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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, 1997
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
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
----------------------------
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
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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 39,900 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.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program IV-3, 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 November 4,
1985. The general partners of the Partnership are Enstar Communications
Corporation, a Georgia corporation (the "Corporate General Partner"), and Robert
T. Graff, Jr. (the "Individual General Partner" and, together with the Corporate
General Partner, the "General Partners"). On September 30, 1988, ownership of
the Corporate General Partner was acquired by Falcon Cablevision, a California
limited partnership that has been engaged in the ownership and operation of
cable television systems since 1984 ("Falcon Cablevision"). The general partner
of Falcon Cablevision is Falcon Holding Group, L.P. ("FHGLP"), which provides
certain management services to the Partnership. The general partner of FHGLP is
Falcon Holding Group, Inc., a California corporation ("FHGI"). See Item 13.,
"Certain Relationships and Related Transactions." The General Partner, FHGLP and
affiliated companies are responsible for the day to day management of the
Partnership and its operations. See "Employees" below.
A cable television system receives television, radio and data signals
at the system's "headend" site by means of over-the-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The 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."
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 additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. The systems also offer to
their customers home shopping services, which pay the systems a share of
revenues from sales of products in the systems' service areas, in addition to
paying the systems a separate fee in return for carrying their shopping service.
Certain other new channels have also recently offered the cable systems managed
by FHGLP, including those of the Partnership, fees in return for carrying their
service. Due to a general lack of channel capacity available for adding new
channels, the Partnership's management cannot predict the impact
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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 began its cable television business operations in
January 1987 with the acquisition of three cable television systems that provide
service to customers in and around the municipalities of Fairfield and
Shelbyville, Illinois and Fulton, Kentucky.
In 1988 The Partnership entered into a general partnership agreement
with two affiliated partnerships (which are also cable television limited
partnerships sponsored by the General Partners) to form Enstar Cable of Macoupin
County (the "Joint Venture"). The Joint Venture was formed in order to enable
each of its partners to participate in the acquisition and ownership of a more
diverse pool of systems by combining certain of their financial resources. The
Joint Venture began its cable television business operations in January 1988
with the acquisition of a cable television system providing service in and
around the municipalities of Carlinville, Virden, Girard, Thayer and Auburn,
Illinois. As of December 31, 1997, cable systems owned by the Partnership and
the Joint Venture served approximately 6,000 and 4,400 basic subscribers,
respectively. Statements made in the remainder of this report regarding the
Partnership's operations and cable systems also apply to the Joint Venture's
operations and cable systems unless a separate discussion is provided.
FHGLP receives a management fee and reimbursement of expenses from the
Corporate General Partner for managing the Partnership's cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of FHGLP is Marc B. Nathanson. Mr.
Nathanson has managed FHGLP or its predecessors since 1975. Mr. Nathanson is a
veteran of more than 28 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices of
the Partnership, the Corporate General Partner and FHGLP are located at 10900
Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and their
telephone number is (310) 824-9990. See Item 10., "Directors and Executive
Officers of the Registrant."
BUSINESS STRATEGY
Historically, the 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. Cable
television service is necessary in many of the Partnership's markets to receive
a wide variety of television signals. In addition, these markets typically offer
fewer competing entertainment alternatives than large cities. As a result, the
Partnership's cable television systems generally have a more stable customer
base than similar systems in large cities. The Partnership believes that, in
comparison to urban systems, its cable television systems also generally have
lower labor, operating and system construction costs. 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 be
phased out altogether in 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership and Joint Venture expect Congress and
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the FCC to explore additional methods of regulating cable service rate
increases, including deferral or repeal of the March 31, 1999 sunset of CPST
rate regulations and legislation recently was introduced in Congress to repeal
the sunset provision. 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 and Joint Venture's business.
See "Legislation and Regulation" and Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Clustering
The Partnership has sought to acquire cable television operations in
communities that are proximate to other system 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," a number of the Partnership's
systems and all of the Joint Venture's systems have no available channel
capacity with which to add new channels or to further expand their use of
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, as well as possible new services
such as video games, video-on-demand and other interactive applications, so that
the systems remain competitive within the industry. In addition to these
potential revenue opportunities, plant upgrades will enhance picture quality and
system reliability, reduce operating costs and improve overall customer
satisfaction.
The Partnership's systems have an average channel capacity of 60 and 40
with 70% and 100% of the channel capacity utilized at December 31, 1997. The
Joint Venture's system had an average channel capacity of 38 which was fully
utilized at December 31, 1997.
The Partnership's and Joint Venture's management have selected a
technical standard that incorporates the use of fiber optic technology where
applicable in its engineering design for the majority of their 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 and telephony
services in the future after incurring incremental capital expenditures related
to these services. The Partnership and Joint Venture are also evaluating the use
of digital compression technology in their systems. See "Technological
Developments" and "Digital Compression."
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 1998 completion of rebuild projects in other nearby communities that
involve consolidating the Shelbyville headend. The entire project is estimated
to cost approximately $1,415,000, including budgeted 1998 expenditures of
approximately $190,000.
Additionally, the Joint Venture is rebuilding its cable system in
Auburn, Illinois and surrounding communities at an estimated total cost of
approximately $1,970,000, which includes expenditures of $660,000 in 1998 to
complete the project. The Macoupin Joint Venture is planning to upgrade its
cable plant in Girard and Carlinville, Illinois beginning in 1999 at an
estimated cost of approximately $2.4 million. The Partnership and the Joint
Venture anticipate capital expenditures in 1998 of approximately $105,000 and
$75,000, respectively, for the upgrade of other equipment. Management believes
that existing cash and cash
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generated by the operations of the Partnership and Joint Venture will be
adequate to fund capital expenditures and the continued payment of distributions
in 1998.
As discussed in prior reports, the Partnership and Joint Venture
postponed a number of rebuild and upgrade projects because of the uncertainty
related to implementation of the 1992 Cable Act and the negative impact thereof
on the Partnership's business and access to capital. As a result, the
Partnership's and Joint Venture's systems are significantly less technically
advanced than had been expected prior to the implementation of reregulation. The
Partnership believes that the delays in upgrading its and the Joint Venture's
systems have had an adverse effect on the value of those systems compared to
systems that have been rebuilt to a higher technical standard. See "Legislation
and Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Decentralized Management
The Corporate General Partner manages the Partnership's and Joint
Venture's systems on a decentralized basis. The Corporate General Partner
believes that its decentralized management structure, by enhancing management
presence at the system level, increases its sensitivity to the needs of its
customers, enhances the effectiveness of its customer service efforts,
eliminates the need for maintaining a large centralized corporate staff and
facilitates the maintenance of good relations with local governmental
authorities.
Marketing
The Partnership has made substantial changes in the way in which it
packages and sells its services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Pursuant to the FCC's rules, the Partnership has set rates for cable
related equipment (e.g., converter boxes and remote control devices) and
installation services based upon actual costs plus a reasonable profit and has
unbundled these charges from the charges for the provision of cable service. In
addition, in some systems, the Partnership began offering programming services
on an a la carte basis that were previously offered only as part of a package.
Services offered on an a la carte basis typically were made available for
purchase both individually and on a combined basis at a lower rate than the
aggregate a la carte rates. The FCC subsequently amended its rules to exclude
from rate regulation newly created packages of program services consisting only
of programming new to a cable system. The FCC also decided that newly-created
packages containing previously offered non-premium programming services will
henceforth be subject to rate regulation, whether or not the services also are
available on an existing a la carte basis. With respect to a la carte
programming packages created by the Partnership and numerous other cable
operators, the FCC decided that where only a few services had been moved from
regulated tiers to a non-premium programming package, the package will be
treated as if it were a tier of new program services, and thus not subject to
rate regulation. Substantially all of the a la carte programming packages
offered by the Partnership have received this desirable treatment. These
amendments to the FCC's rules have allowed the Partnership to resume its core
marketing strategy and reintroduce program service packaging. As a result, in
addition to the basic service package, customers in substantially all of the
systems may purchase an expanded group of regulated services, additional
unregulated packages of satellite-delivered services, and premium services. The
premium services may be purchased on either an a la carte or a discounted
packaged basis. See "Legislation and Regulation."
The Partnership has employed a variety of 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
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includes televised retention advertising that reinforces the value associated
with the initial decision to subscribe and that encourages 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 managers' 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. 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 managers 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 and the Joint Venture's cable systems as of December 31, 1997.
<TABLE>
<CAPTION>
Average
Monthly
Premium Revenue
Homes Basic Basic Service Premium Per Basic
System Passed1 Subscribers Penetration2 Units3 Penetration4 Subscriber5
------ ------- ----------- ------------ ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Enstar Income
Program IV-3, L.P.:
Shelbyville, IL 4,504 3,834 85.1% 1,037 27.0% $ 36.23
Fulton, KY 4,122 2,209 53.6% 538 24.4% $ 36.33
----- ----- -----
Total 8,626 6,043 70.1% 1,575 26.1% $ 36.27
===== ===== =====
Enstar Cable of
Macoupin County:
Macoupin, IL 6,483 4,427 68.3% 1,425 32.2% $ 37.04
</TABLE>
1 Homes passed refers to estimates by the Partnership and Joint Venture
of the approximate number of dwelling units in a particular community that can
be connected to the distribution system without any further extension of
principal transmission lines. Such estimates are based upon a variety of
sources, including billing records, house counts, city directories and other
local sources.
2 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, 1997.
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CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offer customers packages of
services that include the local area network, independent and educational
television stations, a limited number of television signals from distant cities,
numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA,
ESPN, TNT and The Disney Channel) and certain information and public access
channels. For an extra monthly charge, the systems provide certain premium
television services, such as HBO and Showtime. The Partnership also offers other
cable television services to its customers, including pay-per-view programming.
For additional charges, in most of the systems, 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 and Joint Venture vary
from system to system, depending upon a system's channel capacity and viewer
interests. Rates for services also vary from market to market and according to
the type of services selected.
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 and Joint Venture's
systems not deemed to be subject to effective competition under the FCC's
definition. Currently, none of the Partnership's or Joint Venture's systems are
subject to effective competition. See "Legislation and Regulation."
At December 31, 1997, the Partnership's and Joint Venture's monthly
rates for basic cable service for residential customers, excluding special
senior citizen discount rates, ranged from $18.84 to $25.67 and their premium
service rate was $11.95, excluding special promotions offered periodically in
conjunction with the Partnership's and Joint Venture's marketing programs. A
one-time installation fee, which the Partnership and Joint Venture 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 and Joint
Venture's business operations are employed by the Partnership, the Joint
Venture, the Corporate General Partner, its subsidiary corporation and FHGLP. As
of February 6, 1998, the Partnership had four employees and the Joint Venture
had one employee, the cost of which is charged directly to the Partnership and
Joint Venture. The employment costs incurred by the Corporate General Partner,
its subsidiary corporation and FHGLP are allocated and charged to the
Partnership and the Joint Venture for reimbursement pursuant to the partnership
agreement and management agreement. Other personnel required to operate the
Partnership's and Joint Venture's business operations are employed by affiliates
of the Corporate General Partner. The cost of such employment is allocated and
charged to the Partnership and Joint Venture. The amounts of these reimbursable
costs are set forth below in Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership seeks to
apply technological advances in the cable television industry to its cable
television systems on the basis of cost effectiveness, enhancement of product
quality and service delivery and industry-wide acceptance. The Partnership
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continues 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 60 in systems that serve 37% of its customers and an average channel capacity
of 40 in systems that serve 63% of the customers and, on average, utilize 70%
and 100% of their channel capacity. The Joint Venture's systems have an average
channel capacity of 40 in systems that serve substantially all of the Joint
Venture's customers and utilize 100% of their channel capacity. The Partnership
believes that system upgrades would enable it and the Joint Venture to provide
customers with greater programming diversity, better picture quality and
alternative communications delivery systems made possible by the introduction of
fiber optic technology and by the possible future application of digital
compression. The implementation of the Partnership's and Joint Venture's capital
expenditure plans is, however, dependent in part on the availability of adequate
capital on terms satisfactory to the Partnership, of which there can be no
assurance. See "Business Strategy - Capital Expenditures," "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 is expected to enable cable operators to
increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. Depending on the technical characteristics of the
existing system, the Partnership believes that the utilization of digital
compression technology in the future could enable its systems to increase
channel capacity in certain systems in a manner that could, in the short term,
be more cost efficient than rebuilding such systems with higher capacity
distribution plant. However, 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 in the systems also could expand the number and types of services
these systems offer and enhance the development of current and future revenue
sources. Equipment vendors are beginning to market products to provide this
technology, but the Partnership's management has no plans to install it at this
time based on the current technological profile of its systems and its present
understanding of the costs as compared to the benefits of the digital equipment
currently available. This issue is under frequent management review.
PROGRAMMING
The Partnership and the Joint Venture purchase basic and premium
programming for their systems from Falcon Cablevision. In turn, Falcon
Cablevision charges the Partnership and Joint Venture for these costs based on
an estimate of what the Corporate General Partner could negotiate for such
services for the 15 partnerships managed by the Corporate General Partner as a
group (approximately 92,700 basic subscriber at December 31, 1997), which is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Certain other new channels have also
recently offered Cablevision and the Partnership's and Joint Venture'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 certain such payments from programmers be offset against the
programming fee increases which can be passed through to subscribers
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under the FCC's rate regulations. Falcon Cablevision's programming contracts are
generally for a fixed period of time and are subject to negotiated renewal.
Falcon Cablevision does not have long-term programming contracts for the supply
of a substantial amount of its programming. Accordingly, no assurance can be
given that its, and correspondingly the Partnership's and Joint Venture's,
programming costs will not continue to increase substantially in the near
future, or that other materially adverse terms will not be added to Falcon
Cablevision's programming contracts. Management believes, however, that Falcon
Cablevision's relations with its programming suppliers generally are good.
The Partnership's and Joint Venture's cable programming costs have
increased in recent years and are expected to continue to increase due to
additional programming being provided to basic customers, requirements to carry
channels under retransmission carriage agreements entered into with certain
programming sources, increased costs to produce or purchase cable programming
generally (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, 1995, or the date a system's basic cable
service became regulated, may be passed through to customers. See "Legislation
and Regulation - Federal Regulation - Carriage of Broadcast Television Signals."
Generally, programming costs are charged among systems on a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the 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, 1997, the Partnership held seven 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, 1997.
<TABLE>
<CAPTION>
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
- -------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Prior to 1999 0 0 0.0%
1999 - 2003 4 4,088 67.6%
2004 and after 3 1,709 28.3%
- ----- ----
Total 7 5,797 95.9%
= ===== ====
</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
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franchise is necessary. In the aggregate, approximately 246 customers,
comprising approximately 4.1% 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.
Macoupin Joint Venture
As of December 31, 1997, the Joint Venture held seven franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Joint Venture's
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 Joint Venture's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
- -------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Prior to 1999 4 3,239 73.2%
1999-2003 1 88 2.0%
2004 and after 2 1,100 24.8%
- ----- -----
Total 7 4,427 100.0%
= ===== =====
</TABLE>
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 Joint Venture's clustering
strategy. The Joint Venture has never had a franchise revoked for any of its
systems and believes that it has satisfactory relationships with 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 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 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
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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. 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.
Multichannel multipoint distribution systems ("wireless cable") deliver
programming services over microwave channels licensed by the FCC 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 may enable wireless cable
systems to deliver more channels.
Private cable television systems compete for service to 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
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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 will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC 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 is in 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.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, wireless cable,
SMATV or as traditional franchised cable system operators. Alternatively, the
1996 Telecom Act authorizes local telephone companies to operate "open video
systems" without obtaining a local cable franchise, although telephone companies
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Up to two-thirds of the channel capacity
on an "open video system" must be available to programmers unaffiliated with the
local telephone company. The open video system concept replaces the FCC's video
dialtone rules. The 1996 Telecom Act also includes numerous provisions designed
to make it easier for cable operators and others to compete directly with local
exchange telephone carriers.
The cable television industry competes with radio, television, print
media and the Internet for advertising revenues. As the cable television
industry continues to develop programming designed specifically for distribution
by cable, advertising revenues may increase. Premium programming provided by
cable systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services may
depend largely upon the continued availability of attractive programming at
competitive prices.
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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<PAGE> 14
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 and Joint Venture.
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 expanded the definition of effective competition to include
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except DBS. 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. Because
cable service rate increases have continued to outpace inflation under the FCC's
existing regulations, Congress and the FCC can be expected to explore additional
methods of addressing this issue, including deferral or repeal of the March 31,
1999 sunset of CPST rate regulations and legislation recently was introduced in
Congress to repeal the sunset provision.
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
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<PAGE> 15
basic and/or nonbasic cable services and associated equipment, and refunds can
be required. The rate regulations adopt a benchmark price cap system for
measuring the reasonableness of existing basic and nonbasic service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. In addition, new product
tiers consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met such as not moving services
from existing tiers to the new tier. These provisions currently provide limited
benefit to the Partnership's and Joint Venture's systems due to the lack of
channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the Partnership and Joint Venture for basic cable service
and for associated basic cable service equipment.
The Partnership and Joint Venture have adjusted their regulated
programming service rates and related equipment and installation charges in
substantially all of their service areas so as to bring these rates and charges
into compliance with the applicable benchmark or equipment and installation cost
levels.
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, this exemption from compliance with the
statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act 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 will have to obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WGN. The Partnership and Joint
Venture have 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, and the
Partnership and Joint Venture were once again able to complete negotiations with
broadcasters with essentially no change to the previous agreements. The next
election between must-carry and retransmission consent for local commercial
television broadcast stations will be October 1, 1999.
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<PAGE> 16
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 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 video providers to vertically integrated, satellite-distributed
cable programming services. The FCC has commenced a rulemaking proceeding to
seek comment on proposed modifications to its existing rules implementing the
statute, including: (1) establishing specific deadlines for resolving program
access complaints; (2) improving the discovery process, such as requiring the
disclosure of the rates that vertically integrated programmers charge cable
operators; (3) imposing monetary damages for program access violations; (4)
possibly applying the program access rules to certain situations in which
programming is moved from satellite delivery to terrestrial delivery; and (5)
revising the manner in which the rules apply to program buying cooperatives. It
is not clear to what extent, if any, the provisions of the 1992 Cable Act cover
programming distributed by means other than satellite or by programmers
unaffiliated with multiple system operators. Legislation also is expected to be
introduced shortly in Congress to strengthen the program access provisions of
the 1992 Cable Act.
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
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<PAGE> 17
runs from the submission of the renewal proposal, not the completion of the
public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
For alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC. The FCC has
recently changed the formula in order to produce lower rates and thereby
encourage the use of leased access.
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" without obtaining a local cable franchise. See "Competition."
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's signal strength as defined by the FCC's rules) covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminates the
statutory ban and directs the FCC to review its rule within two years. 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),
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<PAGE> 18
officerships, directorships and general partnership interests. 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 (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, inter
alia, 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 the marketplace. The FCC must adopt rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable systems and other multichannel
video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. The states of Illinois and Kentucky where the
Partnership and Joint Venture operate cable systems have certified to the FCC
that they regulate the rates, terms and conditions for pole attachments. In the
absence of state regulation, the FCC administers such pole attachment rates
through use of a formula which it has devised. As directed by the 1996 Telecom
Act, the FCC has adopted a new rate formula for any attaching party, including
cable systems, which offer
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<PAGE> 19
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems which choose to offer such services,
but does not begin to take effect until 2001.
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;
EEO; 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"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves, 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 number
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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.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
ITEM 2. PROPERTIES
The Partnership and Joint Venture own or lease parcels of real property
for signal reception sites (antenna towers and headends), microwave facilities
and business offices, and own or lease their service vehicles. The Partnership
and Joint Venture believe that their properties, both owned and leased, are in
good condition and are suitable and adequate for the their business operations.
The Partnership and Joint Venture own substantially all of the assets
related to their cable television operations, including their program production
equipment, headend (towers, antennae, electronic equipment and satellite earth
stations), cable plant (distribution equipment, amplifiers, customer drops and
hardware), converters, test equipment and tools and maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
The Partnership and Joint Venture are periodically parties to various
legal proceedings. Such legal proceedings are ordinary and routine litigation
proceedings that are incidental to the Partnership's and Joint Venture's
businesses 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 or Joint Venture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED
SECURITY HOLDER MATTERS
LIQUIDITY
While the Partnership's equity securities, which consist of units of
limited partnership interests, are publicly held, there is no established public
trading market for the units and it is not expected that a market will develop
in the future. The approximate number of equity security holders of record was
1,030 as of December 31, 1997. In addition to restrictions on the
transferability of units contained in the Partnership Agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 12% 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 20% to the general partners and 80% to the limited
partners. Any losses from system sales or exchanges shall be allocated first to
all partners having positive capital account balances (based on their respective
capital accounts) until all such accounts are reduced to zero and thereafter to
the Corporate General Partner. All allocations to individual limited partners
will be based on their respective limited partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
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 monthly 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 month to
month 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 liquidity requirements.
However, on February 22, 1994, the FCC announced significant amendments to its
rules implementing certain provisions of the 1992 Cable Act. Compliance with
these rules has had a negative impact on the Partnership's revenues and cash
flow.
The Partnership began making periodic cash distributions to limited
partners from operations during 1987 and distributed $498,800 ($12.50 per unit)
in each of 1995, 1996 and 1997. The Partnership will continue to determine the
Partnership's ability to pay distributions on a quarter-by-quarter basis. See
"Liquidity and Capital Resources."
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<PAGE> 22
The Partnership's ability to pay distributions, the actual level of
distribution, and the continuance of distributions, if any, will depend on a
number of factors, including the amount of cash flow from operations, projected
capital expenditures, provision for contingent liabilities, availability of bank
refinancing, regulatory or legislative developments governing the cable
television industry, and growth in customers. Some of these factors are beyond
the control of the Partnership, and consequently, no assurances can be given
regarding the level or timing of future distributions.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and the
Joint Venture for the five years ended December 31, 1997. This data should be
read in conjunction with the Partnership's and Joint Venture's financial
statements included in Item 8 hereof and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7.
I. THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,222,100 $ 2,241,600 $ 2,311,800 $ 2,489,000 $ 2,658,100
Costs and expenses (1,339,900) (1,448,800) (1,442,700) (1,428,700) (1,582,900)
Depreciation and amortization (727,100) (712,500) (689,100) (703,600) (499,700)
------------ ------------ ------------ ------------ ------------
Operating income 155,100 80,300 180,000 356,700 575,500
Interest expense (78,400) (58,500) (61,800) (30,500) (12,900)
Interest income 20,400 9,600 32,000 23,400 32,500
Gain (loss) on sale of assets -- -- -- (4,700) 45,000
Equity in net income (loss)
of Joint Venture (36,200) 11,900 28,000 123,500 131,900
------------ ------------ ------------ ------------ ------------
Net income $ 60,900 $ 43,300 $ 178,200 $ 468,400 $ 772,000
============ ============ ============ ============ ============
Distributions paid to partners $ 503,800 $ 503,800 $ 503,800 $ 503,800 $ 503,800
============ ============ ============ ============ ============
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income $ 1.51 $ 1.07 $ 4.42 $ 11.62 $ 19.16
============ ============ ============ ============ ============
Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash provided by operating
activities $ 811,500 $ 752,400 $ 1,174,100 $ 661,300 $ 1,342,100
Net cash provided by (used in)
investing activities (247,800) 179,700 (392,800) (265,800) (500,900)
Net cash used in financing
activities (1,495,800) (509,400) (503,800) (887,000) (503,800)
EBITDA1 882,200 792,800 869,100 1,060,300 1,075,200
EBITDA to revenues 39.7% 35.4% 37.6% 42.6% 40.4%
Total debt to EBITDA 0.4x 0.5x 0.4x -- --
Capital expenditures $ 227,900 $ 122,700 $ 373,700 $ 608,900 $ 556,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 4,734,600 $ 4,275,600 $ 4,293,800 $ 3,504,300 $ 4,113,300
Total debt 383,200 383,200 383,200 -- --
General partners' deficit (43,900) (48,500) (51,700) (52,000) (49,300)
Limited partners' capital 3,989,400 3,533,500 3,211,100 3,176,000 3,441,500
</TABLE>
-23-
<PAGE> 24
II. ENSTAR CABLE OF MACOUPIN COUNTY
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,572,900 $ 1,590,800 $ 1,646,000 $ 1,870,600 $ 1,975,900
Costs and expenses (863,500) (876,900) (959,200) (898,300) (1,020,900)
Depreciation and amortization (826,500) (703,900) (634,800) (614,400) (575,400)
------------ ------------ ------------ ------------ ------------
Operating income (loss) (117,100) 10,000 52,000 357,900 379,600
Gain on sale of cable assets -- -- -- 600 --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (108,600) $ 35,700 $ 84,000 $ 370,500 $ 395,700
============ ============ ============ ============ ============
Distributions to venturers $ -- $ 1,050,000 $ -- $ 1,050,000 $ 75,000
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash provided by operating
activities $ 734,100 $ 750,300 $ 799,900 $ 860,200 $ 838,000
Net cash used in investing
activities (123,500) (134,700) (340,000) (439,800) (689,400)
Net cash used in financing
activities -- (1,050,000) -- (1,050,000) (75,000)
EBITDA(1) 709,400 713,900 686,800 972,300 955,000
EBITDA to revenues 45.1% 44.9% 41.7% 52.0% 48.3%
Capital expenditures 115,500 $ 126,900 $ 325,500 $ 411,200 $ 677,900
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 3,662,700 $ 2,647,600 $ 2,840,100 $ 2,084,400 $ 2,564,000
Venturers' capital 3,414,900 2,400,600 2,484,600 1,805,100 2,125,800
</TABLE>
- -------------------
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on their experience in the cable television industry, the
Partnership and Joint Venture believe 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 should not be considered by the reader as an
alternative to net income, as an indicator of the Partnership's or Joint
Venture's financial performance or as an alternative to cash flows as a measure
of liquidity.
-24-
<PAGE> 25
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 and Joint Venture'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 be phased out
altogether in 1999. Because cable service rate increases have continued to
outpace inflation under the FCC's existing regulations, the Partnership and
Joint Venture expect Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 sunset of CPST rate regulations and legislation recently was
introduced in Congress to repeal the sunset provision. 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
and Joint Venture's business. Accordingly, the Partnership's and Joint Venture's
historical financial results as described below are not necessarily indicative
of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership and Joint Venture. Such forward looking statements involve risks and
uncertainties including, without limitation, the uncertainty of legislative and
regulatory changes and the rapid developments in the competitive environment
facing cable television operators such as the Partnership and the Joint Venture,
as discussed more fully elsewhere in this Report.
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 Enstar Cable of Macoupin County. The Joint Venture is owned equally
by the Partnership and two affiliated partnerships (Enstar Income Program IV-1,
L.P. and Enstar Income Program IV-2, L.P.). The Partnership participates equally
with its 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
1997 COMPARED TO 1996
The Partnership's revenues increased from $2,489,000 to $2,658,100, or
by 6.8%, for the year ended December 31, 1997 as compared to 1996. Of the
$169,100 increase, $207,700 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, and $33,600 was due to the July 1, 1996
restructuring of The Disney Channel from a premium channel to a tier channel.
These increases were partially offset by a decrease of $45,300 due to decreases
in the number of subscriptions for basic, premium and tier services and by a
$26,900 decrease in other revenue producing items including advertising sales
revenue. As of December 31, 1997, the Partnership had approximately 6,000 basic
subscribers and 1,600 premium service units.
-25-
<PAGE> 26
Service costs increased from $771,100 to $876,900, or by 13.7%, for the
year ended December 31, 1997 as compared to 1996. Service costs represent costs
directly attributable to providing cable services to customers. The increase was
primarily due to increases in programming expense and decreases in
capitalization of labor and overhead costs. Programming expense increased
primarily as a result of higher rates charged by program suppliers and due to
channel additions. Decreases in capitalization of labor and overhead costs
resulted from reductions in construction activity related to the rebuild of the
Partnership's Shelbyville, Illinois cable system.
General and administrative expenses increased from $341,200 to
$364,100, or by 6.7%, for the year ended December 31, 1997 as compared to 1996,
primarily due to an increase in bad debt expense and professional fees.
Management fees and reimbursed expenses increased from $316,400 to
$341,900, or by 8.1%, for the year ended December 31, 1997 as compared to 1996.
Management fees increased in direct relation to increased revenues as discussed
above. Reimbursed expenses increased due to higher allocated personnel costs
resulting from staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
42.6% to 40.4% for the year ended December 31, 1997 as compared to 1996. The
decrease was primarily due to increased programming expense. EBITDA increased
from $1,060,300 to $1,075,200, or by 1.4%, for the year ended December 31, 1997
as compared to 1996. EBITDA should be considered in addition to and not as a
substitute for net income and cash flows determined in accordance with generally
accepted accounting principles as an indicator of financial performance and
liquidity.
Depreciation and amortization expense decreased from $703,600 to
$499,700, or by 29.0%, for the year ended December 31, 1997 as compared to 1996,
due to certain plant assets becoming fully depreciated and certain intangible
assets becoming fully amortized.
Operating income increased from $356,700 to $575,500, or by 61.3%, for
the year ended December 31, 1997 as compared to 1996, primarily due to increased
revenues and decreased depreciation and amortization as discussed above.
Interest expense decreased from $30,500 to $12,900, or by 57.7%, for
the year ended December 31, 1997 as compared to 1996 due to the repayment of the
Partnership's note payable in February 1996.
Interest income increased by $23,400 to $32,500, or by 38.9%, for the
year ended December 31, 1997 as compared to 1996. The increase was primarily due
to higher average cash balances available for investment and due to a change in
investment policy that yielded a greater return on invested cash.
The Partnership sold a building in June 1997 and recognized a $45,000
gain on the sale.
Due to the factors described above, the Partnership's net income
increased from $468,400 to $772,000 for the year ended December 31, 1997 as
compared to 1996.
1996 COMPARED TO 1995
The Partnership's revenues increased from $2,311,800 to $2,489,000, or
by 7.7%, for the year ended December 31, 1996 as compared to 1995. Of the
$177,200 increase, $175,600 was due to increases in regulated service rates that
were implemented by the Partnership in the second and fourth quarters of 1996,
-26-
<PAGE> 27
$41,400 was due to increases in other revenue producing items including
advertising sales and $35,700 was due to the July 1, 1996 restructuring of The
Disney Channel from a premium channel to a tier channel. These increases were
partially offset by a $75,500 decrease in revenues due to a decrease in the
number of subscriptions for services. As of December 31, 1996, the Partnership
had approximately 6,200 basic subscribers and 2,000 premium service units.
Service costs decreased from $804,700 to $771,100, or by 4.2%, for the
year ended December 31, 1996 as compared to 1995. Service costs represent costs
directly attributable to providing cable services to customers. Capitalization
of labor and overhead expense resulting from the rebuild of the Partnership's
Shelbyville, Illinois cable system during 1996 accounted for the majority of the
decrease for the year.
General and administrative expenses increased from $333,600 to
$341,200, or by 2.3%, for the year ended December 31, 1996 as compared to 1995,
primarily due to an increase in marketing expenses. Increases in expenses
allocated by an affiliate of the Corporate General Partner that provides system
operating management services to the Partnership also accounted for the increase
in 1996.
Management fees and reimbursed expenses increased from $304,400 to
$316,400, or by 3.9%, for the year ended December 31, 1996 as compared to 1995.
Management fees increased in direct relation to increased revenues as described
above. Reimbursed expenses increased primarily due to higher allocated personnel
costs resulting from staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues increased from
37.6% during 1995 to 42.6% in 1996. The increase was principally attributable to
increased revenues. EBITDA increased from $869,100 to $1,060,300, or by 22.0%,
in 1996 compared to 1995. EBITDA should be considered in addition to and not as
a substitute for net income and cash flows determined in accordance with
generally accepted accounting principles as an indicator of financial
performance and liquidity.
Depreciation and amortization expense increased from $689,100 to
$703,600, or by 2.1%, for the year ended December 31, 1996 as compared to 1995,
due to asset additions related to the upgrade of the Partnership's plant.
Operating income increased from $180,000 to $356,700, or by 98.2%, for
the year ended December 31, 1996 as compared to 1995, primarily due to increased
revenues as described above.
Interest expense decreased from $61,800 to $30,500, or by 50.7%, for
the year ended December 31, 1996 as compared to 1995 due to the repayment of the
Partnership's note payable in February 1996. The decrease was partially offset
by a corresponding write-off to interest expense of the related deferred loan
costs.
Interest income decreased from $32,000 to $23,400, or by 26.9%, for the
year ended December 31, 1996 as compared to 1995 due to lower average interest
rates earned on invested funds and lower average cash balances available for
investment.
Due to the factors described above, the Partnership's net income
increased from $178,200 to $468,400 for the year ended December 31, 1996 as
compared to 1995.
-27-
<PAGE> 28
DISTRIBUTIONS TO PARTNERS
The Partnership received distributions totaling $350,000 and $25,000
from the Joint Venture during 1996 and 1997, respectively. The Joint Venture did
not make distributions during 1995. The Partnership distributed $503,800 to its
partners in each of 1995, 1996 and 1997.
THE MACOUPIN JOINT VENTURE
1997 COMPARED TO 1996
The Joint Venture's revenues increased from $1,870,600 to $1,975,900,
or by 5.6%, for the year ended December 31, 1997 as compared to 1996. Of the
$105,300 increase, $156,500 was due to increases in regulated service rates that
were implemented by the Joint Venture in the second and fourth quarters of 1996
and the fourth quarter of 1997, and $24,100 was due to the July 1, 1996
restructuring of The Disney Channel from a premium channel to a tier channel.
These increases were partially offset by a $46,500 decrease in other revenue
producing items including advertising sales revenue, and by a $28,800 decrease
in revenues due to decreases in the number of subscriptions for premium, tier
and equipment rental services. As of December 31, 1997, the Joint Venture had
approximately 4,400 basic subscribers and 1,400 premium service units.
Service costs increased from $532,500 to $573,000, or by 7.6%, for the
year ended December 31, 1997 as compared to 1996. Service costs represent costs
directly attributable to providing cable services to customers. The increase was
primarily due to higher programming expense. Programming expense increased as a
result of higher rates charged by program suppliers.
General and administrative expenses increased from $109,500 to
$149,200, or by 36.3%, for the year ended December 31, 1997 as compared to 1996.
The increase was primarily due to increased insurance costs.
Management fees and reimbursed expenses increased from $256,300 to
$298,700, or by 16.5%, for the year ended December 31, 1997 as compared to 1996.
Management fees increased in direct relation to increased revenues as discussed
above. Reimbursed expenses increased in 1997 due to higher allocated personnel
costs resulting from staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
52.0% in 1996 to 48.3% in 1997. The decrease was primarily due to higher
programming expense and insurance costs. EBITDA decreased from $972,300 to
$955,000, or by 1.8%, for the year ended December 31, 1997 as compared to 1996.
EBITDA should be considered in addition to and not as a substitute for net
income and cash flows determined in accordance with generally accepted
accounting principles as an indicator of financial performance and liquidity.
Depreciation and amortization expense decreased from $614,400 to
$575,400, or by 6.3%, for the year ended December 31, 1997 as compared to 1996,
due to the effect of certain intangible assets becoming fully amortized.
Operating income increased from $357,900 to $379,600, or by 6.1%, for
the year ended December 31, 1997 as compared to 1996, primarily due to increased
revenues as discussed above.
Interest income, net of interest expense, increased from $12,000 to
$16,100, or by 34.2%, for the year ended December 31, 1997 as compared to 1996.
The increase was primarily due to higher average
-28-
<PAGE> 29
cash balances available for investment and due to a change in investment policy
that yielded a greater return on invested cash.
Due to the factors described above, the Joint Venture's net income
increased from $370,500 to $395,700, or by 6.8%, for the year ended December 31,
1997 as compared to 1996.
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $1,646,000 to $1,870,600,
or by 13.6%, for the year ended December 31, 1996 as compared to 1995. Of the
$224,600 increase, $134,700 was due to increases in regulated service rates that
were implemented by the Joint Venture in the second and fourth quarters of 1996,
$74,400 was due to increases in other revenue producing items including
advertising sales and $25,800 was due to the July 1, 1996 restructuring of The
Disney Channel from a premium channel to a tier channel. These increases were
offset by a $10,300 decrease due to decreases in the number of subscriptions for
services. As of December 31, 1996, the Joint Venture had approximately 4,500
basic subscribers and 1,800 premium service units.
Service costs increased from $500,300 to $532,500, or by 6.4%, for the
year ended December 31, 1996 as compared to 1995. Service costs represent costs
directly attributable to providing cable services to customers. Programming
fees, copyright fees and franchise fees accounted for the majority of the
increase. The increase in programming fees was due to higher rates charged by
program suppliers and also included an increase related to the restructuring of
The Disney Channel discussed above. Copyright fees and franchise fees increased
in direct relation to increased revenues.
General and administrative expenses decreased from $232,300 to
$109,500, or by 52.9%, for the year ended December 31, 1996 as compared to 1995,
primarily due to lower insurance expense including workers' compensation
insurance costs. An increase in capitalization of labor and overhead costs
related to the rebuild of the Joint Venture's Auburn, Illinois franchise area
also accounted for the decrease for the year.
Management fees and reimbursed expenses increased from $226,600 to
$256,300, or by 13.1%, for the year ended December 31, 1996 as compared to 1995.
Management fees increased in direct relation to increased revenues as described
above. Reimbursable expenses increased, primarily due to higher allocated
personnel costs resulting from staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues increased from
41.7% in 1995 to 52.0% in 1996. The increase was caused primarily by higher
revenues and lower insurance expense as described above. EBITDA increased from
$686,800 to $972,300, or by 41.6%, in 1996 as compared to 1995. EBITDA should be
considered in addition to and not as a substitute for net income and cash flows
determined in accordance with generally accepted accounting principles as an
indicator of financial performance and liquidity.
Depreciation and amortization expense decreased from $634,800 to
$614,400, or by 3.2%, for the year ended December 31, 1996 as compared to 1995
due to the effect of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Operating income increased from $52,000 to $357,900 for the year ended
December 31, 1996 as compared to 1995, primarily due to increased revenues and
lower insurance expense as described above.
-29-
<PAGE> 30
Interest income, net of interest expense, decreased from $32,000 to
$12,000, or by 62.5%, for the year ended December 31, 1996 as compared to 1995
due to lower average cash balances available for investment.
Due to the factors described above, the Joint Venture's net income
increased from $84,000 to $370,500 for the year ended December 31, 1996 as
compared to 1995.
DISTRIBUTIONS TO PARTNERS
The Macoupin Joint Venture distributed $1,050,000 and $75,000 equally
among its three partners in 1996 and 1997, respectively. No distributions were
made during 1995.
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 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 1998 completion of rebuild projects in other nearby communities that
involve consolidating the Shelbyville headend. Rebuild expenditures totaled
$426,100 in 1997. Total additional rebuild costs are expected to approximate
$190,000 in 1998.
Additionally, the Joint Venture is required to rebuild its Auburn,
Illinois cable system as a condition of its franchise agreement. Construction
began in July 1996 and is expected to be completed in the first half of 1998.
Capital expenditures related to the rebuild approximated $226,000 and $204,900
in 1996 and 1997, with additional construction costs of $25,000 projected for
1998. 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, which included expenditures of approximately $416,600 in 1997. The
Joint Venture has budgeted additional expenditures of $635,000 to complete the
rebuild. In addition, the Joint Venture is planning to upgrade its cable plant
in Girard and Carlinville, Illinois beginning in 1999 at an estimated cost of
approximately $2.4 million. The Partnership and the Joint Venture incurred
expenditures of $129,900 and $56,400, respectively, to upgrade other assets in
1997 and anticipate capital expenditures in 1998 of $105,000 and $75,000,
respectively, for the upgrade of additional equipment. 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 in 1998.
The Partnership paid distributions totaling $503,800 during 1997.
However, there can 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 and Joint Venture'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.
-30-
<PAGE> 31
While the Corporate General Partner has made the election to
self-insure for these risks based upon a comparison of historical damage
sustained over the past 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.
The "Year 2000" issue refers to certain contingencies that could result
from computer programs being written using two digits rather than four to define
the year. Many existing computer systems, including certain systems of the
Partnership and Joint Venture, process transactions based on two digits for the
year of the transaction (for example, "97" for 1997). These computer systems may
not operate effectively when the last two digits become "00," as will occur on
January 1, 2000.
The Corporate General Partner has commenced an assessment of its Year
2000 business risks and its exposure to computer systems, to operating equipment
which is date sensitive and to its vendors and service providers. Based on a
preliminary study, the Corporate General Partner has concluded that certain of
its information systems were not Year 2000 compliant and has elected to replace
such software and hardware with Year 2000 compliant applications and equipment,
although the decision to replace major portions of such software and hardware
had previously been made without regard to the Year 2000 issue based on
operating and performance criteria. The Corporate General Partner expects to
install substantially all of the new systems in 1998, with the remaining systems
to be installed in the first half of 1999. The total anticipated cost, including
replacement software and hardware, will be borne by FHGLP.
In addition to evaluating its internal systems, the Corporate General
Partner has also initiated communications with its third party vendors and
service suppliers to determine the extent to which the Partnership's and Joint
Venture's interface systems are vulnerable should those third parties fail to
solve their own Year 2000 problems on a timely basis. There can be no assurance
that the systems of other companies on which the Partnership's and Joint
Venture's systems rely will be timely converted and that the failure to do so
would not have an adverse impact on the Partnership's and Joint Venture's
systems. The Partnership and Joint Venture continue to closely monitor
developments with their vendors and service suppliers.
1997 VS. 1996
Operating activities provided $680,800 more cash during 1997 than in
1996. The Partnership used $711,700 less 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 $55,200 more cash in 1997 than in the prior year, due to differences
in the timing of receivable collections and the payment of prepaid expenses.
Investing activities used $235,100 more cash in 1997 than in 1996. The
change was primarily due to a $325,000 decrease in distributions received from
the Joint Venture and a $6,500 increase in expenditures for intangible assets,
partially offset by a $52,900 decrease in capital expenditures, and a $43,500
increase in proceeds from the sale of certain Partnership assets. The
Partnership used $383,200 less cash in financing activities during 1997 due to
the repayment of its note payable in February 1996.
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<PAGE> 32
1996 VS. 1995
Operating activities provided $512,800 less cash during 1996 than in
1995. The Partnership used $714,600 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 and prepaid expenses used
$18,500 more cash in 1996 than in 1995 due to differences in the timing of
receivable collections and the payment of prepaid expenses.
The Partnership used $127,000 less cash in investing activities during
1996 than in 1995 due to a $350,000 increase in distributions from the Joint
Venture, a $10,700 decrease in expenditures for intangible assets and $1,500 in
proceeds from the sale of equipment. The increases in cash were partially offset
by a $235,200 increase in capital expenditures. The Partnership used $383,200
more cash in financing activities during 1996 than in 1995 to repay its note
payable.
INFLATION
Certain of the Partnership's and Joint Venture'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 and Joint Venture are
able to increase their service rates periodically, of which there can be no
assurance. See "Legislation and Regulation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVES 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, 1997, the Corporate General Partner managed cable television
systems serving approximately 92,700 basic subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP currently
operates cable systems through a series of subsidiaries and also controls the
general partners of the 15 limited partnerships which operate under the Enstar
name (including the Partnership). Although these limited partnerships are
affiliated with FHGLP, their assets are owned by legal entities separate from
the Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner:
NAME POSITION
- ---- --------
Marc B. Nathanson Director, Chairman of the Board and Chief Executive
Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General
Counsel
Michael K. Menerey Director, Executive Vice President, Chief
Financial Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Thomas J. Hatchell Executive Vice President - Operations
Jon W. Lunsford Executive Vice President - Finance
Abel C. Crespo Controller
MARC B. NATHANSON, 52, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995
also served as President. He has been Chairman of the Board and Chief Executive
Officer of Enstar Communications Corporation since October 1988, and also served
as its President prior to September 1995. Prior to 1975, Mr. Nathanson was Vice
President of Marketing for Teleprompter Corporation, at that time the largest
multiple-system cable operator in the United States. He also held executive
positions with Warner Cable and Cypress Communications Corporation. He is a
former President of the California Cable Television Association and a member of
Cable Pioneers. He is currently a Director of the National Cable Television
Association ("NCTA"). At the 1986 NCTA convention, Mr. Nathanson was honored by
being named the recipient of the Vanguard Award for outstanding
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<PAGE> 34
contributions to the growth and development of the cable television industry.
Mr. Nathanson is a 28-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 also
a Director of TV Por Cable Nacional, S.A. de C.V., an Advisory Board Member of
TVA, (Brazil) and a Director of GRB Entertainment. Mr. Nathanson is also
Chairman of the Board and Chief Executive Officer of Falcon International
Communications, LLC ("FIC"). Mr. Nathanson was appointed by President Clinton
and confirmed by the U.S. Senate on August 14, 1995 for a three year term on the
Board of Governors of International Broadcasting of the United States
Information Agency. He also serves on the Board of 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 the University of
California, Los Angeles ("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. Mr. Nathanson
received the "Entrepreneur of the Year Award" from Inc. Magazine in 1994.
FRANK J. INTISO, 51, was appointed President and Chief Operating Officer of FHGI
in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. He has been President and
Chief Operating Officer of Enstar Communications Corporation since September
1995, and between October 1988 and September 1995 held the positions of
Executive Vice President and Chief Operating Officer. Mr. Intiso is responsible
for the day-to-day operations of all cable television systems under the
management of FHGI. Mr. Intiso has a Masters Degree in Business Administration
from UCLA, and is a Certified Public Accountant. He serves as chair of the
California Cable Television Association, and is on the boards of Cable
Advertising Bureau, Cable In The Classroom, Community Antenna Television
Association and California Cable Television Association. He is a member of the
American Institute of Certified Public Accountants, the American Marketing
Association, the American Management Association, and the Southern California
Cable Television Association.
STANLEY S. ITSKOWITCH, 59, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been Executive Vice President and General Counsel of Enstar Communications
Corporation since October 1988. He has been President and Chief Executive
Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a
marketer of chemical products, since 1980. He is a Certified Public Accountant
and a former tax partner in the New York office of Touche Ross & Co. (now
Deloitte & Touche). He has a J.D. Degree and an L.L.M. Degree in Tax from New
York University School of Law. Mr. Itskowitch is also Executive Vice President
and General Counsel of FIC.
MICHAEL K. MENEREY, 46, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI and Enstar Communications Corporation since
February 1998. Prior to that time, he had been Chief Financial Officer and
Secretary of FHGI and its predecessors since 1984 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.
JOE A. JOHNSON, 53, has been Executive Vice President - Operations of FHGI since
September 1995. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. He was a Divisional Vice
President of FHGI between 1989 and 1992. From 1982 to 1989, he held the
positions of Vice President and Director of Operations for Sacramento Cable
Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr.
Johnson held cable system and regional manager positions with Warner Amex and
Teleprompter.
THOMAS J. HATCHELL, 48, has been Executive Vice President - 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
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<PAGE> 35
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 Falcon's San
Luis Obispo, California region. He was Vice President - Construction of an
affiliate of Falcon from June 1980 to June 1981. In addition, he served as a
General Manager of the cable system in Tulare County, California, from 1977 to
1980. Prior to that time, Mr. Hatchell served as a cable executive with the
Continental Telephone Company.
JON W. LUNSFORD, 38, has been Executive Vice President - Finance of FHGI and
Enstar Communications Corporation since February 1998. Prior to that time, he
had been Vice President - Finance and Corporate Development of FHGI since
September 1994 and of Enstar Communications Corporation since January 1996. From
1991 to 1994, he served as Director of Corporate Finance at Continental
Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice President with Crestar
Bank.
ABEL C. CRESPO, 38, has been Controller of FHGI and Enstar Communications
Corporation since January 1997. Mr. Crespo joined Falcon in December 1984, and
has held various accounting positions during that time, most recently that of
Senior Assistant Controller. Mr. Crespo holds a Bachelor of Science degree in
Business Administration from California State University, Los Angeles.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1997, biographical
information about certain officers of FHGI who share certain responsibilities
with the officers of the Corporate General Partner with respect to the operation
and management of the Partnership.
LYNNE A. BUENING, 44, 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, 44, has been Vice President of Advertising Sales and Production
of FHGI since January 1992. From 1988 to 1991, he served as a Director of
Advertising Sales and Production at Cencom Cable Television in Pasadena,
California. He was an Advertising Sales Account Executive at Choice TV, an
affiliate of Falcon, from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in
various sales and advertising positions.
HOWARD J. GAN, 51, has been Vice President of Regulatory Affairs of FHGI and its
predecessors since 1988. He was General Counsel at Malarkey-Taylor Associates, a
Washington, DC based telecommunications consulting firm, from 1986 to 1988. He
was Vice President and General Counsel at the Cable Television Information
Center from 1978 to 1983. In addition, he was an attorney and an acting Branch
Chief of the Federal Communications Commission's Cable Television Bureau from
1975 to 1978.
R.W. ("SKIP") HARRIS, 50, has been Vice President of Marketing of FHGI since
June 1991. He is a member of the CTAM Premium Television Committee. Mr. Harris
was National Director of Affiliate Marketing for The Disney Channel from 1985 to
1991. He was also a sales manager, regional marketing manager and director of
marketing for Cox Cable Communications from 1978 to 1985.
JOAN SCULLY, 62, 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.
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<PAGE> 36
RAYMOND J. TYNDALL, 50, 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 Donald L. Amick, Daniel H. DeLaney, Ron L. Hall, Michael E.
Kemph, Michael D. Singpiel and Robert S. Smith.
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 and Joint Venture have management agreements (the
"Management Agreements") 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 and Joint Venture's systems
and provides all operational support for the activities of the Partnership and
the Joint Venture. For these services, the Manager receives a management fee of
5% of the Partnership's gross revenues and 4% of the Joint Venture's gross
revenues, excluding revenues from the sale of cable television systems or
franchises, calculated and paid monthly. The Joint Venture also is required to
distribute 1% of its gross revenues to the Corporate General Partner in respect
of its interest as the Corporate General Partner of the Partnership. In
addition, the Partnership and Joint Venture reimburse the Manager for certain
operating expenses incurred by the Manager in the day-to-day operation of their
cable systems. The Management Agreement also requires the Partnership and Joint
Venture 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 Agreements. The Management Agreements are
terminable by the Partnership upon sixty (60) days written notice to the
Manager. The Manager has engaged FHGLP to provide certain management services
for the Partnership and Joint Venture and pays FHGLP a portion of the management
fees it receives in consideration of such services and reimburses FHGLP for
expenses incurred by FHGLP on its behalf. Additionally, the Partnership and
Joint Venture receive certain system operating management services from
affiliates of the Manager in lieu of directly employing personnel to perform
such services. The Partnership and Joint Venture reimburse the affiliates for
their allocable share of the affiliates' operating costs. The Corporate General
Partner also performs certain supervisory and administrative services for the
Partnership and Joint Venture, for which it is reimbursed.
For the fiscal year ended December 31, 1997, the Partnership together
with the Joint Venture paid approximately $211,900 of management fees and
$408,900 of reimbursed expenses. In addition, the Joint Venture paid the
Corporate General Partner approximately $19,800 in respect of its 1% special
interest. The Partnership and Joint Venture reimbursed affiliates approximately
$43,700 for system operating management services. Certain programming services
are purchased through Falcon Cablevision. The Partnership, together with the
Joint Venture, paid Falcon Cablevision approximately $1,036,700 for these
programming services for fiscal year 1997.
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<PAGE> 37
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5., "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of March 3, 1998, the common stock of FHGI was owned as follows:
78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In 1989, FHGI issued to Hellman &
Friedman Capital Partners, A California Limited Partnership ("H&F"), a
$1,293,357 convertible debenture due 1999 convertible under certain
circumstances into 10% of the common stock of FHGI and entitling H&F to elect
one director to the board of directors of FHGI. H&F elected Marc B. Nathanson
pursuant to such right. In 1991 FHGI issued to Hellman & Friedman Capital
Partners II, A California Limited Partnership ("H&FII"), additional convertible
debentures due 1999 in the aggregate amount of $2,006,198 convertible under
certain circumstances into approximately 6.3% of the common stock of FHGI and
entitling H&FII to elect one director to the board of directors of FHGI. As of
March 3, 1998, H&FII had not exercised this right. FHGLP also held 12.1% of the
interests in the General Partner, and Falcon Cable Trust, Frank Intiso and H&FII
held 58.9%, 12.1% and 16.3% of the General Partner, respectively. Such interests
entitle the holders thereof to an allocable share of cash distributions and
profits and losses of the General Partner in proportion to their ownership. Greg
A. Nathanson is Marc B. Nathanson's brother.
As of March 3, 1998, Marc B. Nathanson and members of his family owned,
directly or indirectly, outstanding partnership interests (comprising both
general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P. ("Falcon
Classic") and 2.58% of Falcon Video Communications ("Falcon Video"). In
accordance with the respective partnership agreements of these two partnerships,
after the return of capital to and the receipt of certain preferred returns by
the limited partners of such partnerships, FHGLP and certain of its officers and
directors had rights to future profits greater than their ownership interests of
capital in such partnerships. See Item 13., "Certain Relationships and Related
Transactions."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Classic, Falcon Video and,
through its management of the operation of Falcon Cablevision (a subsidiary of
FHGLP), the partnerships of which Enstar Communications Corporation is the
Corporate General Partner, including the Partnership. On September 30, 1988,
Falcon Cablevision acquired all of the outstanding stock of Enstar
Communications Corporation. Certain members of management of the Corporate
General Partner have also been involved in the management of other cable
ventures. FHGLP contemplates entering into other cable ventures, including
ventures similar to the Partnership.
On March 6, 1998, FHGLP acquired four of the five Falcon Classic cable
systems. FHGLP intends to acquire the fifth system as soon as regulatory
approvals can be obtained, at which point Falcon Classic will be liquidated.
FHGLP executed various agreements on December 30, 1997 related to a series of
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transactions that, if successfully consummated in 1998, would involve the
contribution by Falcon Video of its assets into the newly-formed entity of which
FHGLP would be the managing general partner. The consummation of transactions is
subject to, among other things, the satisfaction of customary closing conditions
and obtaining required regulatory and other third-party consents, including the
consent of franchising authorities, and to obtaining satisfactory financing
arrangements on acceptable terms. Accordingly, there can be no assurance that
the transactions will be successfully completed, or if successfully completed,
when they might be completed. The Corporate General Partner cannot determine at
this time the potential impact from these Falcon Classic and Falcon Video
transactions on the Partnership or the Joint Venture, but it is possible that
certain programming costs could increase.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the Corporate General Partner and
their management to certain conflicts of interest. Such conflicts of interest
relate to the time and services management will devote to the Partnership's
affairs and to the acquisition and disposition of cable television systems.
Management or its affiliates may establish and manage other entities which could
impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties. See "Fiduciary Duties"
below.
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 may obtain, at its expense and in such
reasonable amounts as the Corporate General Partner shall determine, a general
partners liability policy which would insure the Corporate General Partner and
its affiliates, officers and directors against liabilities that 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
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<PAGE> 39
Act of 1933, it is the opinion of the Securities and Exchange Commission that
such indemnification is contrary to public policy and therefore unenforceable.
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<PAGE> 40
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 17, 1997, in which it
reported under Item 5 that an unsolicited offer to purchase
partnership units had been made without the consent of the Corporate
General Partner.
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<PAGE> 41
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 30, 1998.
ENSTAR INCOME PROGRAM IV-3, 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 30th day of March 1998.
<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
Michael K. Menerey (Principal Financial and Accounting Officer)
/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.
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<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------------------------
Enstar Income Enstar Cable
Program of Macoupin
IV-3, L.P. County
------------- ------------
<S> <C> <C>
Reports of Independent Auditors F-2 F-14
Balance Sheets - December 31, 1996 and 1997 F-3 F-15
Financial Statement for each of
the three years in the period
ended December 31, 1997:
Statements of Operations F-4 F-16
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-17
Statements of Cash Flows F-6 F-18
Notes to Financial Statements F-7 F-19
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-3, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income Program IV-3,
L.P. (A Georgia Limited Partnership) as of December 31, 1996 and 1997, and the
related statements of operations, partnership capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1997. 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 IV-3,
L.P. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1998
F-2
<PAGE> 44
ENSTAR INCOME PROGRAM IV-3, L.P.
BALANCE SHEETS
================================
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 450,900 $ 788,300
Accounts receivable, less allowance of $4,500 and
$5,100 for possible losses 61,800 26,100
Prepaid expenses and other assets 25,900 155,100
Equity in net assets of joint venture 601,700 708,600
Property, plant and equipment, less accumulated
depreciation and amortization 1,642,100 1,897,300
Franchise cost, net of accumulated
amortization of $1,850,500 and $2,039,000 714,300 533,000
Deferred charges, net 7,600 4,900
------------ ------------
$ 3,504,300 $ 4,113,300
============ ============
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 222,000 $ 543,400
Due to affiliates 158,300 177,700
------------ ------------
TOTAL LIABILITIES 380,300 721,100
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (52,000) (49,300)
Limited partners 3,176,000 3,441,500
------------ ------------
TOTAL PARTNERSHIP CAPITAL 3,124,000 3,392,200
------------ ------------
$ 3,504,300 $ 4,113,300
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 45
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF OPERATIONS
================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 2,311,800 $ 2,489,000 $ 2,658,100
------------- ------------- -------------
OPERATING EXPENSES:
Service costs 804,700 771,100 876,900
General and administrative expenses 333,600 341,200 364,100
General Partner management fees
and reimbursed expenses 304,400 316,400 341,900
Depreciation and amortization 689,100 703,600 499,700
------------- ------------- -------------
2,131,800 2,132,300 2,082,600
------------- ------------- -------------
Operating income 180,000 356,700 575,500
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (61,800) (30,500) (12,900)
Interest income 32,000 23,400 32,500
Gain (loss) on sale of assets -- (4,700) 45,000
------------- ------------- -------------
(29,800) (11,800) 64,600
------------- ------------- -------------
Income before equity
in net income of joint venture 150,200 344,900 640,100
EQUITY IN NET INCOME OF JOINT VENTURE 28,000 123,500 131,900
------------- ------------- -------------
NET INCOME $ 178,200 $ 468,400 $ 772,000
============= ============= =============
Net income allocated to General Partners $ 1,800 $ 4,700 $ 7,700
============= ============= =============
Net income allocated to Limited Partners $ 176,400 $ 463,700 $ 764,300
============= ============= =============
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 4.42 $ 11.62 $ 19.16
============= ============= =============
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,900 39,900 39,900
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 46
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
===========================================
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------- ------------- -------------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1995 $ (48,500) $ 3,533,500 $ 3,485,000
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 1,800 176,400 178,200
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 (51,700) 3,211,100 3,159,400
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 4,700 463,700 468,400
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 (52,000) 3,176,000 3,124,000
Distributions to partners (5,000) (498,800) (503,800)
Net income for year 7,700 764,300 772,000
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 $ (49,300) $ 3,441,500 $ 3,392,200
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 47
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 178,200 $ 468,400 $ 772,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 689,100 703,600 499,700
Amortization of deferred loan costs 10,900 17,300 --
(Gain) loss on sale of assets -- 4,700 (45,000)
Equity in net income of joint venture (28,000) (123,500) (131,900)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets (19,800) (38,300) (93,500)
Accounts payable and due to affiliates 343,700 (370,900) 340,800
------------- ------------- -------------
Net cash provided by operating activities 1,174,100 661,300 1,342,100
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (373,700) (608,900) (556,000)
Proceeds from sale of property, plant and equipment -- 1,500 45,000
Increase in intangible assets (19,100) (8,400) (14,900)
Distributions from joint venture -- 350,000 25,000
------------- ------------- -------------
Net cash used in investing activities (392,800) (265,800) (500,900)
------------- ------------- -------------
Cash flows from financing activities:
Distributions to partners (503,800) (503,800) (503,800)
Repayment of debt -- (383,200) --
------------- ------------- -------------
Net cash used in financing activities (503,800) (887,000) (503,800)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 277,500 (491,500) 337,400
Cash and cash equivalents at beginning of year 664,900 942,400 450,900
------------- ------------- -------------
Cash and cash equivalents at end of year $ 942,400 $ 450,900 $ 788,300
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 48
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program IV-3, L.P., a Georgia limited partnership (the
"Partnership"), owns and operates cable television systems in rural areas of
Illinois and Kentucky. The Partnership also participates as a co-general partner
in Enstar Cable of Macoupin County, a Georgia general partnership (the "Joint
Venture").
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 $388,000 of short-term
investments in commercial paper.
INVESTMENT IN JOINT VENTURE
The Partnership's investment and share of the income or loss in the
Joint Venture is accounted for on the equity method of accounting.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises. In
addition, franchise cost includes capitalized costs incurred in obtaining new
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.
F-7
<PAGE> 49
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method over two
years.
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 assets,
including franchise costs and other intangible assets, to determine whether
events or circumstances warrant revised estimates of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
The Partnership pays no income taxes. All of the income, gains, losses,
deductions and credits of the Partnership are passed through to its partners.
Nominal taxes are assessed by certain state jurisdictions. The basis in the
Partnership's assets and liabilities differs for financial and tax reporting
purposes. At December 31, 1997, the book basis of the Partnership's net assets
exceeds its tax basis by $459,500.
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 1997 in the financial statements
is $357,700 more than tax income of the Partnership for the same period, caused
principally by timing differences in depreciation and amortization expense
reported by the Partnership and the Joint Venture.
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 are 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.
F-8
<PAGE> 50
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed on November 4, 1985 to acquire, construct or
improve, develop and operate cable television systems in various locations in
the United States. The partnership agreement provides for Enstar Communications
Corporation (the "Corporate General Partner") and Robert T. Graff, Jr. to be the
general partners and for the admission of limited partners through the sale of
interests in the Partnership.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
The Partnership was formed with an initial capital contribution of
$1,100 comprising $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
1986, and the initial closing took place by November 1986. The Partnership
continued to raise capital until $10,000,000 (the maximum) was sold by January
1987.
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The amended partnership agreement also provides that all partnership profits,
gains, operational losses, and credits (all as defined) be allocated 1% to the
general partners and 99% to the limited partners until the limited partners have
been allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 12% 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 20% to the general partners and 80% to the limited
partners. Any losses from system sales or exchanges shall be allocated first to
all partners having positive capital account balances (based on their respective
capital accounts) until all such accounts are reduced to zero and thereafter to
the Corporate General Partner. All allocations to individual limited partners
will be based on their respective limited partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
A portion of the Partnership's distributions to partners is funded from
distributions received from the Joint Venture.
The amended partnership agreement limits the amount of debt the
Partnership may incur.
F-9
<PAGE> 51
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 3 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and two affiliated partnerships (Enstar Income Program
IV-1, L.P. and Enstar Income Program IV-2, L.P.) each owns one third of the
Joint Venture. The Joint Venture was initially funded through capital
contributions made by each venturer during 1988 of $2,199,700 in cash and
$40,000 in capitalized system acquisition and related costs. In 1988, the Joint
Venture acquired certain cable television systems in Illinois from the
Partnership's Corporate General Partner. Each venturer shares equally in the
profits and losses of the Joint Venture. The Joint Venture generated income of
$84,000, $370,500 and $395,700 for 1995, 1996 and 1997, respectively, of which
$28,000, $123,500 and $131,900 was allocated to the Partnership for the
respective years. The operations of the Joint Venture are significant to the
Partnership and should be reviewed in conjunction with these financial
statements. Reference is made to the accompanying financial statements of the
Joint Venture on pages F-14 to F-23 of this Form 10-K.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cable television systems $ 5,525,600 $ 6,014,400
Vehicles, furniture and equipment
and leasehold improvements 203,700 233,800
------------ ------------
5,729,300 6,248,200
Less accumulated depreciation
and amortization (4,087,200) (4,350,900)
------------ ------------
$ 1,642,100 $ 1,897,300
============ ============
</TABLE>
NOTE 5 - NOTE PAYABLE
During 1993, the Partnership entered into a $1,000,000 reducing
revolving line of credit agreement (the "Agreement") with a final maturity of
June 30, 1997. The note, which bore interest at the lender's base rate, was
repaid on February 9, 1996.
F-10
<PAGE> 52
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Partnership leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2009.
Future minimum rental payments under noncancelable operating leases
that have remaining terms in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Amount
- ---- ------
<S> <C>
1998 $14,500
1999 12,100
2000 9,500
2001 9,500
2002 9,500
Thereafter 26,700
-------
$81,800
=======
</TABLE>
Rentals, other than pole rentals, charged to operations amounted to
$16,700, $17,000 and $17,300 in 1995, 1996 and 1997, respectively. Pole rentals
were $32,200, $31,200 and $32,700 in 1995, 1996 and 1997, respectively.
Other commitments include approximately $190,000 at December 31, 1997
to complete the rebuild of the Partnership's Shelbyville, Illinois cable system.
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. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership expects Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 sunset of CPST rate regulations and legislation recently was
introduced in Congress to repeal the sunset provision.
F-11
<PAGE> 53
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
While the Corporate General Partner has made the election to
self-insure for these risks based upon a comparison of historical damage
sustained over the past 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 63% of the Partnership's subscribers are served by its system in
Shelbyville, 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 7 - 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 20% 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
of the Partnership for the Profit Sharing Plan in 1995, 1996 or 1997.
NOTE 8 - 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 gross receipts, as defined, from the operations of the
Partnership. Management fee expense was $115,600, $124,500 and $132,900 in 1995,
1996 and 1997, respectively.
In addition to the monthly fee 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 Manager
and its subsidiaries are charged a proportionate share of these expenses.
Corporate office allocations and district office expenses are charged to the
properties served based primarily on the respective percentage of basic
customers or homes passed (dwelling units within a system) within the designated
service areas. The total amount charged to the Partnership for these services
approximated $188,800, $191,900 and $209,000 in 1995, 1996 and 1997,
respectively.
F-12
<PAGE> 54
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 8 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONTINUED)
The Partnership also receives 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
one of the Partnership's cable systems. The Partnership reimburses the affiliate
for its allocable share of the affiliate's operational costs. The total amount
charged to the Partnership approximated $10,900, $34,700 and $23,700 in 1995,
1996 and 1997, respectively. No management fee is payable to the affiliate by
the Partnership and there is no duplication of reimbursed expenses and costs
paid to the Manager.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the 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
$530,500, $539,200 and $603,400 in 1995, 1996 and 1997, respectively.
Programming fees are included in service costs in the statements of operations.
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $61,700, $30,800 and $12,900 in
1995, 1996 and 1997, respectively.
F-13
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Macoupin
County (A Georgia General Partnership) as of December 31, 1996 and 1997, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Macoupin County
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1998
F-14
<PAGE> 56
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
===============================
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 442,200 $ 515,800
Accounts receivable, less allowance of $3,900 and
$10,000 for possible losses 66,100 45,100
Prepaid expenses and other assets 25,700 336,000
Property, plant and equipment, less accumulated
depreciation and amortization 1,149,400 1,523,200
Franchise cost, net of accumulated
amortization of $3,162,000 and $3,242,100 401,000 143,900
------------- -------------
$ 2,084,400 $ 2,564,000
============= =============
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 196,200 $ 324,600
Due to affiliates 83,100 113,600
------------- -------------
TOTAL LIABILITIES 279,300 438,200
------------- -------------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 601,700 708,600
Enstar Income Program IV-2, L.P. 601,700 708,600
Enstar Income Program IV-3, L.P. 601,700 708,600
------------- -------------
TOTAL VENTURERS' CAPITAL 1,805,100 2,125,800
------------- -------------
$ 2,084,400 $ 2,564,000
============= =============
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 57
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
===============================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 1,646,000 $ 1,870,600 $ 1,975,900
------------- ------------- -------------
OPERATING EXPENSES:
Service costs 500,300 532,500 573,000
General and administrative expenses 232,300 109,500 149,200
General Partner management fees
and reimbursed expenses 226,600 256,300 298,700
Depreciation and amortization 634,800 614,400 575,400
------------- ------------- -------------
1,594,000 1,512,700 1,596,300
------------- ------------- -------------
Operating income 52,000 357,900 379,600
------------- ------------- -------------
INTEREST INCOME, net 32,000 12,000 16,100
GAIN ON SALE OF CABLE ASSETS -- 600 --
------------- ------------- -------------
NET INCOME $ 84,000 $ 370,500 $ 395,700
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 58
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
================================
<TABLE>
<CAPTION>
Enstar Enstar Enstar
Income Income Income
Program Program Program
IV-1, L.P. IV-2, L.P. IV-3, L.P. Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 $ 800,200 $ 800,200 $ 800,200 $ 2,400,600
Net income for year 28,000 28,000 28,000 84,000
------------- ------------- ------------- -------------
BALANCE, December 31, 1995 828,200 828,200 828,200 2,484,600
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 123,500 123,500 123,500 370,500
------------- ------------- ------------- -------------
BALANCE, December 31, 1996 601,700 601,700 601,700 1,805,100
Distributions to venturers (25,000) (25,000) (25,000) (75,000)
Net income for year 131,900 131,900 131,900 395,700
------------- ------------- ------------- -------------
BALANCE, December 31, 1997 $ 708,600 $ 708,600 $ 708,600 $ 2,125,800
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 59
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
===============================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 84,000 $ 370,500 $ 395,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 634,800 614,400 575,400
Gain on sale of cable assets -- (600) --
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets (27,400) (47,900) (292,000)
Accounts payable and due to affiliates 108,500 (76,200) 158,900
------------- ------------- -------------
Net cash provided by operating activities 799,900 860,200 838,000
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (325,500) (411,200) (677,900)
Increase in intangible assets (14,500) (37,700) (11,500)
Proceeds from sale of property, plant and
equipment -- 9,100 --
------------- ------------- -------------
Net cash used in investing activities (340,000) (439,800) (689,400)
------------- ------------- -------------
Cash flows from financing activities:
Distributions to venturers -- (1,050,000) (75,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 459,900 (629,600) 73,600
Cash and cash equivalents at beginning of year 611,900 1,071,800 442,200
------------- ------------- -------------
Cash and cash equivalents at end of year $ 1,071,800 $ 442,200 $ 515,800
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 60
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership (the
"Venture"), owns and operates cable television systems in rural areas of
Illinois.
The financial statements do not give effect to any assets that Enstar
Income Program IV-1, L.P., Enstar Income Program IV-2, L.P. and Enstar Income
Program IV-3, L.P. (the "Venturers") may have outside of their interest in the
Venture, nor to any obligations, including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture 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 $385,000 of short-term
investments in commercial paper.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises. In
addition, franchise cost includes capitalized costs incurred in obtaining new
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 Venture periodically evaluates the amortization periods of these
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives. Costs relating to unsuccessful franchise applications
are charged to expense when it is determined that the efforts to obtain the
franchise will not be successful.
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Venture also evaluates
F-19
<PAGE> 61
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF ASSETS (CONTINUED)
the amortization periods of assets, including franchise costs and other
intangible assets, to determine whether events or circumstances warrant revised
estimates of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the Venture pays no income taxes. All of the income,
gains, losses, deductions and credits of the Venture are passed through to its
Venturers. The basis in the Venture's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1997, the book basis of
the Venture's net assets exceeds its tax basis by $348,300.
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 1997 in the financial statements
is $354,200 more than tax income of the Venture for the same period, caused
principally by timing differences in depreciation and amortization expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture agreement
effective December 30, 1987 among the Venturers, three limited partnerships
sponsored by Enstar Communications Corporation as their corporate general
partner. The Venture was formed to pool the resources of the three limited
partnerships to acquire, own, operate, and dispose of certain cable television
systems. In 1988, the Venture acquired two cable television systems in Illinois.
Under the terms of the agreement, the Venturers share equally in
profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Enstar
Communications Corporation.
F-20
<PAGE> 62
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Cable television systems $ 3,263,300 $ 3,514,500
Vehicles, furniture and equipment
and leasehold improvements 170,400 213,300
------------- -------------
3,433,700 3,727,800
Less accumulated depreciation
and amortization (2,284,300) (2,204,600)
------------- -------------
$ 1,149,400 $ 1,523,200
============= =============
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the
systems under operating leases expiring in 1999.
Future minimum rental payments under non-cancelable operating leases
that have remaining terms in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year Amount
- ---- ------
1998 $5,900
1999 2,800
------
$8,700
======
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$8,200, $8,300 and $7,700 in 1995, 1996 and 1997, respectively, while pole
rental expense approximated $16,300, $13,600 and $16,900 in 1995, 1996 and 1997,
respectively.
Other commitments include approximately $25,000 at December 31, 1997
to complete the rebuild of the Venture's Auburn, Illinois cable system that was
started in 1996.
F-21
<PAGE> 63
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Venture is subject to regulation by various federal, state and
local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other things,
federal and local regulation of rates charged for basic cable service, cable
programming 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 Venture's cable services. The Venture believes that compliance
with the 1992 Cable Act has had a significant negative impact on its operations
and cash flow. It also believes that any potential future liabilities for refund
claims or other related actions would not be material. The Telecommunications
Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. 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. Because cable
service rate increases have continued to outpace inflation under the FCC's
existing regulations, the Venture expects Congress and the FCC to explore
additional methods of regulating cable service rate increases, including
deferral or repeal of the March 31, 1999 sunset of CPST rate regulations and
legislation recently was introduced in Congress to repeal the sunset provision.
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Venture'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.
While the Corporate General Partner has made the election to
self-insure for these risks based upon a comparison of historical damage
sustained over the past 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. All of the
Venture's subscribers are served by its system in Carlinville, 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
Venture's liquidity and cash flows. The Venture 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 Venture 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 20% of the participant's annual compensation which otherwise would
have been payable to the participant as salary. The Venturer'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
of the Venture for the Profit Sharing Plan in 1995, 1996 or 1997.
F-22
<PAGE> 64
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement with a wholly owned
subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 4% of gross receipts, as defined, from the operations of the
Venture. Management fees approximated $65,800, $74,800 and $79,000 in 1995, 1996
and 1997, respectively. In addition, the Venture is required to distribute 1% of
its gross revenues to the Corporate General Partner in respect of its interest
as the Corporate General Partner of the Partnership. This fee approximated
$16,500, $18,700 and $19,800 in 1995, 1996 and 1997, respectively.
The Venture also reimburses the Manager for direct expenses incurred on
behalf of the Venture and for the Venture's allocable share of operational costs
associated with services provided by the Manager. All cable television
properties managed by the Corporate General Partner and its subsidiaries are
charged a proportionate share of these expenses. Corporate office allocations
and district office expenses are charged to the properties served based
primarily on the respective percentage of basic customers or homes passed
(dwelling units within a system) within the designated service areas. The total
amounts charged to the Venture for these services approximated $144,300,
$162,800 and $199,900 during 1995, 1996 and 1997, respectively.
The Venture also receives certain system operating management services
from affiliates of the Corporate General Partner in addition to the Manager, due
to the fact that there are no such employees directly employed by the Venture's
cable system. The Venture reimburses the affiliates for its allocable share of
the affiliates' operational costs. The total amount charged to the Venture for
these costs approximated $1,700, $12,600 and $20,000 in 1995, 1996 and 1997,
respectively. No management fee is payable to the affiliates by the Venture and
there is no duplication of reimbursed expenses and costs paid to the Manager.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the 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 Venture recorded programming fee expense of
$364,800, $388,900 and $433,300 in 1995, 1996 and 1997, respectively.
Programming fees are included in service costs in the statements of operations.
F-23
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3 Second Amended and Restated Agreement of Limited Partnership
of Enstar Income Program IV-3, L.P., as of August 1, 1988(3)
10.1 Management Agreement between Enstar Income Program IV-3 and
Enstar Cable Corporation(1)
10.2 Management Agreement between Enstar Cable of Macoupin County
and Enstar Cable Corporation(2)
10.3 Revolving Credit and Term Note dated December 31, 1987
between Enstar Income Program IV-3 and Rhode Island
Hospital Trust National Bank(2)
10.4 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Fairfield, IL(2)
10.5 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Shelbyville, IL(2)
10.6 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Fulton, KY(2)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of South Fulton, Tennessee(2)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Carlinville, IL(2)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Virden, IL(2)
10.10 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Thayer, IL(2)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Auburn, IL(2)
10.12 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Girard, IL(2)
10.13 Service agreement between Enstar Communications Corporation,
Enstar Cable Corporation and Falcon Holding Group,
Inc. dated as of October 1, 1988(4)
10.14 Amendment No. 2 to Revolving Credit and Term Loan Agreement
dated December 31, 1987 between Enstar Income
Program IV-3 and Rhode Island Hospital Trust National Bank,
dated August 3, 1990.(5)
10.15 Resolution No. 92-16 of the City Council of Shelbyville,
Illinois Extending the Cable Television Franchise of
Enstar Income Program IV-3. Passed and adopted
January 4, 1993.(6)
</TABLE>
E-1
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.16 Loan Agreement between Enstar Income Program IV-3 and
Kansallis-Osake-Pankki dated December 9, 1993.(8)
10.17 Amended and Restated Partnership Agreement of Enstar Cable
of Macoupin County, as of October 1, 1993.(9)
10.18 Franchise Agreement and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Shelbyville, Illinois.(9)
10.19 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system
franchise for the City of Auburn, Illinois.(9)
10.20 A resolution of the City of Carlinville, Illinois extending
the Cable Television Franchise of Enstar Cable of
Macoupin County. Adopted December 1, 1997.
21.1 Subsidiaries: Enstar Cable of Macoupin County
</TABLE>
FOOTNOTES REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 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. 0-15686 for the fiscal year ended
December 31, 1992.
(7) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15686 for the fiscal year ended
December 31, 1993.
(8) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-15686 for the quarter ended March 31,
1995
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-15686 for the quarter ended September
30, 1997.
E-2
<PAGE> 1
Exhibit 10.20
RESOLUTION
Extending the Cable Television Franchise of
Enstar of Macoupin County ("Falcon") in Carlinville, IL
WHEREAS, Enstar of Macoupin County (hereafter referred to as "Falcon")
lawfully provides cable television service to residents of Carlinville; and,
WHEREAS, the City of Carlinville desires that Falcon continue to
provide uninterrupted cable TV service to its subscribers in the City of
Carlinville pursuant to a valid cable television franchise; and,
WHEREAS, the public health, safety and welfare of the residents of the
City of Carlinville will be served by granting a franchise extension to Falcon
pending completion of the franchise renewal process; and,
WHEREAS, the City of Carlinville and Falcon will each retain their
respective legal rights and responsibilities under applicable federal, state and
local law, including the right to initiate formal Cable Act renewal procedures;
NOW, THEREFORE, BE IT RESOLVED that the cable television franchise
under which Falcon has previously been operating in Carlinville is hereby
extended until such time as the City of Carlinville shall formally grant or deny
franchise renewal, consistent with the provisions of Section 626 of the Cable
Communications Policy Act of 1984, as amended.
ADOPTED this 1st day of December, 1997
BY:
/s/ Brad Demuzio
- --------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1997, AND THE STATEMENT OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 788,300
<SECURITIES> 0
<RECEIVABLES> 31,200
<ALLOWANCES> 5,100
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,248,200
<DEPRECIATION> 4,350,900
<TOTAL-ASSETS> 4,113,300
<CURRENT-LIABILITIES> 721,100
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,113,300
<SALES> 0
<TOTAL-REVENUES> 2,658,100
<CGS> 0
<TOTAL-COSTS> 2,082,600
<OTHER-EXPENSES> (77,500)
<LOSS-PROVISION> 43,900
<INTEREST-EXPENSE> 12,900
<INCOME-PRETAX> 772,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 772,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 772,000
<EPS-PRIMARY> 19.16
<EPS-DILUTED> 0
</TABLE>
