<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number 0-15686
-----------
Enstar Income Program IV-3, L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1648320
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
-----------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
<PAGE> 2
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED BALANCE SHEETS
=========================================
<TABLE>
<CAPTION>
December 31, June 30,
1997* 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 788,300 $ 654,400
Accounts receivable, less allowance of $5,100 and
$2,500 for possible losses 26,100 24,300
Prepaid expenses and other assets 155,100 165,500
Equity in net assets of Joint Venture 708,600 801,100
Property, plant and equipment, less accumulated
depreciation and amortization of $4,350,900 and $4,507,600 1,897,300 1,786,600
Franchise cost, net of accumulated
amortization of $2,039,000 and $2,133,400 533,000 438,600
Deferred charges, net 4,900 3,600
----------- -----------
$ 4,113,300 $ 3,874,100
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 543,400 $ 180,200
Due to affiliates 177,700 175,900
----------- -----------
TOTAL LIABILITIES 721,100 356,100
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (49,300) (48,000)
Limited partners 3,441,500 3,566,000
----------- -----------
TOTAL PARTNERSHIP CAPITAL 3,392,200 3,518,000
----------- -----------
$ 4,113,300 $ 3,874,100
=========== ===========
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
-2-
<PAGE> 3
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED STATEMENTS OF OPERATIONS
=========================================
<TABLE>
<CAPTION>
Unaudited
---------------------------
Three months ended
June 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
REVENUES $ 660,400 $ 670,100
--------- ---------
OPERATING EXPENSES:
Service costs 217,200 236,500
General and administrative expenses 105,300 82,200
General Partner management fees
and reimbursed expenses 82,900 91,700
Depreciation and amortization 109,200 134,400
--------- ---------
514,600 544,800
--------- ---------
OPERATING INCOME 145,800 125,300
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 8,300 6,600
Interest expense (3,600) (3,300)
Gain on sale of cable assets 45,000 200
--------- ---------
49,700 3,500
--------- ---------
INCOME BEFORE EQUITY IN NET INCOME
OF JOINT VENTURE 195,500 128,800
EQUITY IN NET INCOME OF JOINT VENTURE 20,400 57,800
--------- ---------
NET INCOME $ 215,900 $ 186,600
========= =========
Net income allocated to General Partners $ 2,200 $ 1,900
========= =========
Net income allocated to Limited Partners $ 213,700 $ 184,700
========= =========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 5.36 $ 4.63
========= =========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 39,900 39,900
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE> 4
ENSTAR INCOME PROGRAM IV-3, L.P.
CONDENSED STATEMENTS OF OPERATIONS
=========================================
<TABLE>
<CAPTION>
Unaudited
-------------------------------
Six months ended
June 30,
-------------------------------
1997 1998
----------- -----------
<S> <C> <C>
REVENUES $ 1,326,200 $ 1,338,900
----------- -----------
OPERATING EXPENSES:
Service costs 419,300 452,600
General and administrative expenses 182,500 164,700
General Partner management fees
and reimbursed expenses 163,700 181,600
Depreciation and amortization 251,300 267,800
----------- -----------
1,016,800 1,066,700
----------- -----------
OPERATING INCOME 309,400 272,200
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 14,200 13,100
Interest expense (5,300) (6,800)
Gain on sale of cable assets 45,000 200
----------- -----------
53,900 6,500
----------- -----------
INCOME BEFORE EQUITY IN NET INCOME
OF JOINT VENTURE 363,300 278,700
EQUITY IN NET INCOME OF JOINT VENTURE 58,700 99,000
----------- -----------
NET INCOME $ 422,000 $ 377,700
=========== ===========
Net income allocated to General Partners $ 4,200 $ 3,800
=========== ===========
Net income allocated to Limited Partners $ 417,800 $ 373,900
=========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 10.47 $ 9.37
=========== ===========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 39,900 39,900
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE> 5
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
=========================================
<TABLE>
<CAPTION>
Unaudited
---------------------------
Six months ended
June 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 422,000 $ 377,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of Joint Venture (58,700) (99,000)
Depreciation and amortization 251,300 267,800
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets 34,000 (8,600)
Accounts payable and due to affiliates 26,200 (365,000)
--------- ---------
Net cash provided by operating activities 674,800 172,900
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (114,900) (59,100)
Increase in intangible assets (5,700) (2,300)
Distributions from Joint Venture 15,000 6,500
--------- ---------
Net cash used in investing activities (105,600) (54,900)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (251,900) (251,900)
--------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 317,300 (133,900)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 450,900 788,300
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 768,200 $ 654,400
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
-5-
<PAGE> 6
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for the three
and six months ended June 30, 1998 and 1997 are unaudited. These condensed
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Partnership's latest
Annual Report on Form 10-K. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of results for the entire year.
2. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with a
wholly-owned subsidiary of the Corporate General Partner (the "Manager") for a
monthly management fee of 5% of revenues, excluding revenues from the sale of
cable television systems or franchises. Management fee expense approximated
$33,500 and $66,900 for the three and six months ended June 30, 1998.
In addition to the monthly management fees described above, the
Partnership reimburses the Manager for direct expenses incurred on behalf of the
Partnership and for the Partnership's allocable share of operational costs
associated with services provided by the Manager. All cable television
properties managed by the Corporate General Partner and its subsidiary are
charged a proportionate share of these expenses. The Corporate General Partner
has contracted with Falcon Holding Group, L.P. ("FHGLP"), an affiliated
partnership, to provide corporate management services for the Partnership.
Corporate office allocations and district office expenses are charged to the
properties served based primarily on the respective percentage of basic
subscribers or homes passed (dwelling units within a system) within the
designated service areas. The total amount charged to the Partnership for these
services approximated $58,200 and $114,700 for the three and six months ended
June 30, 1998.
The Manager has entered into an identical agreement with Enstar Cable
of Macoupin County, a Georgia general partnership, of which the Partnership is a
co-partner (the "Joint Venture"), except that the Joint Venture pays the Manager
only a 4% management fee. However, the Joint Venture is required to distribute
to Enstar Communications Corporation (which is the Corporate General Partner of
the Joint Venture as well as of the Partnership) an amount equal to 1% of the
Joint Venture's gross revenues in respect of Enstar Communications Corporation's
interest as Corporate General Partner of the Joint Venture. No management fee is
payable by the Partnership in respect of any amounts received by the Partnership
from the Joint Venture, and there is no duplication of reimbursed expenses or
costs of the Manager. The Joint Venture paid the Manager management fees of
approximately $20,100 and $39,900 and reimbursement of expenses of approximately
$52,100 and $103,400 under its management agreement for the three and six months
ended June 30, 1998. In addition, the Joint Venture paid the Corporate General
Partner approximately $5,000 and $10,000 in respect of its 1% special interest
during the three and six months ended June 30, 1998. Management fees and
reimbursed expenses due the Corporate General Partner are non-interest bearing.
-6-
<PAGE> 7
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
2. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONTINUED)
The Partnership and the Joint Venture also receive certain system
operating management services from an affiliate of the Corporate General Partner
in addition to the Manager, due to the fact that there are no such employees
directly employed by the Partnership's and Joint Venture's cable systems. The
Partnership and the Joint Venture reimburse the affiliate for their allocable
share of the affiliate's operational costs. The total amount charged to the
Partnership and the Joint Venture approximated $1,800 and $4,000 for the three
and six months ended June 30, 1998. No management fee is payable to the
affiliate by the Partnership and the Joint Venture and there is no duplication
of reimbursed expenses and costs paid to the Manager.
Certain programming services have been purchased through an affiliate
of the Partnership and the Joint Venture. In turn, the affiliate charges the
Partnership and the Joint Venture for these costs based on an estimate of what
the Corporate General Partner could negotiate for such programming services for
the 15 partnerships managed by the Corporate General Partner as a group. The
Partnership and the Joint Venture recorded programming fee expense of $271,200
and $538,800 for the three and six months ended June 30, 1998. Programming fees
are included in service costs in the statements of operations.
3. EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest is based
on the average number of units outstanding during the periods presented. For
this purpose, earnings and losses have been allocated 99% to the Limited
Partners and 1% to the General Partners. The General Partners do not own units
of partnership interest in the Partnership, but rather hold a participation
interest in the income, losses and distributions of the Partnership.
-7-
<PAGE> 8
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
4. EQUITY IN NET ASSETS OF JOINT VENTURE
Each of the Partnership and two affiliated partnerships (Enstar Income
Program IV-1, L.P. and Enstar Income Program IV-2, L.P.) owns one-third (1/3) of
the Joint Venture. Each of the co-partners shares equally in the profits and
losses of the Joint Venture. The investment in the Joint Venture is accounted
for on the equity method. Summarized financial information for the Joint Venture
as of June 30, 1998 and December 31, 1997, and the results of its operations for
the three and six months ended June 30, 1998 and 1997, have been included. The
results of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
December 31, June 30,
1997* 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Current assets $ 893,900 $1,077,200
Investment in cable television properties, net 1,667,100 1,607,700
Other assets 3,000 2,800
---------- ----------
$2,564,000 $2,687,700
========== ==========
Current liabilities $ 438,200 $ 284,500
Venturers' capital 2,125,800 2,403,200
---------- ----------
$2,564,000 $2,687,700
========== ==========
</TABLE>
*As presented in the audited financial statements.
-8-
<PAGE> 9
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
4. EQUITY IN NET ASSETS OF JOINT VENTURE (CONTINUED)
<TABLE>
<CAPTION>
Unaudited
---------------------------
Three months ended
June 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
REVENUES $ 492,700 $ 500,600
--------- ---------
OPERATING EXPENSES:
Service costs 139,400 143,900
General and administrative expenses 45,100 29,400
General Partner management fees and reimbursed expenses 73,300 77,200
Depreciation and amortization 179,200 80,800
--------- ---------
437,000 331,300
--------- ---------
OPERATING INCOME 55,700 169,300
OTHER INCOME (EXPENSE):
Interest income 8,400 7,100
Interest expense (3,000) (3,000)
--------- ---------
NET INCOME $ 61,100 $ 173,400
========= =========
</TABLE>
<TABLE>
<CAPTION>
Unaudited
---------------------------
Six months ended
June 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
REVENUES $ 974,300 $ 997,500
--------- ---------
OPERATING EXPENSES:
Service costs 269,400 305,200
General and administrative expenses 59,200 72,600
General Partner management fees and reimbursed expenses 144,500 153,300
Depreciation and amortization 333,800 175,600
--------- ---------
806,900 706,700
--------- ---------
OPERATING INCOME 167,400 290,800
OTHER INCOME (EXPENSE):
Interest income 14,100 11,900
Interest expense (5,400) (5,800)
--------- ---------
NET INCOME $ 176,100 $ 296,900
========= =========
</TABLE>
-9-
<PAGE> 10
ENSTAR INCOME PROGRAM IV-3, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") required the Federal Communications Commission ("FCC")
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on the Partnership's revenues and cash flow. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of cable programming service tier ("CPST") rates
will be terminated on March 31, 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, 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 termination of CPST rate regulation. There can be no assurance as
to what, if any, further action may be taken by the FCC, Congress or any other
regulatory authority or court, or the effect thereof on the Partnership's
business. Accordingly, the Partnership's historical financial results as
described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership. In addition to the information
provided herein, reference is made to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1997 for additional information regarding
such matters and the effect thereof on the Partnership's business.
The Partnership conducts its cable television business operations both
(i) through the direct ownership and operation of certain cable television
systems and (ii) through its participation as a partner with a one-third (1/3)
interest in the Joint Venture. The Partnership participates equally with its two
affiliated co-partners under the Joint Venture's partnership agreement with
respect to capital contributions, obligations and commitments and results of
operations. Accordingly, in considering the financial condition and results of
operations for the Partnership, consideration must also be made of those matters
as they relate to the Joint Venture. The following discussion reflects such
consideration, and with respect to results of operations, a separate discussion
is provided for each entity.
RESULTS OF OPERATIONS
THE PARTNERSHIP
The Partnership's revenues increased from $660,400 to $670,100, or by
1.5%, and from $1,326,200 to $1,338,900, or by 1.0%, for the three and six
months ended June 30, 1998 as compared to the corresponding periods in 1997. Of
the $9,700 increase in revenues for the three months ended June 30, 1998
-10-
<PAGE> 11
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
as compared to the corresponding period in 1997, $25,200 was due to increases in
regulated service rates that were implemented by the Partnership in 1997 and
$3,200 was due to increases in other revenue producing items. These increases
were partially offset by a decrease of $18,700 due to decreases in the number of
subscriptions for basic, premium and tier services. Of the $12,700 increase in
revenues for the six months ended June 30, 1998 as compared to the corresponding
period in 1997, $57,100 was due to increases in regulated service rates that
were implemented by the Partnership in 1997 and $9,200 was due to increases in
other revenue producing items. These increases were partially offset by a
decrease of $53,600 due to decreases in the number of subscriptions for basic,
premium and tier services. As of June 30, 1998, the Partnership had
approximately 6,400 basic subscribers and 1,600 premium service units.
Service costs increased from $217,200 to $236,500, or by 8.9%, and from
$419,300 to $452,600, or by 7.9%, for the three and six months ended June 30,
1998 as compared to the corresponding periods in 1997. Service costs represent
costs directly attributable to providing cable services to customers. The
increases were primarily due to decreased capitalization of labor and overhead
costs resulting from fewer capital projects in the 1998 periods and due to
higher franchise fees and property taxes. Franchise fees increased in direct
relation to increases in revenues. Property taxes increased due to higher tax
assessments in the Partnership's Kentucky system.
General and administrative expenses decreased from $105,300 to $82,200,
or by 21.9%, and from $182,500 to $164,700, or by 9.8%, for the three and six
months ended June 30, 1998 as compared to the corresponding periods in 1997. The
decreases were primarily due to decreases in certain insurance premiums, bad
debt expense and personnel costs.
Management fees and reimbursed expenses increased from $82,900 to
$91,700, or by 10.6%, and from $163,700 to $181,600, or by 10.9%, for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997. Management fees increased in direct relation to increased revenues as
described above. Reimbursed expenses increased in the three and six months ended
June 30, 1998 as compared with the corresponding periods in 1997 primarily due
to higher allocated personnel costs and telephone expense. Personnel costs
increased as a result of staff additions.
Depreciation and amortization expense increased from $109,200 to
$134,400, or by 23.1%, and from $251,300 to $267,800, or by 6.6%, for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997, due to the addition of plant assets.
Operating income decreased from $145,800 to $125,300, or by 14.1%, and
from $309,400 to $272,200, or by 12.0%, for the three and six months ended June
30, 1998 as compared to the corresponding periods in 1997, primarily due to
lower capitalization of labor and overhead costs and higher franchise fees and
property taxes as described above.
Interest income decreased from $8,300 to $6,600, or by 20.5%, and from
$14,200 to $13,100, or by 7.7%, for the three and six months ended June 30, 1998
as compared to the corresponding periods in 1997. The decreases were primarily
due to lower average cash balances available for investment in the 1998 periods.
-11-
<PAGE> 12
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Gain on sale of cable assets decreased from $45,000 to $200 for the
three and six months ended June 30, 1998 as compared to the corresponding
periods in 1997. The Partnership sold a building during the second quarter of
1997 and recognized a gain of $45,000 in connection with the sale. In the second
quarter of 1998, the Partnership sold equipment and recognized a gain on that
sale.
Due to the factors described above, the Partnership's net income
decreased from $215,900 to $186,600, or by 13.6%, and from $422,000 to $377,700,
or by 10.5%, for the three and six months ended June 30, 1998 as compared to the
corresponding periods in 1997.
Based on its experience in the cable television industry, the
Partnership believes that operating income before depreciation and amortization
(EBITDA) and related measures of cash flow serve as important financial analysis
tools for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage. EBITDA is not a
measurement determined under generally accepted accounting principles ("GAAP")
and does not represent cash generated from operating activities in accordance
with GAAP. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of financial performance or as an alternative to cash
flows as a measure of liquidity. In addition, the definition of EBITDA may not
be identical to similarly titled measures used by other companies. EBITDA as a
percentage of revenues increased from 38.6% to 38.8% and decreased from 42.3% to
40.3% for the three and six months ended June 30, 1998 as compared to the
corresponding periods in 1997. The three months' increase was primarily due to
lower insurance premiums, bad debt expense and personnel costs. The six months'
decrease was primarily due to lower capitalization of labor and overhead costs
and higher franchise fees and property taxes as described above. EBITDA
increased from $255,000 to $259,700, or by 1.8%, and decreased from $560,700 to
$540,000, or by 3.7%, for the three and six months ended June 30, 1998 as
compared to the corresponding periods in 1997.
DISTRIBUTIONS TO PARTNERS
The Partnership distributed $125,900 and $251,900 to its partners
during the three and six months ended June 30, 1998. The Joint Venture
distributed $6,500 to the Partnership during the three and six months ended June
30, 1998.
THE JOINT VENTURE
The Joint Venture's revenues increased from $492,700 to $500,600, or by
1.6%, and from $974,300 to $997,500, or by 2.4%, for the three and six months
ended June 30, 1998 as compared to the corresponding periods in 1997. Of the
$7,900 increase in revenues for the three months ended June 30, 1998 as compared
to the corresponding period in 1997, $29,100 was due to increases in regulated
service rates that were implemented by the Joint Venture in 1997. These
increases were partially offset by a decrease of $2,400 due to decreases in
other revenue producing items and $18,800 due to decreases in the number of
subscriptions for basic, premium, tier and equipment rental services. Of the
$23,200 increase in revenues for the six months ended June 30, 1998 as compared
to the corresponding period in 1997, $61,700 was due to increases in regulated
service rates that were implemented by the Joint Venture in 1997 and $700 was
due to increases in other revenue producing items. These increases were
partially offset by a decrease of $39,200 due to decreases
-12-
<PAGE> 13
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
in the number of subscriptions for basic, premium, tier and equipment rental
services. As of June 30, 1998, the Joint Venture had approximately 4,500 basic
subscribers and 1,300 premium service units.
Service costs increased from $139,400 to $143,900, or by 3.2%, and from
$269,400 to $305,200, or by 13.3%, for the three and six months ended June 30,
1998 as compared to the corresponding periods in 1997. Service costs represent
costs directly attributable to providing cable services to customers. The
increases were principally due to higher programming fees and personnel costs.
Programming expense increased as a result of higher rates charged by program
suppliers. Personnel costs increased due to staff additions.
General and administrative expenses decreased from $45,100 to $29,400,
or by 34.8%, and increased from $59,200 to $72,600, or by 22.6%, for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997. The three months' decrease was principally due to lower insurance
premiums. The six months' increase was principally due to increases in bad debt
expense and professional fees, including audit expense.
Management fees and reimbursed expenses increased from $73,300 to
$77,200, or by 5.3%, and from $144,500 to $153,300, or by 6.1%, for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997. 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.
Depreciation and amortization expense decreased from $179,200 to
$80,800, or by 54.9%, and from $333,800 to $175,600, or by 47.4%, for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997. The decreases were due to certain intangible assets becoming fully
amortized and certain tangible assets becoming fully depreciated.
Operating income increased from $55,700 to $169,300 and from $167,400
to $290,800 for the three and six months ended June 30, 1998 as compared to the
corresponding periods in 1997. The increases were primarily due to decreased
depreciation and amortization expense as described above.
Interest income, net of interest expense, decreased from $5,400 to
$4,100, or by 24.1%, and from $8,700 to $6,100, or by 29.9%, for the three and
six months ended June 30, 1998 as compared to the corresponding periods in 1997.
The decreases were due to lower average cash balances available for investment
in the 1998 periods.
Due to the factors described above, the Joint Venture's net income
increased from $61,100 to $173,400 and from $176,100 to $296,900 for the three
and six months ended June 30, 1998 as compared to the corresponding periods in
1997.
Based on its experience in the cable television industry, the Joint
Venture believes that operating income before depreciation and amortization
(EBITDA) and related measures of cash flow serve as important financial analysis
tools for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage.
EBITDA is not a measurement determined under
-13-
<PAGE> 14
ENSTAR INCOME PROGRAM IV-3, L.P.
RESULTS OF OPERATIONS (CONTINUED)
generally accepted accounting principles ("GAAP") and does not represent cash
generated from operating activities in accordance with GAAP. EBITDA should not
be considered by the reader as an alternative to net income as an indicator of
financial performance or as an alternative to cash flows as a measure of
liquidity. In addition, the definition of EBITDA may not be identical to
similarly titled measures used by other companies. EBITDA as a percentage of
revenues increased from 47.7% to 50.0% and decreased from 51.4% to 46.8% for the
three and six months ended June 30, 1998 as compared to the corresponding
periods in 1997. The three months' increase was primarily due to higher revenues
and lower insurance premiums. The six months' decrease was primarily due to
higher programming expense and personnel costs as described above. EBITDA
increased from $234,900 to $250,100, or by 6.5%, and decreased from $501,200 to
$466,400, or by 6.9%, for the three and six months ended June 30, 1998 as
compared to the corresponding periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems and the Joint Venture, is to distribute to its
partners all available cash flow from operations and proceeds from the sale of
cable systems, if any, after providing for expenses, debt service and capital
requirements relating to the expansion, improvement and upgrade of its cable
systems. The Partnership relies upon the availability of cash generated from
operations and possible borrowings to fund its ongoing expenses and capital
requirements. In general, these requirements involve expansion, improvement and
upgrade of the Partnership's and Joint Venture's existing cable television
systems.
In March 1997, the Partnership completed the initial construction phase
of the franchise-required rebuild of its Shelbyville, Illinois cable system and
the rebuild of its cable systems in surrounding communities. However, completion
of the entire project and the introduction of addressability will be delayed
until the 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. Project costs were approximately $33,600 as of June 30, 1998.
Additionally, the Joint Venture is required to rebuild its Auburn,
Illinois cable system as a condition of its franchise agreement. Capital
expenditures related to the rebuild approximated $430,900 as of December 31,
1997, with additional construction costs of $25,000 budgeted 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.
Capital expenditures in the surrounding communities approximated $876,600 as of
December 31, 1997. The Joint Venture has budgeted additional expenditures of
$635,000 in 1998 to complete the rebuild. Expenditures related to the total
rebuild approximated $78,000 during the first six months of 1998. 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 have budgeted capital
expenditures of $105,000 and $75,000, respectively, for the upgrade of other
assets in 1998. 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.
-14-
<PAGE> 15
ENSTAR INCOME PROGRAM IV-3, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Partnership paid distributions totaling $125,900 and $251,900
during the three and six months ended June 30, 1998. However, there can be no
assurances regarding the level, timing or continuation of future distributions.
Beginning in August 1997, the Partnership and Joint Venture elected to
self-insure their cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to significant increases in the
cost of insurance coverage and decreases in the amount of insurance coverage
available.
While the Partnership and Joint Venture have 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 computer systems of
the Partnership and Joint Venture, process transactions based on two digits for
the year of the transaction (for example, "98" for 1998). 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 the
Partnership's and Joint Venture's Year 2000 business risks and their exposure to
computer systems, to operating equipment which is date sensitive and to the
interface systems of their vendors and service providers. Based on a preliminary
study, the Corporate General Partner has concluded that certain of the
Partnership's and Joint Venture's 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. 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 internal systems, the Corporate General
Partner is currently assessing exposure to risks associated with operating and
revenue generating equipment and has also initiated communications with
significant 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. The Partnership and Joint Venture currently expect that the cost
to replace non-compliant equipment will be determined during the third quarter
of 1998. Such costs will be borne by the Partnership and Joint Venture. There
can be no assurance that the systems of other
-15-
<PAGE> 16
ENSTAR INCOME PROGRAM IV-3, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 their business. The Partnership and Joint Venture continue to closely monitor
developments with their vendors and service suppliers.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Operating activities provided $501,900 less cash during the six months
ended June 30, 1998 than in the corresponding prior year period. The Partnership
used $391,200 more cash to pay liabilities owed to the Corporate General Partner
and third-party creditors due to timing differences of payments during the first
half of 1998 as compared with the prior year period. Changes in accounts
receivable, prepaid expenses and other assets used $42,600 more cash in the
first half of 1998 due to the timing of receivable collections and the payment
of prepaid expenses.
Investing activities used $50,700 less cash in the six months ended
June 30, 1998 than in the corresponding prior year period. The change was
primarily due to a $55,800 decrease in capital expenditures and a $3,400
decrease in expenditures for intangible assets, partially offset by an $8,500
decrease in distributions from the Joint Venture.
INFLATION
Certain of the Joint Ventures' expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that the Joint Ventures are able to increase their
service rates periodically, of which there can be no assurance.
-16-
<PAGE> 17
ENSTAR INCOME PROGRAM IV-3, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None.
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSTAR INCOME PROGRAM IV-3, L.P.
a GEORGIA LIMITED PARTNERSHIP
-----------------------------
(Registrant)
By: ENSTAR COMMUNICATIONS CORPORATION
General Partner
Date: August 13, 1998 By: /s/ Michael K. Menerey
-------------------------------
Michael K. Menerey,
Executive Vice President,
Chief Financial Officer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JUNE 30, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 654,400
<SECURITIES> 0
<RECEIVABLES> 26,800
<ALLOWANCES> 2,500
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,294,200
<DEPRECIATION> 4,507,600
<TOTAL-ASSETS> 3,874,100
<CURRENT-LIABILITIES> 356,100
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,874,100
<SALES> 0
<TOTAL-REVENUES> 1,338,900
<CGS> 0
<TOTAL-COSTS> 1,066,700
<OTHER-EXPENSES> (13,300)
<LOSS-PROVISION> 15,700
<INTEREST-EXPENSE> 6,800
<INCOME-PRETAX> 377,700
<INCOME-TAX> 0
<INCOME-CONTINUING> 377,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 377,700
<EPS-PRIMARY> 9.37
<EPS-DILUTED> 0
</TABLE>
