December 31, 1997. The Joint Venture is also rebuilding portions
of its cable systems in surrounding communities at an estimated total additional
cost of approximately $1,500,000. Capital expenditures in the surrounding
communities approximated $876,600 as of December 31, 1997. Expenditures related
to the total rebuild were only $94,500 during the first nine months of 1998 due
to delays in obtaining certain permits. The Partnership and the Joint Venture
spent approximately $44,200 and $46,500, respectively, to upgrade other assets
in the first nine months of 1998. In addition, the Joint Venture
-14-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
is planning to upgrade its cable plant in Girard and Carlinville, Illinois
beginning in 1999 at an estimated cost of approximately $2.4 million provided
the franchise agreements are renewed. The renewed franchise agreements are
expected to require the Macoupin Joint Venture to upgrade the cable systems in
these franchise areas within three years. Management believes that existing cash
and cash generated by operations of the Partnership and Joint Venture will be
adequate to fund capital expenditures and the continued payment of distributions
during the remainder of 1998 and beyond.
The Partnership paid distributions totaling $125,900 and $377,800 during
the three and nine months ended September 30, 1998. However, there can be no
assurances regarding the level, timing or continuation of future distributions.
Beginning in August 1997, the Partnership and Joint Venture elected to
self-insure their 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.
While the Partnership and Joint Venture made the election to self-insure
for these risks based upon a comparison of historical damage sustained over the
previous five years with the cost and amount of insurance currently available,
there can be no assurance that future self-insured losses will not exceed prior
costs of maintaining insurance for these risks. Approximately 71% of the
Partnership's and Joint Venture's subscribers are served by their systems in
Shelbyville and Carlinville, Illinois and neighboring communities. Significant
damage to these systems due to seasonal weather conditions or other events could
have a material adverse effect on the Partnership's and Joint Venture's
liquidity and cash flows. The Partnership and Joint Venture continue to purchase
insurance coverage in amounts their management views as appropriate for all
other property, liability, automobile, workers' compensation and other types of
insurable risks.
In October 1998, the Partnership and Joint Venture reinstated third party
insurance coverage against damage to their cable distribution plant and
subscriber connections and against business interruptions resulting from such
damage. Although this coverage is subject to a significant annual deductible,
the policy is intended to insure the Partnership and Joint Venture against
catastrophic losses, if any, in future periods.
During the third quarter, the Corporate General Partner continued its
identification and evaluation of the Partnership's and Joint Venture's Year 2000
business risks and their exposure to computer systems, to operating equipment
which is date sensitive and to the interface systems of their vendors and
service providers. The evaluation has focused on identification and assessment
of systems and equipment 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, the Corporate General Partner
concluded that certain of the Partnership's and Joint Venture'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. The Corporate General Partner expects to install substantially all of
the new systems in the fourth quarter of 1998, with the remaining systems to be
installed in the first half of 1999. The total anticipated
-15-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
cost, including replacement software and hardware, will be borne by FCLP. FCLP
is utilizing internal and external resources to install the new systems. The
Partnership and Joint Venture do not believe that any other significant
information technology ("IT") projects affecting them have been delayed due to
efforts to identify and address Year 2000 issues.
Additionally, the Partnership and Joint Venture have inventoried their
operating and revenue generating equipment to identify items that need to be
upgraded or replaced and have surveyed cable equipment manufacturers to
determine which of their models require upgrade or replacement to become Year
2000 compliant. Identification and evaluation are essentially completed and a
plan is being developed to remediate non-compliant equipment prior to January 1,
2000. The Partnership and Joint Venture expect to complete their planning
process by the end of 1998. Upgrade or replacement, testing and implementation
will be performed in 1999. The cost of such replacement or remediation,
currently estimated at $16,000, is not expected to have a material effect on the
Partnership's or Joint Venture's financial position or results of operations.
The Partnership and Joint Venture have not incurred any costs related to the
Year 2000 project as of September 30, 1998. The Partnership and Joint Venture
plan to inventory, assess, replace and test equipment with embedded computer
chips in a separate segment of their project, presently scheduled for 1999.
The Partnership and Joint Venture have continued to survey their
significant third party vendors and service suppliers to determine the extent to
which their 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 and Joint Venture rely are
programming suppliers, power and telephone companies, various banking
institutions and a customer billing service. A majority of these service
suppliers either have not responded to 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 and Joint Venture must rely
will be Year 2000 compliant on a timely basis.
The Partnership and Joint Venture expect to develop a contingency plan in
1999 to address possible situations in which their various systems, or of third
parties with which they do 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 and Joint
Venture's results of operations and financial condition.
The Partnership's and Joint Venture'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 and Joint
Venture's ability to bill and/or collect payment from their customers, which
could negatively impact their 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 and Joint
Venture. Failure to achieve Year 2000 readiness in either area could have a
material adverse impact on the Partnership and Joint Venture. The Partnership
and Joint Venture are unable to estimate the possible effect on their results of
operations, liquidity and financial condition should their significant service
suppliers
-16-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 and Joint Venture will be
unable to provide the signal to their cable subscribers, which could result in a
loss of revenues. Due to the number of individually owned and operated channels
the Partnership and Joint Venture carry for their subscribers, and the packaging
of those channels, the Partnership and Joint Venture are unable to estimate any
reasonable dollar impact of such interruption.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Operating activities provided $382,900 less cash during the nine months
ended September 30, 1998 than in the corresponding prior year period. The
Partnership used $462,400 more cash to pay liabilities owed to the Corporate
General Partner and third party creditors due to differences in the timing of
payments. Changes in accounts receivable, prepaid expenses and other assets used
$95,500 less cash in the first nine months of 1998 than in the comparable 1997
period due to differences in the timing of receivable collections and in the
payment of prepaid expenses.
Investing activities used $70,800 more cash in the nine months ended
September 30, 1998 than in the corresponding prior year period. The change was
primarily due to a $44,800 decrease in proceeds from the sale of certain
partnership assets, a $17,400 increase in capital expenditures, and a $12,500
decrease in distributions from the Joint Venture, partially offset by a $3,900
decrease in expenditures for intangible assets.
INFLATION
Certain of the Joint Ventures' expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that the Joint Ventures are able to increase their
service rates periodically, of which there can be no assurance.
-17-
<PAGE>
ENSTAR INCOME PROGRAM IV-3, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None.
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ENSTAR INCOME PROGRAM IV-3, L.P.
a GEORGIA LIMITED PARTNERSHIP
-----------------------------
(Registrant)
By: ENSTAR COMMUNICATIONS CORPORATION
General Partner
Date: November 13, 1998 By: /s/ Michael K. Menerey
-------------------------
Michael K. Menerey,
Executive Vice President,
Chief Financial Officer and
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 653,200
<SECURITIES> 0
<RECEIVABLES> 26,100
<ALLOWANCES> 3,500
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,406,000
<DEPRECIATION> 4,588,500
<TOTAL-ASSETS> 3,896,100
<CURRENT-LIABILITIES> 313,800
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,896,100
<SALES> 0
<TOTAL-REVENUES> 1,998,800
<CGS> 0
<TOTAL-COSTS> 1,593,900
<OTHER-EXPENSES> (20,800)
<LOSS-PROVISION> 22,100
<INTEREST-EXPENSE> 9,600
<INCOME-PRETAX> 567,900
<INCOME-TAX> 0
<INCOME-CONTINUING> 567,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 567,900
<EPS-PRIMARY> 14.09
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