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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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[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: 0-18495
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Enstar Income/Growth Program Six-B, L.P.
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(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1754588
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Wilshire Boulevard -- 15th Floor
Los Angeles, California 90024
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 824-9990
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which Registered
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<S> <C>
Units of Limited Partnership Interest None
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting equity securities held by
non-affiliates of the registrant -- all of the registrant's 36,626 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/Growth Program Six-B, 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 September 23,
1987. 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 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."
During January 1990, the Partnership began its cable television business
operations with the acquisition of a small cable television system providing
service to approximately 200 customers in the city of Ivins, Utah.
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During 1990, two additional acquisitions were completed serving the communities
in and around Fisk, Missouri and Villa Rica, Georgia. As of December 31, 1997,
the Partnership served approximately 7,200 basic subscribers. The Partnership
does not expect to make any additional material acquisitions during the
remaining term of the Partnership.
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. In the
Partnership's markets, consumers have access to only a limited number of
over-the-air broadcast 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. Nonetheless, the Partnership believes
that all cable operators will face increased competition in the future from
alternative providers of multi-channel video programming services. See
"Competition."
Adoption of rules implementing certain provisions of the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") by the
Federal Communications Commission (the "FCC") has had a negative impact on the
Partnership's revenues and cash flow. These rules are subject to further
amendment to give effect to the Telecommunications Act of 1996 (the "1996
Telecom Act"). Among other changes, the 1996 Telecom Act provides that the
regulation of certain cable programming service tier ("CPST") rates will be
phased out altogether in 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 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
business. See "Legislation and Regulation" and Item 7., "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Partnership's management has concluded that the Partnership is unable
to fund its liquidity requirements including approximately $1.9 million for the
required upgrade of its systems in two franchise areas in Georgia. In view of
such liquidity issues and due to limitations on indebtedness imposed by the
partnership agreement, the Corporate General Partner has initiated discussions
with a business broker to explore selling the Partnership's systems. The
Partnership's management believes that the sale of these assets would allow the
Partnership to pay off its bank debt and other obligations and liquidate as soon
as practicable thereafter. There can be no assurance that the Partnership's
systems can be sold in the near term at an acceptable price, if at all. The
Corporate General Partner or its affiliates may purchase the Partnership's cable
systems depending upon the offers received from prospective outside buyers. Any
such sale would require the consent of the holders of a majority of the
Partnership's limited partnership units and, if such sale were to the Corporate
General Partner or an affiliate thereof, would require an amendment to the
partnership agreement.
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Clustering
The Partnership has sought to acquire cable television operations in
communities that are proximate to other owned or affiliated systems in order to
achieve the economies of scale and operating efficiencies associated with
regional "clusters." The Partnership believes clustering can reduce marketing
and personnel costs and can also reduce capital expenditures in cases where
cable service can be delivered through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments", the Partnership's systems have
almost 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, so that the systems
remain competitive within the industry.
The Partnership's management has selected a technical standard that
incorporates the use of fiber optic technology where applicable in its
engineering design for the majority of its systems that are to be rebuilt. A
system built with this type of architecture can provide for future channels of
analog service as well as new digital services. Such a system will also permit
the introduction of high speed data transmission and telephony services in the
future after incurring incremental capital expenditures related to these
services. The Partnership is also evaluating the use of digital compression
technology in its systems. See "Technological Developments" and "Digital
Compression."
The Partnership's 1997 capital expenditures approximated $577,200 to extend
its systems passed new serviceable homes in their franchise areas and to upgrade
certain equipment. The Partnership's future capital expenditure plans are,
however, all subject to the availability of adequate capital on terms
satisfactory to the Partnership, of which there can be no assurance. The
Partnership's upgrade program is estimated to require aggregate capital
expenditures of approximately $7.5 million. These upgrades cover seven franchise
areas and are currently required in two existing franchise agreements. The cost
to upgrade the two franchise areas is estimated to be approximately $1.9 million
and must be completed by February 1999.
On September 30, 1997, the Partnership entered into a loan agreement with
an affiliate for a revolving loan facility (the "Facility") of $2,528,900 of
which $1,750,000 was advanced to the Partnership at closing. Such funds together
with available cash were used to repay outstanding borrowings under the
Partnership's previous credit facility and deferred expenses owed to the
Corporate General Partner and an affiliated partnership. The Partnership has
relatively little borrowing capacity remaining under the Facility and would
require additional sources of capital to undertake its upgrade program.
The partnership agreement, however, contains certain limitations on the
Partnership's indebtedness. The partnership agreement provides that without the
approval of a majority of interests of limited partners, the Partnership may not
incur any borrowings unless the amount of such borrowings together with all
outstanding borrowings does not exceed 33% of the original capital raised by the
Partnership, or a maximum of $3,052,500 permitted debt outstanding. In order to
obtain the appropriate amount of capital to upgrade the Partnership's systems as
discussed above, this provision of the partnership agreement would need to be
amended to increase the Partnership's leverage. There can be no assurance that
the Partnership will be able to effect such an amendment to the partnership
agreement, nor that it will seek to do so. As discussed in prior reports, the
Partnership 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 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 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."
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Decentralized Management
The Corporate General Partner manages the Partnership's systems on a
decentralized basis. The Corporate General Partner believes that its
decentralized management structure, by enhancing management presence at the
system level, increases its sensitivity to the needs of its customers, enhances
the effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
Marketing
The Partnership 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 includes televised retention advertising to reinforce
the initial decision to subscribe and encourage customers to purchase higher
service levels.
Customer Service and Community Relations
The Partnership places a strong emphasis on customer service and community
relations and believes that success in these areas is critical to its business.
FHGLP 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 FHGLP'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. FHGLP 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 the Partnership's 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. FHGLP's
corporate executives and regional managers lead the Partnership's involvement in
a number of programs benefiting the communities the Partnership serves,
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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.
DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's cable systems as of December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE
MONTHLY
PREMIUM REVENUE PER
HOMES BASIC BASIC SERVICE PREMIUM BASIC
SYSTEM PASSED(1) SUBSCRIBERS PENETRATION(2) UNITS(3) PENETRATION(4) SUBSCRIBER(5)
------ --------- ----------- -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ivins, UT................... 863 330 38.2% 90 27.3% $32.43
Fisk, MO.................... 770 388 50.4% 107 27.6% $21.61
Villa Rica, GA.............. 9,593 6,494 67.7% 1,796 27.7% $34.99
------ ----- -----
Total............. 11,226 7,212 64.2% 1,993 27.6% $34.15
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</TABLE>
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(1) Homes passed refers to estimates by the Partnership of the approximate
number of dwelling units in a particular community that can be connected to
the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
(2) Basic subscribers to cable service 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.
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
and, in certain test markets, the Sega Channel. For additional charges, in most
of its 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 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 systems not deemed to
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be subject to effective competition under the FCC's definition. Currently, none
of the Partnership's systems are subject to effective competition. See
"Legislation and Regulation."
At December 31, 1997, the Partnership's monthly rates for basic cable
service for residential customers, excluding special senior citizen discount
rates, ranged from $16.24 to $20.96 and premium service rates ranged from $5.00
to $11.95, excluding special promotions offered periodically in conjunction with
the Partnership's marketing programs. A one-time installation fee, which the
Partnership may wholly or partially waive during a promotional period, is
usually charged to new customers. Commercial customers, such as hotels, motels
and hospitals, are charged a negotiated, non-recurring fee for installation of
service and monthly fees based upon a standard discounting procedure. Most
multi-unit dwellings are offered a negotiated bulk rate in exchange for
single-point billing and basic service to all units. These rates are also
subject to regulation.
EMPLOYEES
The Partnership has no employees. The various personnel required to operate
the Partnership's business are employed by the Corporate General Partner, its
subsidiary corporation and FHGLP. The cost of such employment is allocated and
charged to the Partnership for reimbursement pursuant to the partnership
agreement and management agreement. Other personnel required to operate the
Partnership's business are employed by affiliates of the Corporate General
Partner. The cost of such employment is allocated and charged to the
Partnership. 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, capital availability,
enhancement of product quality and service delivery and industry-wide
acceptance. Currently, the Partnership's systems have an average channel
capacity of 12 in systems that serve 5% of its customers and an average channel
capacity of 35 in systems that serve 95% of its customers and on average utilize
100% of such systems' respective channel capacity. The Partnership believes that
system upgrades would enable it to provide customers with greater programming
diversity, better picture quality and alternative communications delivery
systems made possible by the introduction of fiber optic technology and by the
possible future application of digital compression. The implementation of the
Partnership's capital expenditure plans is, however, dependent in part on the
availability of adequate capital on terms satisfactory to the Partnership. The
Corporate General Partner has concluded that the Partnership is not able to
obtain the necessary capital and, thus, has initiated discussions with a
business broker to sell the assets of the Partnership. 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.
As of December 31, 1997, approximately 5% of the customers of the
Partnership's systems were served by systems that utilize addressable
technology. Addressable technology permits the cable operator to activate from a
central control point the cable television services to be delivered to a
customer if that customer has also been supplied with an addressable converter
box. To date, the Partnership has supplied addressable converter boxes to
customers of the systems utilizing addressable technology who subscribe to one
or more premium services and, in selected regions, to customers who subscribe to
certain new product tiers. As a result, if the system utilizes addressable
technology and the customer has been supplied with an addressable converter box,
the Partnership can upgrade or downgrade services immediately, without the delay
or expense associated with
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dispatching a technician to the home. Addressable technology also reduces pay
service theft, is an effective enforcement tool in collecting delinquent
payments and allows the Partnership to offer pay-per-view services.
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 purchases basic and premium programming for its systems
from 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 services for the 15 partnerships managed by the Corporate
General Partner as a group (approximately 92,700 basic subscribers 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 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 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, 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 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 resulted in the Partnership agreeing to carry
one new service in its Villa Rica system, for which it expects to receive
reimbursement of certain costs related to launching the service. All other
negotiations were completed with essentially no change to the previous
agreements. Under the FCC's rate regulations, increases in programming costs for
regulated cable services occurring after the earlier of March 1, 1994, or the
date a 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.
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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 10 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
NUMBER OF BASIC BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES SUBSCRIBERS SUBSCRIBERS
---------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Prior to 1999............................................ 4 4,601 63.8%
1999 - 2003.............................................. 3 544 7.5%
2004 and after........................................... 3 1,893 26.2%
-- ----- ----
Total.......................................... 10 7,038 97.5%
== ===== ====
</TABLE>
The Partnership operates cable television systems which serve multiple
communities and, in some circumstances, portions of such systems extend into
jurisdictions for which the Partnership believes no franchise is necessary. In
the aggregate, approximately 174 customers, comprising approximately 2.5% of the
Partnership's customers, are served by unfranchised portions of such systems. In
certain instances, where a single franchise comprises a large percentage of the
customers in an operating region, the loss of such franchise could decrease the
economies of scale achieved by the Partnership's clustering strategy. The
Partnership has never had a franchise revoked for any of its systems and
believes that it has satisfactory relationships with substantially all of its
franchising authorities.
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise, but no value 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 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
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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 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
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<PAGE> 11
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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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected, and
may in the future materially affect, the Partnership and the cable television
industry. The following is a summary of federal laws and regulations affecting
the growth and operation of the cable television industry and a description of
certain state and local laws. The Partnership believes that the regulation of
its industry remains a matter of interest to Congress, the FCC and other
regulatory authorities. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the effect
thereof on the Partnership.
FEDERAL REGULATION
The primary federal statute dealing with the regulation of the cable
television industry is the Communications Act of 1934 (the "Communications
Act"), as amended. The three principal amendments to the Communications Act that
shaped the existing regulatory framework for the cable television industry were
the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act.
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.
Rate Regulation
The 1992 Cable Act replaced the FCC's previous standard for determining
effective competition, under which most cable systems were not subject to local
rate regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to local rate regulation of basic service.
The 1996 Telecom Act 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 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
11
<PAGE> 13
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 systems due to the lack
of channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate the
rates charged by the Partnership for basic cable service and for associated
basic cable service equipment.
The Partnership has adjusted its regulated programming service rates and
related equipment and installation charges in a majority of its 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 has thus far not been required to pay cash
compensation to broadcasters for retransmission consent or been required by
broadcasters to remove broadcast stations from the cable television channel
line-ups. The Partnership has, however, agreed to carry some services in
specified markets pursuant to retransmission consent arrangements which it
believes are comparable to those entered into by most other large cable
operators, and for which it pays monthly fees to the service providers, as it
does with other satellite providers. The second election between must-carry and
retransmission consent for local commercial television broadcast stations was
October 1, 1996, and the Partnership has agreed to carry one new service in
specified markets pursuant to these retransmission consent arrangements. The
next election between must-carry and retransmission consent for local commercial
television broadcast stations will be October 1, 1999.
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
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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 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
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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), 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
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<PAGE> 16
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 state of Utah where the Partnership
operates a cable system has certified to the FCC that it regulates the rates,
terms and conditions for pole attachments. In the absence of state regulation,
the FCC administers such pole attachment rates through use of a formula which it
has devised. As directed by the 1996 Telecom Act, the FCC has adopted a new rate
formula for any attaching party, including cable systems, which offer
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.
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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 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 owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and owns or leases its service vehicles. The Partnership believes that
its properties, both owned and leased, are in good condition and are suitable
and adequate for the Partnership's business operations.
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The Partnership owns substantially all of the assets related to its cable
television operations, including its program production equipment, headend
(towers, 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 is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business and management believes that the
outcome of all pending legal proceedings will not, in the aggregate, have a
material adverse effect on the financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED
SECURITYHOLDER 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
1,004 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. The Partnership
Agreement also provides that all Partnership operating profits be allocated to
the partners in the same proportion as cash flow distributions are made.
However, even after the limited partners have received cash flow equal to their
initial investment, the general partners will only receive a 1% distribution of
proceeds from a disposition or refinancing of a system until the limited
partners have received an annual simple interest return of at least 8% of their
initial investment less any distributions from previous dispositions or
refinancing of systems. Thereafter, proceeds from a disposition or refinancing
of a system shall be distributed 80% to the limited partners and 20% to the
general partners. Gains from dispositions of systems are first allocated in the
same manner as the proceeds from such dispositions. This occurs until the
dispositions result in the aggregate fair market value of the Partnership's
remaining system(s) being less than or equal to 50% of the aggregate
contributions to the capital of the Partnership by the partners. Once this level
of dispositions has occurred, gain is allocated to the partners so that
distributions upon liquidation of the Partnership in accordance with capital
account balances will result in the same amounts being distributed to the
partners as if distributions were made in the same manner as they are prior to a
liquidation.
Any losses, whether resulting from operations or the sale or disposition of
a system, are allocated 99% to the limited partners and 1% to the general
partners until the limited partners' capital account balances are equal to or
less than zero. Thereafter, all losses are allocated to the Corporate General
Partner.
Upon dissolution of the Partnership, distributions are to be made to the
partners in accordance with their capital account balances. No partners other
than general partners shall be obligated to restore any negative capital account
balance existing upon dissolution of a partnership. All allocations to
individual limited partners will be based on their respective limited
partnership ownership interests.
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 other liquidity requirements.
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 from operations in
January 1990 and discontinued distributions in July 1994. No distributions were
made during 1995, 1996 and 1997.
The Partnership's ability to pay distributions, the actual level of
distributions 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
financing, regulatory or
18
<PAGE> 20
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 assurance can be given regarding the level or timing of future
distributions, if any. The Partnership's new Facility does not restrict the
payment of distributions to partners unless an event of default exists
thereunder or the Maximum Leverage Ratio, as defined, is greater than 4 to 1.
However, due to the Partnership's pending rebuild requirements, management does
not anticipate paying distributions at any time in the foreseeable future. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership for the five
years ended December 31, 1997. This data should be read in conjunction with the
Partnership's financial statements included in Item 8 hereof and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues.................. $ 1,797,000 $ 2,007,800 $ 2,211,900 $ 2,524,700 $ 2,917,600
Costs and expenses........ (1,167,800) (1,293,600) (1,291,200) (1,461,100) (1,675,100)
Depreciation and
amortization........... (915,200) (1,004,200) (976,400) (1,054,200) (1,118,800)
----------- ----------- ----------- ----------- -----------
Operating income (loss)... (286,000) (290,000) (55,700) 9,400 123,700
Interest expense.......... (150,500) (161,300) (195,400) (147,700) (140,800)
Interest income........... 5,200 1,500 4,300 8,000 11,600
----------- ----------- ----------- ----------- -----------
Net loss.................. $ (431,300) $ (449,800) $ (246,800) $ (130,300) $ (5,500)
=========== =========== =========== =========== ===========
Distributions to
partners............... $ 443,900 $ 259,000 $ -- $ -- $ --
=========== =========== =========== =========== ===========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net loss.................. $ (11.66) $ (12.16) $ (6.67) $ (3.52) $ (0.15)
=========== =========== =========== =========== ===========
Distributions............. $ 12.00 $ 7.00 $ -- $ -- $ --
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash provided by
operating activities... $ 495,600 $ 532,900 $ 408,700 $ 957,000 $ 1,379,800
Net cash used in investing
activities............. (582,500) (447,900) (548,100) (700,100) (604,800)
Net cash provided by (used
in) financing
activities............. 165,300 (47,900) (13,900) 56,800 (823,700)
EBITDA(1)................. 629,200 714,200 920,700 1,063,600 1,242,500
EBITDA to revenues........ 35.0% 35.6% 41.6% 42.1% 42.6%
Total debt to EBITDA...... 3.2x 2.7x 1.8x 1.2x 1.4x
Capital expenditures...... $ 578,500 $ 438,400 $ 526,700 $ 673,300 $ 577,200
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................... $7,539,800 $7,027,700 $6,765,700 $6,656,500 $5,894,700
Total debt..................... 2,013,200 1,907,500 1,630,700 1,288,400 1,750,000
General partners' deficit...... (26,300) (33,400) (35,900) (37,200) (37,300)
Limited partners' capital...... 4,655,600 3,953,900 3,709,600 3,580,600 3,575,200
</TABLE>
- ---------------
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry, the
Partnership believes that EBITDA and related measures of cash flow serve as
important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. In addition, the covenants in the primary debt
instrument of the Partnership use EBITDA-derived calculations as a measure
of financial performance. EBITDA is not a measurement determined under GAAP
and does not represent cash generated from operating activities in
accordance with GAAP. EBITDA should not be considered by the reader as an
alternative to net income, as an indicator of the Partnership's financial
performance or as an alternative to cash flows as a measure of liquidity. In
addition, the Partnership's definition of EBITDA may not be identical to
similarly titled measures used by other companies.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The 1992 Cable Act required the FCC to, among other things, implement
extensive regulation of the rates charged by cable television systems for basic
and programming service tiers, installation, and customer premises equipment
leasing. Compliance with those rate regulations has had a negative impact on the
Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will be phased out altogether in
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 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 business. Accordingly, the Partnership's
historical financial results as described below are not necessarily indicative
of future performance.
This Report includes certain forward looking statements regarding, among
other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership, as discussed more fully elsewhere
in this Report.
RESULTS OF OPERATIONS
1997 Compared to 1996
The Partnership's revenues increased from $2,524,700 to $2,917,600, or by
15.6%, for the year ended December 31, 1997 as compared to 1996. Of the $392,900
increase, $188,300 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, $125,900 was due to increases in the number of
subscriptions for basic, premium and tier services, $46,100 was due to increases
in other revenue producing items including advertising sales revenue and $32,600
was due to the July 1, 1996 restructuring of The Disney Channel from a premium
channel to a tier channel. As of December 31, 1997, the Partnership had
approximately 7,200 basic subscribers and 2,000 premium service units.
Service costs increased from $825,200 to $976,600, or by 18.3%, for the
year ended December 31, 1997 as compared to 1996. Service costs represent costs
directly attributable to providing cable services to customers. Programming fees
accounted for the majority of the increase. The increase was also due to
increases in franchise fees, personnel costs, pole rent expense and copyright
fees. The increase in programming fees was primarily due to higher rates charged
by program suppliers and increases in the number of subscriptions for services.
Franchise fees and copyright fees increased in direct relation to increased
revenues as described above. Personnel costs charged to the Partnership by
affiliates increased due to staff additions and wage increases, while pole rent
expense increased due to extensions of the Partnership's systems to pass new
serviceable homes in their franchise areas.
General and administrative expenses increased from $404,500 to $430,700, or
by 6.5%, for the year ended December 31, 1997 as compared to 1996, primarily due
to an increase in bad debt expense and personnel costs charged to the
Partnership by affiliates.
Management fees and reimbursed expenses increased from $231,400 to
$267,800, or by 15.7%, for the year ended December 31, 1997 as compared to 1996.
Management fees increased in direct relation to increased revenues as described
above and reimbursed expenses increased primarily due to higher allocated
personnel costs resulting from staff additions and wage increases.
21
<PAGE> 23
Depreciation and amortization expense increased from $1,054,200 to
$1,118,800, or by 6.1%, for the year ended December 31, 1997 as compared to
1996, primarily due to a reduction in the estimated remaining life of existing
plant, which must be rebuilt by 1999 as required by two franchise agreements.
Operating income increased from $9,400 to $123,700 for the year ended
December 31, 1997 as compared to 1996, primarily due to increases in revenues as
described above.
Interest expense, net of interest income, decreased from $139,700 to
$129,200, or by 7.5%, for the year ended December 31, 1997 as compared to 1996,
primarily due to a decrease in average borrowings.
Due to the factors described above, the Partnership's net loss decreased
from $130,300 to $5,500, or by 95.8%, for the year ended December 31, 1997 as
compared to 1996.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 42.1% during 1996 to 42.6% in 1997. The
increase was primarily caused by increased revenues. EBITDA increased from
$1,063,600 to $1,242,500, or by 16.8%, as a result.
1996 Compared to 1995
The Partnership's revenues increased from $2,211,900 to $2,524,700, or by
14.1%, for the year ended December 31, 1996 as compared to 1995. Of the $312,800
increase, $154,600 was due to increases in the number of subscriptions for basic
and premium services, $126,300 was due to increases in regulated service rates
that were implemented by the Partnership in the second and fourth quarters of
1996, $29,200 was due to the July 1, 1996 restructuring of The Disney Channel
from a premium channel to a tier channel and $2,700 was due to increases in
other revenue producing items. As of December 31, 1996, the Partnership had
approximately 7,000 basic subscribers and 2,100 premium service units.
Service costs increased from $705,000 to $825,200, or by 17.0%, 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, property taxes, franchise fees and copyright fees accounted for the
majority of the increase. The increase in programming fees was primarily due to
higher rates charged by program suppliers and increases in the number of
subscriptions for service. The increase in property taxes was due to
non-recurring credits taken against expense in the second quarter of 1995 to
adjust estimated property taxes to reflect actual tax assessments in Georgia.
General and administrative expenses increased from $383,500 to $404,500, or
by 5.5%, for the year ended December 31, 1996 as compared to 1995, primarily due
to an increase in bad debt expense and compliance costs associated with
reregulation by the FCC. A decrease in capitalization of labor and overhead
costs also accounted for the increase for the year.
Management fees and reimbursed expenses increased from $202,700 to
$231,400, or by 14.2%, 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, rent expense, dues and subscription expense, professional service fees
and compliance costs associated with reregulation by the FCC.
Depreciation and amortization expense increased from $976,400 to
$1,054,200, or by 8.0%, for the year ended December 31, 1996 as compared to
1995, primarily due to a reduction in the estimated remaining life of existing
plant which will be rebuilt in 1998 and 1999. The increase in depreciation was
partially offset by decreased amortization expense due to the effect of certain
intangible assets becoming fully amortized in December 1995.
The Partnership generated operating income of $9,400 for the year ended
December 31, 1996 as compared to an operating loss of $55,700 in 1995, primarily
due to increases in revenues as described above.
22
<PAGE> 24
Interest expense, net of interest income, decreased from $191,100 to
$139,700, or by 26.9%, for the year ended December 31, 1996 as compared to 1995
primarily due to lower average interest rates and due to a decrease in average
borrowings.
Due to the factors described above, the Partnership's net loss decreased
from $246,800 to $130,300, or by 47.2%, for the year ended December 31, 1996 as
compared to 1995.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 41.6% during 1995 to 42.1% in 1996. The
increase was primarily caused by increased revenues. EBITDA increased from
$920,700 to $1,063,600, or by 15.5%, as a result.
Distributions to Partners
As provided in the partnership agreement, distributions to partners are
funded from such amounts after providing for working capital and other liquidity
requirements including debt service and capital expenditures not otherwise
funded by borrowings. The Partnership discontinued distributions to partners in
July 1994 due to liquidity requirements and financial market conditions. The
Partnership's new credit Facility does not restrict the payment of distributions
unless an event of default exists thereunder or the Maximum Leverage Ratio, as
defined, is greater than 4 to 1.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, is to distribute to its partners all available cash
flow from operations and proceeds from the sale of cable systems, if any, after
providing for expenses, debt service and capital requirements relating to the
expansion, improvement and upgrade of its cable systems. In general, these
requirements involve expansion, improvement and upgrade of the Partnership's
existing cable systems.
As of the date of this Report, substantially all of the available channel
capacity in the Partnership's systems is being utilized and each of such systems
requires upgrading. The desired upgrade program is presently estimated to
require aggregate capital expenditures of approximately $7.5 million. These
upgrades cover seven franchise areas in Georgia and are currently required in
two existing franchise agreements. The cost to upgrade the two franchise areas
is estimated to be approximately $1.9 million and must be completed by February
1999. Three of the remaining five franchise agreements are under negotiation for
renewal. Capital expenditures amounted to $577,200 during 1997.
Funding upgrade capital expenditures beyond 1997, however, will require new
sources of capital. In an effort to obtain the necessary capital, the Corporate
General Partner had engaged in discussions with a number of possible financing
sources regarding the availability and terms of a replacement bank facility for
the Partnership. These discussions were not successful. The Corporate General
Partner was generally advised that an individual facility of the size needed by
the Partnership is too small to interest most banks which lend to the cable
television industry. Accordingly, on June 6, 1997, the Corporate General Partner
and an affiliated partnership formed Enstar Finance Company, LLC ("EFC"). On
September 30, 1997, EFC obtained a secured bank facility of $35 million from two
agent banks in order to obtain funds that would in turn be advanced to the
Partnership and certain of the other partnerships managed by the Corporate
General Partner. The Partnership entered into a loan agreement with EFC for a
revolving loan facility of $2,528,900 of which $1,750,000 was advanced to the
Partnership at closing. Such funds together with available cash were used to
repay the Partnership's previous note payable balance of $1,077,100 and related
interest expense, deferred management fees and reimbursed expenses of $387,500
due the Corporate General Partner and deferred programming fees of $408,000 owed
to an affiliated partnership.
Based on discussions with prospective lenders, the Corporate General
Partner believes that this structure provides capital to the Partnership on
terms more favorable than could be obtained on a "stand-alone" basis. Advances
by EFC under its partnership loan facilities are independently collateralized by
the individual partnership borrowers so that no partnership is liable for
advances made to other partnerships. The
23
<PAGE> 25
Partnership's Facility will mature on August 31, 2001, at which time all funds
previously advanced will be due in full. Borrowings bear interest at the
lender's base rate (8.5% at December 31, 1997), as defined, plus 0.625%, or at
an offshore rate, as defined, plus 1.875%. The Partnership is permitted to
prepay amounts outstanding under the Facility at any time without penalty, and
is able to reborrow throughout the term of the Facility up to the maximum
commitment then available so long as no event of default exists. If the
Partnership has "excess cash flow" (as defined in its loan agreement) and has
leverage, as defined, in excess of 4.25 to 1, or receives proceeds from sales of
its assets in excess of a specified amount, the Partnership is required to make
mandatory prepayments under the Facility. Such prepayments permanently reduce
the maximum commitment under the Facility. The Partnership is also required to
pay a commitment fee of 0.5% per annum on the unused portion of its Facility,
and an annual administrative fee. At closing, the Partnership paid to EFC a
$25,700 facility fee. This represented the Partnership's pro rata portion of a
similar fee paid by EFC to its lenders.
The Facility contains certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sales of assets, acquisitions and other covenants, defaults and
conditions. The Corporate General Partner believes the Partnership was in
compliance with the covenants at December 31, 1997.
The Facility does not restrict the payment of distributions to partners
unless an event of default exists thereunder or the Maximum Leverage Ratio, as
defined, is greater than 4 to 1. As previously disclosed, however, in response
to the FCC's amended rate regulation rules and the Partnership's capital
expenditure requirements, distributions to Unitholders were discontinued in July
1994. As stated at the time of the announcement of this decision, management
believes that it is critical for the Partnership to preserve its liquidity
though the retention of cash. As a result, and because of the pending system
upgrade requirements discussed above, the Partnership does not anticipate paying
distributions at any time in the foreseeable future.
The Corporate General Partner contributed $244,600 of its $632,100
receivable balance from the Partnership for past due management fees and
reimbursed expenses as an equity contribution to EFC. As a result, this balance
was not repaid on September 30, 1997 and remains an outstanding obligation of
the Partnership.
The Partnership has relatively little borrowing capacity remaining under
the Facility and would require additional sources of capital to undertake its
upgrade program. The partnership agreement, however, contains certain
limitations on the Partnership's indebtedness. The partnership agreement
provides that without the approval of a majority of interests of limited
partners, the Partnership may not incur any borrowings unless the amount of such
borrowings together with all outstanding borrowings does not exceed 33% of the
original capital raised by the Partnership, or a maximum of $3,052,500 permitted
debt outstanding. In order to obtain the appropriate amount of capital to
upgrade the Partnership's systems as discussed above, this provision of the
partnership agreement would need to be amended to increase the Partnership's
leverage. There can be no assurance that the Partnership will be able to effect
such an amendment to the partnership agreement, nor that it will seek to do so.
The Corporate General Partner has concluded that the Partnership is not able to
obtain the necessary capital to complete its franchise required upgrades and,
accordingly, has initiated discussions with a business broker to sell the assets
of the Partnership. However, there can be no assurance that these systems can be
sold in the near term at an acceptable price, if at all. The Corporate General
Partner or its affiliates may purchase the Partnership's cable systems depending
upon the offers received from prospective outside buyers. Any such sale would
require the consent of the holders of a majority of the Partnership's limited
partnership units and, if such sale were to the Corporate General Partner or an
affiliate thereof, would require an amendment to the partnership agreement.
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
24
<PAGE> 26
currently available, there can be no assurance that future self-insured losses
will not exceed prior costs of maintaining insurance for these risks.
Approximately 90% of the Partnership's subscribers are served by its system in
Villa Rica, Georgia 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.
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 of the Partnership's
systems, 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 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 systems rely will be timely converted
and that the failure to do so would not have an adverse impact on the
Partnership's systems. The Partnership continues to closely monitor developments
with its vendors and service suppliers.
1997 vs. 1996
Cash provided by operating activities increased by $422,800 from $957,000
to $1,379,800 for the year ended December 31, 1997 as compared to 1996. Cash
increased by $139,400 from the collection of receivable balances, including an
insurance settlement for storm damage to the Partnership's Georgia cable
systems. Changes in prepaid expenses and accounts payable provided $88,600 more
cash due to differences in the timing of payments.
The Partnership used $95,300 less cash in investing activities during 1997
than in 1996 primarily due to a decrease of $96,100 in expenditures for tangible
assets. Financing activities used $880,500 more cash in 1997 than in 1996. The
Partnership used $1,652,800 more cash to pay previously deferred amounts owed to
the Corporate General Partner and Falcon Cablevision. The Partnership also used
$946,200 more cash to repay debt under its previous credit facility and $31,500
more cash for the payment of deferred loan costs related to the new Facility.
Borrowings of $1,750,000 under the new Facility partially offset increased uses
of cash for financing activities during 1997.
1996 vs. 1995
Cash provided by operating activities increased by $548,300 from $408,700
to $957,000 for the year ended December 31, 1996 as compared to 1995. This
increase was primarily due to a $387,900 reduction in receivable balances that
resulted, in part, from an insurance settlement for storm damage to the
Partnership's Georgia cable systems. The Partnership used $4,400 less cash for
the payment of prepaid expenses and $34,400 more cash in the payment of
liabilities owed to third party creditors due to the differences in the timing
of payments.
25
<PAGE> 27
The Partnership used $152,000 more cash in investing activities during 1996
than in 1995 due to increases of $146,600 in expenditures for tangible assets
and $5,700 for intangible assets. Financing activities provided $70,700 more
cash in 1996 than in 1995 primarily due to a $136,200 increase in the deferral
of payments owed to the Corporate General Partner for management fees and
reimbursed expenses. The increase in cash was partially offset by a $65,400
increase in debt repayments.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on Costs of Start-Up Activities." The new
standard, which becomes effective for the Partnership on January 1, 1999,
requires costs of start-up activities to be expensed as incurred. The
Partnership believes that adoption of this standard will not have a material
impact on the Partnership's financial position or results of operations.
INFLATION
Certain of the Partnership's expenses, such as those for equipment repair
and replacement, 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 it
is able to increase its 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.
26
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988 acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General Partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993 pursuant to which, among other things, the Corporate General
Partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which was originally 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
with 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 15
other limited partnerships which operate under the Enstar name (including the
Partnership). Although these limited partnerships are affiliated with FHGLP,
their assets are owned by legal entities separate from the Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Marc B. Nathanson Director, Chairman of the Board and Chief Executive Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General Counsel
Michael K. Menerey Director, Executive Vice President, Chief Financial Officer
and Secretary
Joe A. Johnson Executive Vice President -- Operations
Thomas J. Hatchell Executive Vice President -- Operations
Jon W. Lunsford Executive Vice President -- Finance
Abel C. Crespo Controller
</TABLE>
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 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
27
<PAGE> 29
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 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
28
<PAGE> 30
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.
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.
29
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership has a management agreement (the "Management Agreement")
with Enstar Cable Corporation, a wholly owned subsidiary of the Corporate
General Partner (the "Manager"), pursuant to which Enstar Cable Corporation
manages the Partnership's systems and provides all operational support for the
activities of the Partnership. For these services, the Manager receives a
management fee of 5% of the Partnership's gross revenues, excluding revenues
from the sale of cable television systems or franchises, calculated and paid
monthly. In addition, the Partnership reimburses the Manager for certain
operating expenses incurred by the Manager in the day-to-day operation of the
Partnership's cable systems. The Management Agreement also requires the
Partnership to indemnify the Manager (including its officers, employees, agents
and shareholders) against loss or expense, absent negligence or deliberate
breach by the Manager of the Management Agreement. The Management Agreement is
terminable by the Partnership upon sixty (60) days written notice to the
Manager. The Manager has engaged FHGLP to provide certain management services
for the Partnership 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 receives certain system
operating management services from affiliates of the Manager in lieu of directly
employing personnel to perform such services. The Partnership reimburses the
affiliates for its allocable share of their operating costs. The Corporate
General Partner also performs certain supervisory and administrative services
for the Partnership, for which it is reimbursed.
For the fiscal year ended December 31, 1997, the Manager charged the
Partnership management fees of approximately $145,900 and reimbursed expenses of
$121,900. The Partnership reimbursed affiliates approximately $266,100 for
system operating management services. In addition, certain programming services
are purchased through Falcon Cablevision. The Partnership paid Falcon
Cablevision approximately $526,800 for these programming services for fiscal
year 1997.
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 ten
percent 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
30
<PAGE> 32
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
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, 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. See Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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.
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
31
<PAGE> 33
partnership derivative action if general partners with authority to do so have
refused to bring the action or if an effort to cause those general partners to
bring the action is not likely to succeed. Certain cases decided by federal
courts have recognized the right of a limited partner to bring such actions
under the Securities and Exchange Commission's Rule 10b-5 for recovery of
damages resulting from a breach of fiduciary duty by a general partner involving
fraud, deception or manipulation in connection with the limited partner's
purchase or sale of partnership units.
The partnership agreement provides that the General Partners will be
indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partners (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that their conduct was negligent. In addition, the
partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited partners
will have a more limited right of action than they would have absent such
provisions. In addition, the Partnership maintains, at its expense and in such
reasonable amounts as the Corporate General Partner shall determine, a liability
insurance policy which insures the Corporate General Partner, FHGI and its
affiliates (which includes FHGLP), officers and directors and such other persons
as the Corporate General Partner shall determine, against liabilities which they
may incur with respect to claims made against them for certain wrongful or
allegedly wrongful acts, including certain errors, misstatements, misleading
statements, omissions, neglect or breaches of duty. To the extent that the
exculpatory provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, it is the opinion of the Securities
and Exchange Commission that such indemnification is contrary to public policy
and therefore unenforceable.
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
None.
32
<PAGE> 34
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 January 26, 1999.
ENSTAR INCOME/GROWTH PROGRAM SIX-B, 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
amended report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 26th day of January 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE(*)
---------- --------
<C> <S>
/s/ MARC B. NATHANSON Chairman of the Board and Chief Executive Officer
- --------------------------------------------------- (Principal Executive Officer)
Marc B. Nathanson
/s/ MICHAEL K. MENEREY Executive Vice President, Chief Financial Officer,
- --------------------------------------------------- Secretary and Director (Principal Financial and
Michael K. Menerey 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.
33
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets -- December 31, 1996 and 1997................ F-3
Financial Statements for each of the three years in the
period ended December 31, 1997:
Statements of Operations.................................. F-4
Statements of Partnership Capital (Deficit)............... F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Six-B, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income/Growth
Program Six-B, 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/Growth Program
Six-B, 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> 37
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
BALANCE SHEETS
========================================
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 353,500 $ 304,800
Accounts receivable, less allowance of $1,900 and $2,500 for
possible losses........................................... 67,200 101,500
Insurance claim receivable.................................. 250,500 --
Prepaid expenses and other assets........................... 61,600 48,800
Property, plant and equipment, less accumulated depreciation
and amortization.......................................... 3,593,400 3,477,400
Franchise cost, net of accumulated amortization of
$2,256,400 and $2,615,600................................. 2,053,300 1,714,100
Intangible costs, net of accumulated amortization of
$322,300 and $380,800..................................... 277,000 248,100
---------- ----------
$6,656,500 $5,894,700
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
Liabilities:
Accounts payable.......................................... $ 145,700 $ 176,500
Due to affiliates......................................... 1,679,000 430,300
Note payable.............................................. 1,288,400 --
Note payable -- affiliate................................. -- 1,750,000
---------- ----------
Total Liabilities................................. 3,113,100 2,356,800
---------- ----------
Commitments and Contingencies
Partnership Capital (Deficit):
General partners.......................................... (37,200) (37,300)
Limited partners.......................................... 3,580,600 3,575,200
---------- ----------
TOTAL PARTNERSHIP CAPITAL......................... 3,543,400 3,537,900
---------- ----------
$6,656,500 $5,894,700
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 38
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
STATEMENTS OF OPERATIONS
========================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES............................................... $2,211,900 $2,524,700 $2,917,600
---------- ---------- ----------
OPERATING EXPENSES:
Service costs........................................ 705,000 825,200 976,600
General and administrative expenses.................. 383,500 404,500 430,700
General Partner management fees and reimbursed
expenses.......................................... 202,700 231,400 267,800
Depreciation and amortization........................ 976,400 1,054,200 1,118,800
---------- ---------- ----------
2,267,600 2,515,300 2,793,900
---------- ---------- ----------
Operating income (loss)...................... (55,700) 9,400 123,700
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense..................................... (195,400) (147,700) (140,800)
Interest income...................................... 4,300 8,000 11,600
---------- ---------- ----------
(191,100) (139,700) (129,200)
---------- ---------- ----------
NET LOSS............................................... $ (246,800) $ (130,300) $ (5,500)
========== ========== ==========
Net loss allocated to General Partners................. $ (2,500) $ (1,300) $ (100)
========== ========== ==========
Net loss allocated to Limited Partners................. $ (244,300) $ (129,000) $ (5,400)
========== ========== ==========
NET LOSS PER UNIT OF LIMITED
PARTNERSHIP INTEREST.............................. $ (6.67) $ (3.52) $ (0.15)
========== ========== ==========
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING
DURING THE YEAR................................... 36,626 36,626 36,626
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 39
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
===========================================
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1995....................................... $(33,400) $3,953,900 $3,920,500
Net loss for year.................................. (2,500) (244,300) (246,800)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995..................................... (35,900) 3,709,600 3,673,700
Net loss for year.................................. (1,300) (129,000) (130,300)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996..................................... (37,200) 3,580,600 3,543,400
Net loss for year.................................. (100) (5,400) (5,500)
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997..................................... $(37,300) $3,575,200 $3,537,900
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 40
ENSTAR INCOME/GROWTH PROGRAM SIX-B, 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 loss........................................... $(246,800) $ (130,300) $ (5,500)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................... 976,400 1,054,200 1,118,800
Amortization of deferred loan costs............. 5,200 1,300 6,700
Increase (decrease) from changes in:
Receivables................................... (311,100) 76,800 216,200
Prepaid expenses and other assets............. (8,700) (4,300) 12,800
Accounts payable.............................. (6,300) (40,700) 30,800
--------- ----------- -----------
Net cash provided by operating
activities............................... 408,700 957,000 1,379,800
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures............................... (526,700) (673,300) (577,200)
Increase in intangible assets...................... (21,400) (27,100) (27,600)
Proceeds from sale of property, plant and
equipment....................................... -- 300 --
--------- ----------- -----------
Net cash used in investing activities...... (548,100) (700,100) (604,800)
--------- ----------- -----------
Cash flows from financing activities:
Repayment of debt.................................. (276,800) (342,200) (1,288,400)
Borrowings from affiliate.......................... -- -- 1,750,000
Deferred loan costs................................ (5,000) (5,100) (36,600)
Due to affiliate................................... 267,900 404,100 (1,248,700)
--------- ----------- -----------
Net cash provided by (used in) financing
activities............................... (13,900) 56,800 (823,700)
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (153,300) 313,700 (48,700)
Cash and cash equivalents at beginning of year....... 193,100 39,800 353,500
--------- ----------- -----------
Cash and cash equivalents at end of year............. $ 39,800 $ 353,500 $ 304,800
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 41
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS
========================================
NOTE 1 SUMMARY OF ACCOUNTING POLICIES
Form of Presentation
Enstar Income/Growth Program Six-B, L.P., a Georgia limited partnership
(the "Partnership"), owns and operates cable television systems in rural areas
of Georgia, Utah and Missouri.
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.
Cash equivalents at December 31, 1996 include $277,000 of short-term
investments in commercial paper.
Property, Plant, Equipment and Depreciation and Amortization
Property, plant and equipment are stated at cost. Direct costs associated
with installations in homes not previously served by cable are capitalized as
part of the distribution system, and reconnects are expensed as incurred. For
financial reporting, depreciation and amortization is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television systems............................... 5-15 years
Vehicles............................................... 3 years
Furniture and equipment................................ 5-7 years
Leasehold improvements................................. Life of lease
</TABLE>
In 1996, the Partnership revised the estimated useful life of its existing
plant assets in two Georgia franchise areas from 15 years to approximately 8.5
years. The Partnership implemented the reduction as a result of system upgrades
that are required to be completed by February 1999 as provided for in the
franchise agreements. The impact of this change in the life of the assets was to
increase depreciation expense by approximately $139,000 and $133,000 in 1996 and
1997, respectively.
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.
Intangible Costs
Intangible costs include covenants-not-to-compete and deferred charges
which are amortized using the straight-line method over two years or the life of
the covenant and certain fees paid to the Corporate General Partner and other
system acquisition costs which are amortized using the straight-line method over
two to 12 years. Costs related to borrowings are capitalized and amortized to
interest expense over the life of the related loan.
F-7
<PAGE> 42
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 1 SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Recoverability of Assets
The Partnership assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Partnership also evaluates the amortization periods of assets,
including goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
Revenue Recognition
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system.
Income Taxes
As a partnership, Enstar Income/Growth Program Six-B, L.P. pays no income
taxes. All of the income, gains, losses, deductions and credits of the
Partnership are passed through to its partners. The basis in the Partnership's
assets and liabilities differs for financial and tax reporting purposes. At
December 31, 1997, the book basis of the Partnership's net assets exceeds its
tax basis by $2,390,000.
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 the Partnership's net loss for 1997 in the
financial statements is $5,500 as compared to its tax income of $252,900 for the
same period. The difference is principally due to timing differences in
depreciation and amortization expense.
Costs of Start-Up Activities
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on Costs of Start-Up Activities." The new
standard, which becomes effective for the Partnership on January 1, 1999,
requires costs of start-up activities to be expensed as incurred. The
Partnership believes that adoption of this standard will not have a material
impact on the Partnership's financial position or results of operations.
Advertising Costs
All advertising costs are expensed as incurred.
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
distribution of the Partnership.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
F-8
<PAGE> 43
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 1 SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 PARTNERSHIP MATTERS
The Partnership was formed on September 23, 1987 to acquire, construct,
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
comprised of $1,000 from the Corporate General Partner and $100 from the initial
limited partner. Sale of interests in the Partnership began November 1988, and
the initial closing took place in January 1989. The Partnership continued to
raise capital until November 1989, at which time the Partnership had raised a
total of $9,156,400. The Partnership began its cable television business
operations in January 1990 with the acquisition of its first cable television
property.
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. The amended
partnership agreement also provides that all partnership operating profits be
allocated to the partners in the same proportion as cash flow distributions are
made. However, even after the limited partners have received cash flow equal to
their initial investment, the general partners will only receive a 1%
distribution of proceeds from a disposition or refinancing of a system until the
limited partners have received an annual simple interest return of at least 8%
of their initial investment less any distributions from previous dispositions or
refinancing of systems. Thereafter, proceeds from a disposition or refinancing
of a system shall be distributed 80% to the limited partners and 20% to the
general partners. Gains from dispositions of systems are first allocated in the
same manner as the proceeds from such dispositions. This occurs until the
dispositions result in the aggregate fair market value of the Partnership's
remaining system(s) being less than or equal to 50% of the aggregate
contributions to the capital of the Partnership by the partners.
Any losses, whether resulting from operations or the sale or disposition of
a system, are allocated 99% to the limited partners and 1% to the general
partners until the limited partners' capital account balances are equal to zero.
Thereafter, all losses are allocated to the Corporate General Partner.
Upon dissolution of the Partnership, distributions are to be made to the
partners in accordance with their capital account balances. No partners other
than general partners shall be obligated to restore any negative capital account
balance existing upon dissolution of the Partnership. All allocations to
individual limited partners will be based on their respective limited
partnership ownership interests.
The amended partnership agreement limits the amount of debt the Partnership
may incur.
NOTE 3 POTENTIAL LIQUIDATION OF PARTNERSHIP ASSETS
The Corporate General Partner has initiated discussions with a business
broker to explore selling the Partnership's cable systems. The Corporate General
Partner believes the sale of these assets would allow the Partnership to pay off
its bank debt and other obligations and liquidate as soon as practicable
thereafter. The
F-9
<PAGE> 44
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 3 POTENTIAL LIQUIDATION OF PARTNERSHIP ASSETS (CONTINUED)
Partnership is required by provisions in its franchise agreements to rebuild two
of its cable systems in Georgia at an approximate cost of $1.9 million. The
Partnership has insufficient borrowing capacity available under its current
credit facility (approximately $779,000) and is unable to seek adequate sources
of capital due to limitations on indebtedness imposed by the partnership
agreement. The partnership agreement provides that without the approval of a
majority of interests of limited partners, the Partnership may not incur
borrowings unless the amount of such borrowings together with all outstanding
borrowings does not exceed 33% of the original capital raised by the
Partnership, or a maximum of $3,052,500 permitted debt outstanding, versus the
Partnership's current facility of $2,528,900 (See Note 7). This provision of the
partnership agreement would need to be amended to increase the Partnership's
leverage. There can be no assurance that the Partnership would be able to effect
such an amendment to the partnership agreement, nor that it will seek to do so.
Neither are there any guarantees that the Partnership's systems can be sold in
the near term at an acceptable price, if at all. The Corporate General Partner
or its affiliates may purchase the Partnership's cable systems depending upon
the offers received from prospective outside buyers. Any such sale would require
the consent of the holders of a majority of the Partnership's limited
partnership units and, if such sale were to the Corporate General Partner or an
affiliate thereof, would require an amendment to the partnership agreement.
NOTE 4 INSURANCE CLAIM RECEIVABLE
Insurance claim receivable at December 31, 1996 represents an uncollected
insurance claim arising from storm-related system damage which occurred in 1995.
In 1995, the Partnership recorded revenues of approximately $38,000, pertaining
to estimated insurance proceeds for lost revenues due to the storm. Insurance
proceeds pertaining to internal labor and overhead costs of $39,000 and $144,000
in 1995 and 1996, respectively, to repair cable systems damaged by the storm
were recorded as reductions of service costs and general and administrative
expenses.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cable television systems.......................... $ 6,041,600 $ 6,531,200
Vehicles, furniture and equipment, and leasehold
improvements.................................... 173,300 190,800
----------- -----------
6,214,900 6,722,000
Less accumulated depreciation and amortization.... (2,621,500) (3,244,600)
----------- -----------
$ 3,593,400 $ 3,477,400
=========== ===========
</TABLE>
NOTE 6 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
those instruments.
F-10
<PAGE> 45
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 6 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Notes Payable
The carrying amount approximates fair value due to the variable rate nature
of the notes payable.
NOTE 7 NOTE PAYABLE -- AFFILIATE
On September 30, 1997, the Partnership refinanced its existing debt with a
credit facility from a subsidiary of the Corporate General Partner, Enstar
Finance Company, LLC ("EFC"). EFC obtained a secured bank facility of $35
million from two agent banks in order to obtain funds that would in turn be
advanced to the Partnership and certain of the other partnerships managed by the
Corporate General Partner. The Partnership entered into a loan agreement with
EFC for a revolving loan facility (the "Facility") of $2,528,900 of which
$1,750,000 was advanced to the Partnership at closing. Such funds together with
available cash were used to repay the Partnership's previous note payable
balance of $1,077,100 and related interest expense, deferred management fees and
reimbursed expenses of $387,500 due the Corporate General Partner and deferred
programming fees of $408,000 owed to an affiliated partnership.
The Partnership's Facility will mature on August 31, 2001, at which time
all funds previously advanced will be due in full. Borrowings bear interest at
the lender's base rate (8.5% at December 31, 1997), as defined, plus 0.625%, or
at an offshore rate, as defined, plus 1.875%. The Partnership is permitted to
prepay amounts outstanding under the Facility at any time without penalty, and
is able to reborrow throughout the term of the Facility up to the maximum
commitment then available so long as no event of default exists. If the
Partnership has "excess cash flow" (as defined in its loan agreement) and has
leverage, as defined, in excess of 4.25 to 1, or receives proceeds from sales of
its assets in excess of a specified amount, the Partnership is required to make
mandatory prepayments under the Facility. Such prepayments permanently reduce
the maximum commitment under the Facility. The Partnership is also required to
pay a commitment fee of 0.5% per annum on the unused portion of its Facility,
and an annual administrative fee. Advances by EFC under its partnership loan
facilities are independently collateralized by individual partnership borrowers
so that no partnership is liable for advances made to other partnerships.
Borrowings under the Partnership's Facility are collateralized by substantially
all assets of the Partnership. At closing, the Partnership paid to EFC a $25,700
facility fee. This represented the Partnership's pro rata portion of a similar
fee paid by EFC to its lenders. In connection with this refinancing, the
Partnership wrote off $3,200 in deferred loan costs relating to the former bank
credit agreement.
The Facility contains certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sales of assets, acquisitions and other covenants, defaults and
conditions. The Facility does not restrict the payment of distributions to
partners unless an event of default exists thereunder or the Maximum Leverage
Ratio, as defined, is greater than 4 to 1. The Corporate General Partner
believes the Partnership was in compliance with the covenants at December 31,
1997.
The Corporate General Partner contributed a $244,600 receivable balance due
from the Partnership for deferred management fees and reimbursed expenses as an
equity contribution to EFC. This balance remains an outstanding obligation of
the Partnership.
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Partnership leases tower sites associated with its systems under
operating leases expiring in various years through 2002.
F-11
<PAGE> 46
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
YEAR AMOUNT
---- -------
<S> <C>
1998....................................................... $ 7,100
1999....................................................... 6,600
2000....................................................... 6,600
2001....................................................... 1,700
-------
$22,000
=======
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$13,800, $17,300 and $18,300 in 1995, 1996 and 1997, respectively. Pole rentals
approximated $41,300, $40,800 and $47,500 in 1995, 1996 and 1997, respectively.
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.
Capital expenditures of approximately $1.9 million will be necessary to
upgrade an existing cable television system by February 1999 as required by two
franchise agreements. The Partnership is unable to obtain adequate capital to
accomplish the upgrade. Consequently, the Corporate General Partner has
initiated discussions with a business broker to sell the Partnership's assets.
See Note 3.
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 90% of the Partnership's
subscribers are served by its system in Villa Rica, Georgia 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
F-12
<PAGE> 47
ENSTAR INCOME/GROWTH PROGRAM SIX-B, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
=========================================
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
appropriate for all other property, liability, automobile, workers' compensation
and other types of insurable risks.
NOTE 9 TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the "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 $110,600, $126,200 and
$145,900 in 1995, 1996 and 1997, respectively.
In addition to the monthly management fee, the Partnership reimburses the
Manager for direct expenses incurred on behalf of the Partnership, and for the
Partnership's allocable share of operational costs associated with services
provided by the Manager. All cable television properties managed by the
Corporate General Partner and its subsidiaries are charged a proportionate share
of these expenses. 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. Reimbursed expenses were $92,100, $105,200 and
$121,900 in 1995, 1996 and 1997, respectively.
The payment of management fees and reimbursed expenses was deferred in
prior years. On September 30, 1997, the Partnership obtained new financing and
subsequently used such borrowings and other available cash to pay $387,500 of
its cumulative deferred balance, which approximated $632,100. The remainder of
these deferred amounts was contributed as an equity contribution by the
Corporate General Partner to EFC. See Note 7.
The Partnership 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
Partnership. The Partnership reimburses the affiliates for its allocable share
of the affiliates' operational costs. The total amount charged to the
Partnership for these costs approximated $243,900, $243,000 and $266,100 in
1995, 1996 and 1997, respectively. No management fee is payable to the
affiliates by the Partnership and there is no duplication of reimbursed expenses
and costs paid to the Manager.
Substantially all programming services have been purchased through Falcon
Cablevision. 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. Programming fee expense was $370,900, $451,900 and $526,800
in 1995, 1996 and 1997, respectively. The payment of programming fees to
Cablevision was deferred in prior years. On September 30, 1997, the Partnership
utilized borrowings from its Facility together with available cash to pay its
cumulative deferred programming expense balance, which approximated $408,000.
Programming fees are included in service costs in the statements of operations.
NOTE 10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1995, 1996 and 1997, cash paid for
interest amounted to $237,900, $148,700 and $114,400, respectively.
F-13
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3 Amended and Restated Agreement of Limited Partnership of
Enstar Income/Growth Program Six-B, L.P. dated January 5,
1989.(1)
10.1 Management Agreement between Enstar Income/Growth Program
Six-B, L.P. and Enstar Cable Corporation.(1)
10.2 Service agreement between Enstar Communication Corporation,
Enstar Cable Corporation and Falcon Holding Group, Inc.
dated as of October 1, 1988.(1)
10.3 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television system for the
City of Ivins, Utah.(1)
10.4 Franchise Ordinance 86-7 and related documents thereto
granting a non-exclusive community antenna television
franchise for the City of Ivins, Utah.(2)
10.5 Franchise Ordinance 90-2 establishing the uniform franchise
tax on all public utilities of the Town of Ivins, Utah.(2)
10.6 Franchise Ordinance 210 and related documents thereto
granting a non-exclusive community antenna television
franchise for the City of Fisk, Missouri.(2)
10.7 Franchise Ordinance 121 and related documents thereto
granting a non-exclusive community antenna television
franchise for the City of Qulin, Missouri.(2)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
City of Buchanan, Georgia.(2)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
City of Temple, Georgia.(2)
10.10 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
County of Carroll, Georgia.(2)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
City of Bowden, Georgia.(2)
10.12 Franchise Resolution and related documents thereto granting
a non-exclusive community antenna television franchise for
the County of Haralson, Georgia.(2)
10.13 Franchise Agreement and related documents thereto granting a
non-exclusive community antenna television franchise for the
City of Bremen, Georgia.(2)
10.14 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
City of Villa Rica, Georgia.(2)
10.15 Credit and Term Loan Agreement dated December 14, 1990 by
and between Enstar Income/Growth Program Six-B, L.P. and The
First National Bank of Boston.(2)
10.16 Amendment No. 1 to Credit Agreement dated December 14, 1990
by and between Enstar Income/Growth Program Six-B, L.P. and
the First National Bank of Boston, dated March 23, 1993.(3)
10.17 Amendment No. 2 to Credit Agreement dated December 14, 1990
by and between Enstar Income/Growth Program Six-B, L.P. and
the First National Bank of Boston, dated March 22, 1994.(4)
10.18 Amendment No. 3 to Credit Agreement dated December 14, 1990
by and between Enstar Income/Growth Program Six-B, L.P. and
the First National Bank of Boston, dated August 11, 1994.(5)
10.19 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna franchise for the City of
Villa Rica, Georgia.(6)
</TABLE>
E-1
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.20 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna franchise for the city of
Temple, Georgia.(6)
10.21 Amendment No. 4 to Credit Agreement dated December 14, 1990
by and between Enstar Income/Growth Program Six-B, L.P. and
the First National Bank of Boston, dated September 29,
1995.(7)
10.22 Amendment No. 5 to Credit Agreement dated December 14, 1990
by and between Enstar Income/Growth Program Six-B, L.P. and
the First National Bank of Boston, dated March 28, 1996.(8)
10.23 Loan Agreement between Enstar Income/Growth Program Six-B,
L.P. and Enstar Finance Company, LLC dated September 30,
1997.(9)
10.24 A resolution of the City of Bremen, Georgia extending the
Cable Television Franchise of Enstar Income/Growth Program
Six-B, L.P. Passed and adopted December 8, 1997.
21.1 Subsidiaries: None.
</TABLE>
- ---------------
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-18495 for the fiscal year ended December 31, 1989.
(2) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-18495 for the fiscal year ended December 31, 1990.
(3) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18495 for the quarter ended March 31, 1993.
(4) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-18495 for the fiscal year ended December 31, 1993.
(5) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18495 for the quarter ended September 30,
1994.
(6) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18495 for the quarter ended March 31, 1995.
(7) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18495 for the quarter ended September 30,
1995.
(8) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 0-18495 for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18495 for the quarter ended September 30,
1997.
E-2
