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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
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: 000-14508
ENSTAR INCOME PROGRAM II-1, L.P.
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(Exact name of registrant as specified in its charter)
Georgia 58-1628877
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12405 Powerscourt Drive
St. Louis, Missouri 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Units of Limited Partnership Interest None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting equity securities held by
non-affiliates of the registrant: All of the registrant's 29,936 units of
limited partnership interests, its only class of equity securities, are held by
non-affiliates. There is no public trading market for the units, and transfers
of units are subject to certain restrictions; accordingly, the registrant is
unable to state the market value of the units held by non-affiliates.
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The Exhibit Index is located at Page E-1.
ENSTAR INCOME PROGRAM II-1, L.P.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
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Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 18
Item 3. Legal Proceedings ................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders .............. 18
PART II
Item 5. Market for the Registrant's Equity Securities and Related
Security Holder Matters .......................................... 19
Item 6. Selected Financial Data .......................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....... 27
Item 8. Financial Statements and Supplementary Data ...................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 28
Item 11. Executive Compensation ........................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management. .. 32
Item 13. Certain Relationships and Related Transactions ................... 32
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 35
Signatures ....................................................... 36
This Annual Report on Form 10-K is for the year ended December 31, 2001. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. In addition, information that we file with the Securities and Exchange
Commission in the future will automatically update and supersede information
contained in this Annual Report. In this Annual Report, "we," "us," and "our"
refers to Enstar Income Program II-1, L.P.
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PART I
Item 1. BUSINESS
Introduction
Enstar Income Program II-1, L.P., a Georgia Limited Partnership (the
"Partnership"), is engaged in the ownership and operation of cable television
systems serving approximately 6,300 basic customers at December 31, 2001 in and
around the cities of Taylorville, Litchfield and Gillespie, Illinois, and
portions of unincorporated Christian County, Illinois.
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"). 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 14 Limited
Partnerships formed to own and operate cable television systems and through a
wholly-owned operating subsidiary. As of December 31, 2001, the Corporate
General Partner managed cable television systems serving approximately 68,500
basic customers. On November 12, 1999, the Corporate General Partner became an
indirect controlled subsidiary of Charter Communications, Inc. (also called
Charter), the nation's fourth largest cable operator, serving approximately
seven million customers. The Corporate General Partner is responsible for
day-to-day management of the Partnership and its operations. Charter and its
affiliates provide management and other services to the Partnership, for which
they receive a management fee and reimbursement of expenses. The principal
executive offices of the Partnership and the Corporate General Partner are
located at 12405 Powerscourt Drive, St. Louis, MO 63131-0555 and their telephone
number is (314) 965-0555.
Proposed Sale of Assets
On August 29, 2001, the Partnership entered into an asset purchase
agreement providing for the sale of all of the Partnership's cable television
systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate
of the Corporate General Partner and an indirect subsidiary of Charter, for a
total sale price of approximately $14,706,800 in cash ($2,258 per customer
acquired), anticipated to result in a post-closing distribution of approximately
$510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The
Charter Sale is part of a larger transaction in which the Partnership and five
other affiliated partnerships (which, together with the Partnership are
collectively referred to as the "Selling Partnerships") would sell all of their
assets used in the operation of their respective Illinois cable television
systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the
"Purchasers") for a total cash sale price of $63,000,000. The total sale price
has been allocated among the Selling Partnerships based on the number of
customers served by each of the Selling Partnerships' respective Illinois cable
systems as of June 30, 2001. Each Selling Partnership will receive the same
value per customer. Closing of the Charter Sale is subject to closing sale price
adjustments, regulatory approvals, customary closing conditions and the approval
by the limited partners of the five other affiliated Selling Partnerships of the
sale of their respective Illinois cable systems. In addition, unless waived by
the Purchasers, the limited partners of each of the Selling Partnerships must
approve an amendment to their respective partnership agreement to allow the sale
of assets to an affiliate of such partnership's general partner. The Purchasers
are each indirect subsidiaries of the Corporate General Partner's ultimate
parent company, Charter, and, therefore, are affiliates of the Partnership and
each of the other Selling Partnerships. The Purchasers have indicated that they
may waive the requirement of limited partner approval by all six Selling
Partnerships. If the Purchasers do waive this requirement, then they might
purchase the Illinois systems in more than one closing, and only with respect to
those Selling Partnerships that have received the approval of their limited
partners. Although it is presently expected that the sale of the Partnership's
Illinois systems will be consummated in the second quarter of 2002, there is no
assurance regarding completion of the transaction. The financial statements
continue to be presented on a going concern basis. If the sale is approved in
accordance with the terms of the purchase agreement, the Partnership will
immediately change to a liquidation basis of accounting.
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The proposed Charter Sale resulted from a sale process actively pursued
since 1999, when the Corporate General Partner sought purchasers for all of the
cable television systems of the Selling Partnerships, as well as eight other,
affiliated limited partnership cable operators of which the Corporate General
Partner is also the general partner. This effort was undertaken primarily
because, based on the Corporate General Partner's experience in the cable
television industry, it was concluded that generally applicable market
conditions and competitive factors were making (and would increasingly make) it
extremely difficult for smaller operators of rural cable systems (such as the
Partnership and the other affiliated partnerships) to effectively compete and be
financially successful. This determination was based on the anticipated cost of
electronics and additional equipment to enable the Partnership's systems to
operate on a two-way basis with improved technical capacity, insufficiency of
Partnership cash reserves and cash flows from operations to finance such
expenditures, limited customer growth potential due to the Partnership's
systems' rural location, and a general inability of a small cable system
operator such as the Partnership to benefit from economies of scale and the
ability to combine and integrate systems that large cable operators have.
Although significant plant upgrades have been made to increase channel capacity
and enhance the value of the Partnership's systems, the Corporate General
Partner projected that if the Partnership made the comprehensive additional
upgrades deemed necessary to enable enhanced and competitive services,
particularly activation of two-way capability, the Partnership would not recoup
the costs or regain its ability to operate profitably within the remaining term
of its franchises, and as a result, making these upgrades would not be
economically prudent.
As a result of marketing efforts using an independent broker experienced
in the sale of cable systems, the Partnership, together with certain affiliated
partnerships for which the Corporate General partner also served as a general
partner (collectively, the "Gans Selling Partnerships"), entered into a purchase
and sale agreement, dated as of August 8, 2000, as amended as of September 29,
2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of
Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to
acquire the assets comprising the Partnership's system, as well as certain
assets of the other Gans Selling Partnerships. Following a series of discussions
and meetings, the Partnership and Gans determined that they were not able to
agree on certain further amendments to the Gans Agreement required to satisfy
conditions precedent to close the transactions. In light of these conditions and
existing economic and financial market conditions, and their impact on Gans'
inability to arrange financing in order to close the acquisitions, on April 18,
2001, the parties agreed to terminate the Gans Agreement.
Following termination of the Gans Agreement, the broker once again
attempted to market the various Illinois systems of the affiliated partnerships,
including the Partnership's system. As a result of a "sealed-bid" auction
process, six bids were received and the bid submitted by certain affiliates of
the Corporate General Partner was the highest, and exceeded the next highest bid
by 25%. Following this second sale process, the Partnership entered into the
asset purchase agreement for the Charter Sale.
Distribution of Sale Proceeds and Liquidation of the Partnership.
After paying its debts and obligations and paying or providing for the
payment of the expenses of the Charter Sale, the Partnership will terminate and
dissolve, and the Corporate General Partner will make one or more liquidating
distributions to itself and the Limited Partners of the Partnership's remaining
assets, in accordance with the Partnership Agreement. We currently estimate that
pre-tax liquidating distributions to the Limited Partners from the Charter Sale
will total approximately $510 per Unit, after estimated closing adjustments and
closing and liquidation expenses. As the holder of a 1% interest in the
Partnership, the Corporate General Partner will receive a liquidating
distribution of approximately $154,300.
Description of the Partnership's Systems
At December 31, 2001, the Partnership's cable systems operated from
headends located in Litchfield and Taylorville, Illinois. The systems passed
approximately 11,354 homes, and served 6,267 basic customers, or 55.2% of the
homes passed. In addition to the basic cable television channels, the
Partnership
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offers single premium channel services (such as HBO) for a monthly fee per
channel. As of December 31, 2001, the Partnership had 1,100 premium service
units, or 17.6% of homes subscribing to cable service. The Partnership's average
monthly revenue per basic customer during the year ended December 31, 2001 was
approximately $42.20.
Homes passed refers to our estimates of the approximate number of dwelling
units in a particular community that can be connected to our cable systems
without any further extension of principal transmission lines. Estimates are
based upon a variety of sources, including billing records, house counts, city
directories and other local sources. Basic penetration represents basic
customers as a percentage of homes passed by cable transmission lines. 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. Premium penetration represents 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. Average monthly revenue per basic customer has
been computed based on revenue for the year ended December 31, 2001, divided by
twelve months, divided by the actual number of basic customers at the end of the
year.
Services, Marketing and Prices
Our cable television systems offer customers various levels of cable
services consisting of:
o broadcast television signals of local network, independent and
educational stations;
o a limited number of television signals originating from distant
cities, such as WGN;
o various satellite delivered, non-broadcast channels, such as CNN,
MTV, The USA Network, ESPN, TNT, and The Disney Channel;
o programming originated locally by the cable television system, such
as public, educational and government access programs; and
o digital services delivered over a hybrid fiber and satellite
delivered system.
For an extra monthly charge, our cable television systems also offer
premium television services to their customers. These services, such as 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 "Regulation and Legislation."
In October 2001, we began offering customers digital services through a
hybrid system that delivers traditional cable television services through the
terrestrial cable plant and digital service through a satellite dish mounted at
the customer's home. This hybrid digital package includes a digital set top
terminal, an interactive electronic programming guide, 45 channels of CD quality
digital music, a menu of pay per view channels and at least thirty additional
digital channels. Certain digital packages also offer customers one or more
premium channels with "multiplexes." Multiplexes give customers access to
several different versions of the same premium channels which are varied as to
time of broadcast (such as east and west coast time slots) or programming
content and theme (such as westerns and romance).
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 our cable television systems. In addition to customer revenues, our
cable television systems receive revenues from the sale of available advertising
spots on advertiser-supported programming and also offer to our customers home
shopping services, which pay the Partnership a share of revenues from sales of
products to our customers, in addition to paying us a separate fee in return for
carrying their shopping service.
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Our marketing strategy is to provide added value to increasing levels of
subscription services through packaging. In addition to the basic service
package, customers in substantially all of our cable television systems may
purchase additional unregulated packages of satellite delivered services and
premium services. Our service options vary from system to system, depending upon
a cable system's channel capacity and viewer interests. We employ radio and
local newspaper advertising to market our services. In some cable television
systems, we offer discounts to customers who purchase premium services on a
limited trial basis in order to encourage a higher level of service
subscription. We also have 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.
Rates for services also vary from market to market and according to the
type of services selected. Under the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"), most cable television systems
are subject to rate regulation of the basic service tier, 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 our cable television systems not deemed to
be subject to effective competition under the Federal Communications
Commission's ("FCC") definition. Currently, none of our cable television systems
are subject to effective competition. See "Regulation and Legislation."
At December 31, 2001, our monthly rates for basic cable service for
residential customers, including certain discounted rates, ranged from $24.50 to
$25.51 and our premium service rate was $11.95, excluding special promotions
offered periodically in conjunction with our marketing programs. A one-time
installation fee, which we may wholly or partially waive during a promotional
period, is usually charged to new customers. We charge commercial customers,
such as hotels, motels and hospitals, a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. We offer most multi-unit dwellings a negotiated bulk rate in exchange
for single-point billing and basic service to all units. These rates are also
subject to regulation.
Programming
We purchase basic and premium programming for our systems from Charter
based on Charter's actual cost. Charter's programming costs are generally based
on a fixed fee per customer or a percentage of the gross receipts for the
particular service. Charter's programming contracts are generally for a fixed
period of time and are subject to negotiated renewal. Accordingly, no assurances
can be given that Charter's, and correspondingly our, programming costs will not
continue to increase substantially in the near future, or that other materially
adverse terms will not be added to Charter's programming contracts. Management
believes, however, that Charter's relations with its programming suppliers
generally are good.
Our cable programming costs have increased in recent years due to
additional programming being provided to basic customers. In addition we are
facing higher costs to carry local broadcast channels who elect retransmission
carriage agreements. Programming costs have increased in the past, and are
expected to continue to increase due to increased costs to produce or purchase
cable programming (generally with particularly significant increases with
respect to sports programming), inflationary increases and other factors.
Cable System and Technology
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. 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
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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 completed the upgrade of its cable system served by the
Taylorville and Litchfield headends (88% of the Partnership's cable plant) to
750 megahertz or above, which allows for offering up to 110 channels. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The technical standard for this
upgrade incorporates the use of fiber optic technology to enable future channels
of analog service as well as new digital services, although additional
electronics and equipment are necessary at the headends to activate two-way
capability. The system architecture permits the introduction of high-speed data
transmission/Internet access and telephony services in the future after
incurring incremental capital expenditures related to these services. This
upgrade was financed with available funds and enabled the Partnership to enhance
the economic value of these systems.
The Gillespie franchise area, which operates from the Litchfield headend,
covering approximately 12% of the Partnership's cable plant, operates at 330
megahertz and is limited to 40 channels. Gillespie has no available channel
capacity to accommodate the addition of new channels or to provide pay-per-view
offerings to customers. There is a current plan to upgrade Gillespie to small
system digital in 2002 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.
Significant additional capital would be required to complete a
comprehensive plant and headend upgrade. The estimated cost of making additional
upgrades to the Taylorville and Litchfield headends, including the electronics
to activate two-way capability in order to be able to offer high-speed internet
service from both headends, as well as to increase channel capacity and allow
additional video, would be an aggregate of approximately $2.7 million (for an
upgrade to 550 megahertz (MHz) capacity) to $3.1 million (for an upgrade to 870
MHz capacity). However, given the proposed sale of all of the Partnership's
systems and for the reasons previously stated in the section entitled "Proposed
Sale of Assets," the Corporate General Partner does not plan to proceed with
these additional upgrades.
Customer Service and Community Relations
We place a strong emphasis on customer service and community relations and
believe that success in these areas is critical to our business. We have
developed and implemented a wide range of internal training programs for
employees, including our regional managers, that focus on our operations and
employee interaction with customers. The effectiveness of our training programs
relating to employees' interaction with customers is monitored on an ongoing
basis. We are also committed to fostering strong community relations in the
towns and cities we serve. We support many local charities and community causes
in various ways, including in-kind donations that include production services
and free air-time on major cable networks. We also participate in the "Cable in
the Classroom" program, whereby cable television companies throughout the United
States provide schools with free cable television service. In addition, we
install and provide free basic cable service to public schools, government
buildings and non-profit hospitals in many of the communities in which we
operate.
Franchises
As of December 31, 2001, we operated cable systems in six franchise areas,
pursuant to permits and similar authorizations issued by local and state
governmental authorities. Each franchise is awarded by a governmental authority
and may not be transferable unless the granting governmental authority consents.
Most franchises are subject to termination proceedings in the event of a
material breach. In addition, franchises can require us to pay the granting
authority a franchise fee of up to 5% of gross revenues as defined by the
franchise agreements, which is the maximum amount that may be charged under the
applicable law.
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Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. The Cable Communications Policy Act
of 1984 (the "1984 Cable Act") provides for, among other things, an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied the franchising authority may acquire
ownership of the system or effect a transfer of the system to another person,
the operator generally is entitled to the fair market value for the system
covered by such franchise, but no value may be attributed to the franchise
itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act,
establishes comprehensive renewal procedures which require that an incumbent
franchisee's renewal application be assessed on its own merit and not as part of
a comparative process with competing applications. See "Regulation and
Legislation." In connection with the franchise renewal process, many
governmental authorities require the cable operator to make certain commitments,
such as technological upgrades to the system. Although historically we have been
able to renew our franchises without incurring significant costs, we cannot
assure you that any particular franchise will be renewed or that it can be
renewed on commercially favorable terms. Our failure to obtain renewals of our
franchises, especially those areas where we have the most customers, would have
a material adverse effect on our business, results of operations and financial
condition.
Under the 1996 Telecommunications Act ("1996 Telecom Act"), state and
local authorities are prohibited from limiting, restricting or conditioning the
provision of telecommunications services. They may, however, impose
"competitively neutral" requirements and manage the public rights-of-way.
Granting authorities may not require a cable operator to provide
telecommunications services or facilities, other than institutional networks, as
a condition of an initial franchise grant, a franchise renewal, or a franchise
transfer. The 1996 Telecom Act also limits franchise fees to an operator's
cable-related revenues and clarifies that they do not apply to revenues that a
cable operator derives from providing new telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
The following table groups the franchises of our 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 basic customers for each
group as of December 31, 2001:
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Customers Customers
-------------------- ---------- --------- ---------
Prior to 2003 -- -- --
2003 - 2007 1 18 0.3%
2008 and after 5 6,249 99.7%
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Total 6 6,267 100.0%
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We operate cable television systems which serve multiple communities and,
in some circumstances, portions of such systems extend into jurisdictions for
which we believe no franchise is necessary. In the aggregate, approximately 160
customers, representing approximately 2.5% of our customers, are served by
unfranchised portions of such systems. We have never had a franchise revoked for
any of our systems and we believe that we have satisfactory relationships with
substantially all of our franchising authorities.
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Competition
We face competition in the areas of price, products and services, and
service reliability. We compete with other providers of television signals and
other sources of home entertainment. We operate in a very competitive business
environment which can adversely affect our business and operations.
Through business developments such as the merger of Tele-Communications,
Inc. and AT&T and the merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers have come to expect a variety of services from a single provider.
While these mergers are not expected to have a direct or immediate impact on our
business, they encourage providers of cable and telecommunications services to
expand their service offerings. They also encourage consolidation in the cable
industry, such as the proposed merger of AT&T Broadband with Comcast Corp., the
largest and third largest cable providers in the country, as cable operators
recognize the competitive benefits of a large customer base and expanded
financial resources.
Our key competitors include:
DBS. Direct broadcast satellite, known as DBS, is a significant competitor
to cable systems. The DBS industry has grown rapidly over the last several
years, far exceeding the growth rate of the cable television industry, and now
serves more than 17 million subscribers nationwide. DBS service allows the
subscriber to receive video and high-speed Internet access services directly via
satellite using a relatively small dish antenna. Moreover, video compression
technology allows DBS providers to offer more than 100 digital channels, thereby
surpassing the typical analog cable system.
DBS companies historically were prohibited from retransmitting popular
local broadcast programming. However, a change to the copyright laws in 1999
eliminated this legal impediment. As a result, DBS companies now may retransmit
such programming, once they have secured retransmission consent from the popular
broadcast stations they wish to carry, and they faced mandatory carriage
obligations of less popular broadcast stations as of January 2002. In response
to the legislation, DirecTV, Inc. and EchoStar Communications Corporation have
begun carrying the major network stations in the nation's top television
markets. DBS, however, is limited in the local programming it can provide
because of the current capacity limitations of satellite technology, and the DBS
companies currently offer local broadcast programming only in the larger U.S.
markets. The DBS industry initiated a judicial challenge to the 2002 requirement
mandating carriage of less popular broadcast stations. This lawsuit alleges that
the requirement (similar to the one applicable to cable systems) is
unconstitutional. The federal district court and circuit court both rejected the
DBS industry's constitutional challenge, but the industry is now seeking review
by the U.S. Supreme Court.
In October 2001, EchoStar and DirecTV, the two largest DBS providers in
the country, announced EchoStar's planned merger with DirecTV, subject to, among
other things, regulatory approval. If approved by regulators and consummated,
the proposed merger would provide expanded transmission capacity for a single
company serving more than 17 million customers. It is unclear what impact the
consolidation of these two companies will have on the competition we face from
the DBS industry. EchoStar and DirecTV have announced, however, that the merger
would afford the surviving entity sufficient capacity to expand the carriage of
local broadcast programming to every U.S. television market.
DSL. The deployment of digital subscriber line technology, known as DSL,
allows Internet access to subscribers at data transmission speeds greater than
available over conventional telephone lines. DSL service therefore is
competitive with high-speed Internet access over cable systems. Several
telephone companies and other companies offer DSL service. There are bills now
before Congress that would reduce regulation of Internet services offered by
incumbent telephone companies, and the FCC recently initiated a rulemaking
proceeding that could materially reduce existing regulation of DSL service,
essentially freeing such service from traditional telecommunications regulation.
The FCC's decisions and policies in this area are
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subject to change. We cannot predict the likelihood of success of the Internet
access services offered by our competitors, or the impact on our business and
operations of these competitive ventures.
DSL and other forms of high-speed Internet access provide competition to
our own provision of Internet access. For example, EchoStar and DirecTV have
both begun the provision of high-speed Internet access to residential consumers.
High-speed Internet access also facilitates the streaming of video into homes
and businesses. As the quality and availability of video streaming over the
Internet improve, video streaming may compete with the traditional delivery of
video programming services over cable systems. It is possible that programming
suppliers will consider bypassing cable operators and market their services
directly to the consumer through video streaming over the Internet.
Broadcast Television. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the FCC will
provide incumbent television licenses with the ability to deliver high
definition television pictures and multiple digital-quality program streams, as
well as advanced digital services such as subscription video and data
transmission.
Traditional Overbuilds. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that such
a franchise might contain terms and conditions more favorable than those
afforded us. In addition, entities willing to establish an open video system,
under which they offer unaffiliated programmers non-discriminatory access to a
portion of the system's cable system, may be able to avoid local franchising
requirements. Well-financed businesses from outside the cable industry, such as
public utilities that already possess fiber optic and other transmission lines
in the areas they serve, may over time become competitors. There are a number of
cities that have constructed their own cable systems, in a manner similar to
city-provided utility services. There also has been interest in traditional
overbuilds by private companies. Constructing a competing cable system is a
capital intensive process which involves a high degree of risk. We believe that
in order to be successful, a competitor's overbuild would need to be able to
serve the homes and businesses in the overbuilt area on a more cost-effective
basis than us. Any such overbuild operation would require either significant
access to capital or access to facilities already in place that are capable of
delivering cable television programming. As of December 31, 2001, the
Partnership is unaware of any overbuild situations in its cable systems.
Telephone Companies and Utilities. The competitive environment has been
significantly affected by technological developments and regulatory changes
enacted under the 1996 Telecommunications Act ("1996 Telecom Act"), which was
designed to enhance competition in the cable television and local telephone
markets. Federal cross-ownership restrictions historically limited entry by
local telephone companies into the cable business. The 1996 Telecom Act modified
this cross-ownership restriction, making it possible for local exchange
carriers, who have considerable resources, to provide a wide variety of video
services competitive with services offered by cable systems.
Several telephone companies have obtained or are seeking cable franchises
from local governmental authorities and are constructing cable systems. Some
local exchange carriers may choose to make broadband services available under
the open video regulatory framework of the FCC or through wireless technology.
We cannot predict the likelihood of success of the broadband services offered by
our competitors or the impact on us of such competitive ventures. Although
enthusiasm on the part of local exchange carriers appears to have waned in
recent months, the entry of telephone companies as direct competitors in the
video marketplace may become more widespread and could adversely affect the
profitability and valuation of established cable systems.
-10-
The telecommunications industry is highly competitive and includes
competitors with greater financial and personnel resources, who have brand name
recognition and long-standing relationships with regulatory authorities and
customers. Moreover, mergers, joint ventures and alliances among franchise,
wireless or private cable operators, local exchange carriers and others may
result in providers capable of offering cable television, Internet, and
telecommunications services in direct competition with us.
Additionally, we are subject to competition from utilities which possess
fiber optic transmission lines capable of transmitting signals with minimal
signal distortion.
Private Cable. Additional competition is posed by satellite master antenna
television systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDUs", such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes. Private
cable systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by cable
systems. SMATV systems currently benefit from operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of our
current and potential competitors. The FCC ruled in 1998 that private cable
operators can lease video distribution capacity from local telephone companies
and distribute cable programming services over public rights-of-way without
obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts
of Appeals upheld this FCC policy.
Wireless Distribution. Cable television systems also compete with wireless
program distribution services such as multi-channel multipoint distribution
systems or "wireless cable," known as MMDS. MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. Both analog and
digital MMDS services require unobstructed "line of sight" transmission paths.
Regulation and Legislation
The following summary addresses the key regulatory developments and
legislation affecting the cable industry.
The operation of a cable system is extensively regulated by the FCC, some
state governments and most local governments. The FCC has the authority to
enforce its 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 used in connection with cable
operations. The 1996 Telecom Act altered the regulatory structure governing the
nation's communications providers. It removed barriers to competition in both
the cable television market and the local telephone market. Among other things,
it reduced the scope of cable rate regulation and encouraged additional
competition in the video programming industry by allowing local telephone
companies to provide video programming in their own telephone service areas.
The 1996 Telecom Act required the FCC to undertake a host of implementing
rulemakings. Moreover, Congress and the FCC have frequently revisited the
subject of cable regulation. Future legislative and regulatory changes could
adversely affect our operations.
-11-
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems were subjected to rate regulation, unless they faced "effective
competition" in their local franchise area. Federal law defines "effective
competition" on a community-specific basis as requiring satisfaction of certain
conditions. These conditions are not typically satisfied in the current
marketplace; hence, most cable systems potentially are subject to rate
regulation. However, with the rapid growth of DBS, it is likely that additional
cable systems will soon qualify for "effective competition" and thereby avoid
further rate regulation.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service - the basic service tier, which typically contains local broadcast
stations and public, educational, and government access channels. Before a local
franchising authority begins basic service rate regulation, it must certify to
the FCC that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 2001, none of our local franchising authorities were
certified to regulate basic tier rates. Because the 1992 Cable Act permits
communities to certify and regulate prices at any time, it is possible that
additional localities served by the systems may choose to certify and regulate
basic prices in the future.
For regulated cable systems, the basic service tier rate increases are
governed by a complicated price cap scheme devised by the FCC that allows for
the recovery of inflation and certain increased costs, as well as providing some
incentive for system upgrades. Operators also have the opportunity to bypass
this "benchmark" regulatory scheme in favor of traditional "cost-of-service"
regulation in cases where the latter methodology appears favorable. Cost of
service regulation is a traditional form of rate regulation, under which a
utility is allowed to recover its costs of providing the regulated service, plus
a reasonable profit.
With regard to cable programming service tiers, which are the expanded
basic programming packages that offer services other than basic programming and
which typically contain satellite-delivered programming, the FCC historically
administered rate regulation of these tiers. Under the 1996 Telecom Act,
however, the FCC's authority to regulate cable programming service tier rates
expired on March 31, 1999. The FCC still adjudicates cable programming service
tier complaints filed prior to that date, but strictly limits its review, and
possible refund orders, to the time period prior to March 31, 1999. As of
December 31, 2001, we had no cable programming service tier rate complaints
pending at the FCC. The elimination of cable programming service tier regulation
affords us substantially greater pricing flexibility.
Premium cable services offered on a per-channel or per-program basis
remain unregulated under both the 1992 Cable Act and the 1996 Telecom Act.
However, federal law requires that the basic service tier be offered to all
cable subscribers and limits the ability of operators to require purchase of any
cable programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which expires in October 2002. The 1996 Telecom Act also relaxes existing
"uniform rate" requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.
Cable Entry into Telecommunications and Pole Attachment Rates. The 1996
Telecom Act creates a more favorable environment for us to provide
telecommunications services beyond traditional video
-12-
delivery. It provides that no state or local laws or regulations may prohibit or
have the effect of prohibiting any entity from providing any interstate or
intrastate telecommunications service. A cable operator is authorized under the
1996 Telecom Act to provide telecommunications services without obtaining a
separate local franchise. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles if the operator
provides telecommunications service, as well as cable service, over its plant.
The FCC clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, and that approach ultimately was
upheld by the United States Supreme Court.
Cable entry into telecommunications will be affected by the rulings and
regulations implementing the 1996 Telecom Act, including the rules governing
interconnection. A cable operator offering telecommunications services generally
needs efficient interconnection with other telephone companies to provide a
viable service. A number of details designed to facilitate interconnection are
subject to ongoing regulatory and judicial review, but the basic obligation of
incumbent telephone companies to interconnect with competitors, such as cable
companies offering telephone service, is well established. Even so, the economic
viability of different interconnection arrangements can be greatly affected by
regulatory changes. Consequently, we cannot predict whether reasonable
interconnection terms will be available in any particular market we may choose
to enter.
Internet Service. Over the past several years, proposals have been
advanced at the FCC and Congress that would require cable operators to provide
non-discriminatory access to unaffiliated Internet service providers and online
service providers. Several local franchising authorities actually adopted
mandatory "open access" requirements, but various federal courts have rejected
each of these actions, relying on different legal theories.
In March 2002, the FCC ruled that cable modem service (that is, the
provision of high speed internet access over cable system infrastructure) is an
interstate information service, rather than a cable or telecommunications
service. This classification should leave cable modem service exempt from the
burdens associated with traditional cable and telecommunications regulation.
Indeed, the FCC tentatively concluded that revenue earned from the provision of
cable service is not subject to local cable franchise fee assessments. With
regard to the open access question, the FCC specifically held that, regardless
of classification, regulatory forbearance should now apply.
The full consequences of classifying cable modem service as an interstate
information service are not yet fully known. The FCC is already considering
whether providers of cable modem service should contribute to the federal
government's universal service fund. This contribution could more than offset
the savings associated with excluding cable modem service from local franchise
fee assessments. The FCC also initiated a rulemaking proceeding to determine
whether its jurisdiction over information services still might warrant
imposition of open access requirements in the future. Finally, the information
services classification itself is likely to be subject to judicial review. If
regulators ultimately were allowed to impose Internet access requirements on
cable operators, it could burden the capacity of cable systems and complicate
our own plans for providing Internet service.
Telephone Company Entry into Cable Television. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers
can now compete with cable operators both inside and outside their telephone
service areas with certain regulatory safeguards. Because of their resources,
local exchange carriers could be formidable competitors to traditional cable
operators. Various local exchange carriers already are
-13-
providing video programming services within their telephone service areas
through a variety of distribution methods.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. Even then, the FCC revised its open video system policy
to leave franchising discretion to state and local authorities. It is unclear
what effect this ruling will have on the entities pursuing open video system
operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of cable systems serving an overlapping
territory. Cable operator buyouts of overlapping local exchange carrier systems,
and joint ventures between cable operators and local exchange carriers in the
same market, also are prohibited. The 1996 Telecom Act provides a few limited
exceptions to this buyout prohibition, including a carefully circumscribed
"rural exemption." The 1996 Telecom Act also provides the FCC with the limited
authority to grant waivers of the buyout prohibition.
Electric Utility Entry into Telecommunications/Cable Television. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the FCC for operating authority. Like telephone companies,
electric utilities have substantial resources at their disposal, and could be
formidable competitors to traditional cable systems. Several such utilities have
been granted broad authority by the FCC to engage in activities which could
include the provision of video programming.
Additional Ownership Restrictions. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing FCC regulations
prohibiting local cross-ownership between co-located television stations and
cable systems. The District of Columbia Circuit Court of Appeals recently struck
down this remaining cross-ownership prohibition, concluding that the FCC had
failed to explain why its continuation was "necessary" in the public interest.
In the same decision, the Court struck down another FCC regulation precluding
any entity from operating broadcast television stations serving more than 35% of
the nation. If these rulings withstand further administrative and judicial
review, they may trigger additional consolidation among domestic media
companies.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Also pursuant to the
1992 Cable Act, the FCC adopted rules that preclude any cable operator from
serving more than 30% of all U.S. domestic multichannel video subscribers,
including cable and direct broadcast satellite subscribers. The D.C. Circuit
Court of Appeals struck down these vertical and horizontal ownership limits as
unconstitutional, concluding that the FCC had not adequately justified the
specific rules (i.e., the 40% and 30% figures) adopted. As a result, an existing
divestiture requirement on AT&T was suspended. The FCC is now considering
replacement regulations. These ownership restrictions may be affected by the
proposed merger of EchoStar and DirecTV and the proposed merger of AT&T
Broadband and Comcast Cable. These recently announced transactions involve the
nation's two largest DBS providers and the nation's largest and third largest
cable operators. The proposed combinations might prompt additional consolidation
in the cable industry and are likely to heighten regulatory concerns regarding
industry
-14-
consolidation. Although any resulting restrictions could be limited to the
particular entities involved, it is also possible that the restrictions would
apply to other cable operators, including us.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to require a cable system to carry the
station. More popular stations, such as those affiliated with a national
network, typically elect retransmission consent which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to negotiate for payments for granting permission to the cable operator to carry
the stations. Must carry requests can dilute the appeal of a cable system's
programming offerings because a cable system with limited channel capacity may
be required to forego carriage of popular channels in favor of less popular
broadcast stations electing must carry. Retransmission consent demands may
require substantial payments or other concessions. Either option has a
potentially adverse effect on our business. The burden associated with must
carry may increase substantially if broadcasters proceed with planned conversion
to digital transmission and the FCC determines that cable systems simultaneously
must carry all analog and digital broadcasts in their entirety. This burden
would reduce capacity available for more popular video programming and new
Internet and telecommunication offerings. The FCC tentatively decided against
imposition of dual digital and analog must carry in a January 2001 ruling. At
the same time, however, it initiated further fact-gathering which ultimately
could lead to a reconsideration of the tentative conclusion. The FCC is also
considering whether it should maintain its initial ruling that, whenever a
digital broadcast signal does become eligible for must carry, a cable operator's
obligation is limited to carriage of the primary video signal. If the Commission
reverses itself, and cable operators are required to carry ancillary digital
feeds, the burden associated with digital must carry could be significantly
increased.
Access Channels. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The FCC has
adopted rules regulating the terms, conditions and maximum rates a cable
operator may charge for commercial leased access use. We believe that requests
for commercial leased access carriages have been relatively limited. The FCC
rejected a request that unaffiliated Internet service providers be found
eligible for commercial leased access.
Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business position, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their satellite-delivered programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming arrangements to cable
companies. This prohibition is scheduled to expire in October 2002, unless the
FCC determines in a pending proceeding that an extension is necessary to protect
competition and diversity. There also has been interest expressed in further
restricting the marketing practices of cable programmers, including subjecting
programmers who are not affiliated with cable operators to all of the existing
program access requirements, and subjecting terrestrially-delivered programming
(especially regional sports networks) to the program access requirements.
Terrestrially-delivered programming is programming delivered other than by
satellite and is currently exempt from the ban on exclusivity. These changes
should not have a dramatic impact on us, but would limit potential competitive
advantages we now enjoy. DBS providers have no similar restrictions on exclusive
programming contracts. Pursuant to the Satellite Home Viewer Improvement Act,
the FCC has adopted regulations governing
-15-
retransmission consent negotiations between broadcasters and all multichannel
video programming distributors, including cable and DBS.
Inside Wiring; Subscriber Access. In an order issued in 1997, the FCC
established rules that require an incumbent cable operator upon expiration of a
multiple dwelling unit service contract to sell, abandon, or remove "home run"
wiring that was installed by the cable operator in a multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers who are willing to pay the building owner a higher fee, where such a
fee is permissible. The FCC has also proposed terminating all exclusive multiple
dwelling unit service agreements held by incumbent operators, but allowing such
contracts when held by new entrants. In another proceeding, the FCC has
preempted restrictions on the deployment of private antennae on property within
the exclusive use of a condominium owner or tenant, such as balconies and
patios. This FCC ruling may limit the extent to which we along with multiple
dwelling unit owners may enforce certain aspects of multiple dwelling unit
agreements which otherwise prohibit, for example, placement of digital broadcast
satellite receiver antennae in multiple dwelling unit areas under the exclusive
occupancy of a renter. These developments may make it even more difficult for us
to provide service in multiple dwelling unit complexes.
Other Regulations of the Federal Communications Commission. In addition to
the FCC regulations noted above, there are other regulations of the FCC covering
such areas as:
o subscriber privacy,
o programming practices, including, among other things,
(1) blackouts of programming offered by a distant broadcast signal
carried on a cable system which duplicates the programming for
which a local broadcast station has secured exclusive
distribution rights,
(2) local sports blackouts,
(3) indecent programming,
(4) lottery programming,
(5) political programming,
(6) sponsorship identification,
(7) children's programming advertisements, and
(8) closed captioning,
o registration of cable systems and facilities licensing,
o maintenance of various records and public inspection files,
o aeronautical frequency usage,
o lockbox availability,
o antenna structure notification,
o tower marking and lighting,
o consumer protection and customer service standards,
o technical standards,
o equal employment opportunity,
o consumer electronics equipment compatibility, and
o emergency alert systems.
The FCC ruled that cable customers must be allowed to purchase set-top
terminals from third parties and established a multi-year phase-in during which
security functions (which would remain in the operator's exclusive control)
would be unbundled from basic converter functions, which could then be provided
by third party vendors. The first phase implementation date was July 1, 2000.
Additional Regulatory Policies May Be Added in the Future. The FCC
recently initiated an inquiry to determine whether the cable industry's future
provision of interactive services should be subject to
-16-
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the Commission's review of the AOL-Time Warner
merger, is in its earliest stages, but is yet another expression of regulatory
concern regarding control over cable capacity.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this
legislative activity. Copyright clearances for nonbroadcast programming services
are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
State and Local Regulation. Cable systems generally are operated pursuant
to nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, franchising fees, system construction and maintenance obligations,
system channel capacity, design and technical performance, customer service
standards, and indemnification protections. A number of states, including
Connecticut, subject cable systems to the jurisdiction of centralized state
governmental agencies, some of which impose regulation of a character similar to
that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming. Certain
states are considering the imposition of new broadly applied telecommunications
taxes.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for
-17-
certain "competitively neutral" requirements and as necessary to manage the
public rights-of-way. This law should facilitate entry into competitive
telecommunications services, although certain jurisdictions still may attempt to
impose rigorous entry requirements. In addition, local franchising authorities
may not require a cable operator to provide any telecommunications service or
facilities, other than institutional networks under certain circumstances, as a
condition of an initial franchise grant, a franchise renewal, or a franchise
transfer. The 1996 Telecom Act also provides that franchising fees are limited
to an operator's cable-related revenues and do not apply to revenues that a
cable operator derives from providing new telecommunications services. In a
March 2002 decision, the FCC tentatively held that a cable operator's provision
of Internet access service should not subject the operator to additional
franchising requirements nor should the revenue derived from such service be
subject to local franchise fee assessments.
Employees
The various operating personnel required to operate our business are
employed by the Corporate General Partner's subsidiary and by a Charter
subsidiary. As of December 31, 2001, the cost of 28 employees was charged
directly to the Partnership. Neither the Corporate General Partner nor the
Partnership is the employer of management personnel, and the persons performing
these services are employees of affiliates of the Corporate General Partner.
Accordingly, management fees are payable for supervisory and administrative
services provided by the Corporate General Partner's affiliates. See Item 10.
"Directors and Officers of the Registrant" and Item 11. "Executive
Compensation."
Item 2. PROPERTIES
We own or lease parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices, and
own or lease our service vehicles. We believe that our properties, both owned
and leased, are in good condition and are suitable and adequate for our business
operations. We own substantially all of the assets related to our cable
television operations, including our program production equipment, headend
(towers, antennas, electronic equipment and satellite earth stations), cable
plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
Item 3. LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters and other
claims incidental to our business. We believe that the resolution of such
matters will not have a material adverse impact on our financial position or
results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-18-
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
Liquidity
While our equity securities, which consist of units of Limited Partnership
interests, are publicly held, there is no established public trading market for
the units and we do not expect that a market will develop. The approximate
number of equity security holders of record was 923 as of December 31, 2001. In
addition to restrictions on the transferability of units described in our
partnership agreement, the transferability of units may be affected by
restrictions on resales imposed by federal or state law.
Distributions
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the General Partners and 99% to
the Limited Partners until the Limited Partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the General
Partners and 99% to the Limited Partners until the Limited Partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the Limited Partners have received cash flow equal to their
initial investments, the General Partners will receive a 1% allocation of cash
flow from sale or liquidation of a system until the Limited Partners have
received an annual simple interest return of at least 18% of their initial
investments less any distributions from previous system sales and cash
distributions from operations after Capital Payback. Thereafter, the respective
allocations will be made 15% to the General Partners and 85% to the Limited
Partners. Any losses from system sales or exchanges shall be allocated first to
all partners having positive capital account balances (based on their respective
capital accounts) until all such accounts are reduced to zero and thereafter to
the Corporate General Partner. All allocations to individual Limited Partners
will be based on their respective Limited Partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the Limited Partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the General Partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
The policy of the Corporate General Partner, not recognized by the terms
of the partnership agreement, is to cause the Partnership to make cash
distributions on a quarterly basis throughout the operational life of the
Partnership, assuming the availability of sufficient cash flow from Partnership
operations. The amount of such distributions, if any, will vary from quarter to
quarter depending upon our 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.
We began making periodic cash distributions to Limited Partners from
operations during 1986, and distributed an aggregate of $374,200 ($12.50 per
unit) to Limited Partners in each year during 1999, 2000 and 2001. The
Partnership will continue to determine the Partnership's ability to pay
distributions on a quarter-by-quarter basis.
Our ability to pay distributions, the actual amount of distributions and
the continuance of distributions will depend on a number of factors, including
the amount of cash flow from operations, projected capital expenditures,
provision for contingent liabilities, regulatory or legislative developments
-19-
governing the cable television industry, sale of cable system assets and growth
in customers. Some of these factors are beyond our control and consequently, we
cannot make assurances regarding the level or timing of future distributions.
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership for the five
years ended December 31, 2001. This data should be read in conjunction with the
Partnership's financial statements and related notes thereto included in Item 8.
"Financial Statements and Supplementary Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7.
Year Ended December 31,
---------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Revenues $ 3,173,700 $ 3,247,600 $ 3,200,400 $ 3,158,400 $ 2,994,500
Operating expenses (1,683,700) (1,807,800) (1,842,500) (1,743,300) (1,567,100)
Depreciation and amortization (801,400) (612,600) (472,400) (466,700) (326,000)
----------- ----------- ----------- ----------- -----------
Operating income 688,600 827,200 885,500 948,400 1,101,400
Interest income 38,900 129,400 93,900 81,900 128,800
Interest expense -- -- (19,400) (15,100) (1,600)
Other expense (28,800) (39,200) -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 698,700 $ 917,400 $ 960,000 $ 1,015,200 $ 1,228,600
=========== =========== =========== =========== ===========
Distributions to partners $ 378,000 $ 378,000 $ 378,000 $ 378,000 $ 378,000
=========== =========== =========== =========== ===========
Per unit of limited partnership interest:
Net income $ 23.11 $ 30.34 $ 31.75 $ 33.57 $ 40.63
=========== =========== =========== =========== ===========
Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash from operating activities $ 782,900 $ 1,993,500 $ 1,339,700 $ 1,397,200 $ 1,505,100
Net cash from investing activities (1,183,000) (2,062,900) (643,000) (806,800) (2,198,400)
Net cash from financing activities (378,000) (378,000) (378,000) (378,000) (378,000)
EBITDA(1) (Unaudited) 1,461,200 1,400,600 1,357,900 1,415,100 1,427,400
EBITDA as a percentage of revenues
(Unaudited) 46.0% 43.1% 42.4% 44.8% 47.7%
Capital expenditures $ 1,175,700 $ 2,060,900 $ 627,900 $ 794,100 $ 2,182,700
BALANCE SHEET DATA
Total assets $ 7,903,100 $ 8,161,700 $ 7,096,500 $ 6,555,700 $ 6,015,100
General Partners' capital (deficit) 500 (2,700) (8,100) (13,900) (20,300)
Limited Partners' capital $ 7,444,100 $ 7,126,600 $ 6,592,600 $ 6,016,400 $ 5,385,600
- ------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to income from operations or to cash
flows from operating, investing or financing activities, as determined in
accordance with generally accepted accounting principles (GAAP). EBITDA should
also not be construed as an indication of a company's operating performance or
as a measure of liquidity. In addition, because EBITDA may not be calculated
consistently by all companies, the presentation here in may not be comparable to
other similarly titled measures of other companies. Management's discretionary
use of funds depicted by EBITDA may be limited by working capital, debt service
and capital expenditure requirements and by restrictions related to legal
requirements, commitments and uncertainties.
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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 prices charged by cable television systems for basic
and premium service tiers, installation, and equipment leased by customers.
Compliance with those price regulations has had a negative impact on our
revenues and cash flow. The 1996 Telecommunications Act substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996
Telecommunications Act ended the regulation of cable programming service tier
rates on March 31, 1999. There can be no assurance as to what, if any, further
action may be taken by the FCC, Congress or any other regulatory authority or
court, or their effect on our business. Accordingly, our historical financial
results as described below are not necessarily indicative of future performance.
This annual report includes certain forward-looking statements regarding,
among other things, our 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
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues decreased $73,900 from $3,247,600 to $3,173,700, or 2.3%, for the
year ended December 31, 2001 compared to 2000. The decrease was due to decline
in basic and premium service customers. As of December 31, 2001 and 2000, we had
approximately 6,300 and 6,600 basic customers, respectively, and 1,100 and 1,500
premium service units, respectively.
The Partnership reimburses the Corporate General Partner and its
affiliates for service costs and general and administrative expenses based on
actual costs incurred on behalf of the Partnership. These reimbursed costs are
included in general partner management fees and reimbursed expenses on the
Partnership's statements of operations. The total of service costs, general and
administrative expenses and
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general partner management fees and reimbursed expenses decreased $124,100, or
6.9%, from $1,807,800 to $1,683,700 for the year ended December 31, 2001 as
compared to 2000.
Service costs decreased $43,200 from $930,100 to $886,900, or 4.6%, for
the year ended December 31, 2001 compared to 2000. Service costs represent costs
directly attributable to providing cable services to customers. The decrease is
primarily due to the decline in customers as compared to 2000.
General and administrative expenses decreased $70,800 from $361,700 to
$290,900, or 19.5%, for the year ended December 31, 2001 compared to 2000,
primarily due to an increase in capitalized labor as a result of rebuild
activity.
General partner management fees and reimbursed expenses decreased $10,100
from $516,000 to $505,900, or 2.0%, for the year ended December 31, 2001
compared to 2000. The decrease is primarily due to a decrease in management fees
as a result of a decrease in customers.
Depreciation and amortization expense increased $188,800 from $612,600 to
$801,400, or 30.8%, for the year ended December 31, 2001 compared to 2000. The
increase is due to asset additions for cable system upgrades in 2001 and
throughout 2000.
Due to the factors described above, operating income decreased $138,600
from $827,200 to $688,600, or 16.8%, for the year ended December 31, 2001
compared to 2000.
Interest income decreased $90,500 from $129,400 to $38,900, or 69.9%, for
the year ended December 31, 2001 compared to 2000, primarily due to lower
average cash balances available for investment.
Other expense of $28,800 and $39,200 for the years ended December 31, 2001
and 2000, respectively, represent legal and proxy costs associated with the
proposed sales of the Partnership's assets.
Due to the factors described above, net income decreased $218,700 from
$917,400 to $698,700, or 23.8%, for the year ended December 31, 2001 compared to
2000.
Based on our experience in the cable television industry, we believe that
earnings before interest, income taxes, depreciation and amortization, or
EBITDA, and related measures of cash flow serve as important financial analysis
tools for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage. EBITDA is not a
measurement determined under GAAP and does not represent cash generated from
operating activities in accordance with GAAP. EBITDA should not be considered by
the reader as an alternative to net income as an indicator of financial
performance or as an alternative to cash flows as a measure of liquidity. In
addition, the definition of EBITDA may not be identical to similarly titled
measures used by other companies. EBITDA increased $60,600 from $1,400,600 to
$1,461,200, or 4.3%, for the year ended December 31, 2001 as compared to 2000.
EBITDA as a percentage of revenues increased 2.9% from 43.1% to 46.0%, during
the year ended December 31, 2001 as compared to 2000. The increase was related
to the changes in revenues and expenses as described above.
Operating activities provided $1,210,600 less cash in 2001 than in 2000.
Changes in receivables, prepaid expenses, other assets and due from affiliates
used $169,200 less cash in 2001 due to differences in the timing of receivable
collections and in the payment of prepaid expenses. We used $1,349,900 more cash
to pay liabilities owed to third party creditors in 2001 than in 2000 due to
differences in the timing of payments.
We used $879,900 less cash in investing activities during 2001 than in
2000, due to a $885,200 decrease in capital expenditures partially offset by a
$5,300 increase in spending for intangible assets.
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Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased $47,200 from $3,200,400 to $3,247,600, or 1.5%, for the
year ended December 31, 2000 compared to 1999. Of the increase, $92,500 was due
to increases in regulated prices we implemented in 2000 and $17,800 was due to
an increase in other revenue producing items. The increases were partially
offset by a $63,100 decrease due to decreases in the number of subscriptions for
basic service. As of December 31, 2000 and 1999, we had approximately 6,600 and
7,100 basic customers and 1,500 and 1,400 premium service units, respectively.
Effective with the acquisition of the Corporate General Partner and
certain affiliates by Charter on November 12, 1999, certain activities
previously performed by the Partnership and expensed through service cost and
general and administrative expenses have been either eliminated by Charter, or
have been performed by Charter and then been reimbursed by the Partnership based
on Charter's costs incurred. These reimbursed costs are included in general
partner management fees and reimbursed expenses on the Partnership's statements
of operations. The total of service costs, general and administrative expenses
and general partner management fees and reimbursed expenses decreased $34,700,
or 1.9%, from $1,842,500 to $1,807,800 for the year ended December 31, 2000 as
compared to 1999.
Service costs decreased $57,000 from $987,100 to $930,100, or 5.8%, for
the year ended December 31, 2000 compared to 1999. Service costs represent costs
directly attributable to providing cable services to customers. The decrease is
primarily due to decreases in programming fees, personnel costs and certain
costs incurred by the Partnership prior to the Charter acquisition that are now
incurred by Charter and reimbursed by the Partnership, as described above.
Programming fees decreased as a result of lower prices that Charter has extended
to us and a decrease in customers.
General and administrative expenses increased $2,000 from $359,700 to
$361,700, or less than 1.0%, for the year ended December 31, 2000 compared to
1999, primarily due to an increase in bad debt expense.
General partner management fees and reimbursed expenses increased $20,300
from $495,700 to $516,000, or 4.1%, for the year ended December 31, 2000
compared to 1999. General partner management fees increased in direct relation
to increased revenues as described above. As described above, Charter now
performs certain management and operational functions formerly performed by the
Partnership. This has resulted in more reimbursable costs and lower service
costs and general and administrative expenses.
Depreciation and amortization expense increased $140,200 from $472,400 to
$612,600, or 29.7%, for the year ended December 31, 2000 compared to 1999,
primarily due to the rebuild of our plant in Taylorville, Illinois. Depreciation
expense increased as portions of the system rebuild were placed into service.
Due to the factors described above, operating income decreased $58,300
from $885,500 to $827,200, or 6.6%, for the year ended December 31, 2000
compared to 1999.
Interest income, net of interest expense, increased $54,900 from $74,500
to $129,400, or 73.7%, for the year ended December 31, 2000 compared to 1999,
primarily due to higher average cash balances available for investment, and the
reclassification of certain bank charges from interest expense to general and
administrative expenses.
Other expense of $39,200 for the year ended December 31, 2000 consisted of
legal and proxy costs associated with the proposed sale of our partnership
assets.
Due to the factors described above, net income decreased $42,600 from
$960,000 to $917,400, or 4.4%, for the year ended December 31, 2000 compared to
1999.
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Based on our experience in the cable television industry, we believe that
earnings before interest, income taxes, depreciation and amortization, or
EBITDA, and related measures of cash flow serve as important financial analysis
tools for measuring and comparing cable television companies in several areas,
such as liquidity, operating performance and leverage. EBITDA is not a
measurement determined under GAAP and does not represent cash generated from
operating activities in accordance with GAAP. EBITDA should not be considered by
the reader as an alternative to net income as an indicator of financial
performance or as an alternative to cash flows as a measure of liquidity. In
addition, the definition of EBITDA may not be identical to similarly titled
measures used by other companies. EBITDA increased $42,700 from $1,357,900 to
$1,400,600, or 3.1%, for the year ended December 31, 2001 as compared to 2000.
EBITDA as a percentage of revenues increased less than 1% from 42.4% to 43.1%,
during the year ended December 31, 2001 as compared to 2000. The decrease was
related to the changes in revenues and expenses as described above.
Operating activities provided $653,800 more cash in 2000 than in 1999.
Changes in receivables, prepaid expenses and other assets used $30,600 less cash
in 2000 due to differences in the timing of receivable collections and in the
payment of prepaid expenses. We used $525,600 less cash to pay liabilities owed
to affiliates and third party creditors in 2000 than in 1999 due to differences
in the timing of payments.
We used $1,419,500 more cash in investing activities during 2000 than in
1999, due to a $1,433,000 increase in capital expenditures partially offset by a
$13,500 decrease in spending for intangible assets.
Distributions to Partners
Partnership operations generated income exclusive of depreciation and
amortization of $1,501,100, $1,530,000 and $1,432,400 in 2001, 2000, and 1999,
respectively. As provided in the Partnership Agreement, distributions to
partners are funded from such amounts after providing for working capital and
other liquidity requirements, including debt service costs and capital
expenditures not otherwise funded by borrowings. In each of 2001, 2000 and 1999,
the Partnership paid distributions of $378,000 to its partners.
LIQUIDITY AND CAPITAL RESOURCES
Our primary objective, having invested net offering proceeds in cable
television systems, is to distribute to our partners all available cash flow
from operations and proceeds from the sale of cable systems, if any, after
providing for expenses and any planned capital requirements relating to the
expansion, improvement and upgrade of its cable systems.
We believe that cash generated by operations, will be adequate to fund
capital expenditures, debt service and other liquidity requirements in 2002 and
beyond. See "Results of Operations" for discussion regarding cash from
operating, investing and financing activities.
PROPOSED SALE OF ASSETS
On August 29, 2001, the Partnership entered into an asset purchase
agreement providing for the sale of all of the Partnership's cable television
systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate
of the Corporate General Partner and an indirect subsidiary of Charter, for a
total sale price of approximately $14,706,800 in cash ($2,258 per customer
acquired), anticipated to result in a post-closing distribution of approximately
$510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The
Charter Sale is part of a larger transaction in which the Partnership and five
other affiliated partnerships (which, together with the Partnership are
collectively referred to as the "Selling Partnerships") would sell all of their
assets used in the operation of their respective Illinois cable television
systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the
"Purchasers") for a total cash sale price of $63,000,000. The
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total sale price has been allocated among the Selling Partnerships based on the
number of customers served by each of the Selling Partnerships' respective
Illinois cable systems as of June 30, 2001. Each Selling Partnership will
receive the same value per customer. Closing of the Charter Sale is subject to
closing sale price adjustments, regulatory approvals, customary closing
conditions and the approval by the limited partners of the five other affiliated
Selling Partnerships of the sale of their respective Illinois cable systems. In
addition, unless waived by the Purchasers, the limited partners of each of the
Selling Partnerships must approve an amendment to their respective partnership
agreement to allow the sale of assets to an affiliate of such partnership's
general partner. The Purchasers are each indirect subsidiaries of the Corporate
General Partner's ultimate parent company, Charter, and, therefore, are
affiliates of the Partnership and each of the other Selling Partnerships. The
Purchasers have indicated that they may waive the requirement of limited partner
approval by all six Selling Partnerships. If the Purchasers do waive this
requirement, then they might purchase the Illinois systems in more than one
closing, and only with respect to those Selling Partnerships that have received
the approval of their limited partners. Although it is presently expected that
the sale of the Partnership's Illinois systems will be consummated in the second
quarter of 2002, there is no assurance regarding completion of the transaction.
The financial statements continue to be presented on a going concern basis. If
the sale is approved in accordance with the terms of the purchase agreement, the
Partnership will immediately change to a liquidation basis of accounting.
The proposed Charter Sale resulted from a sale process actively pursued
since 1999, when the Corporate General Partner sought purchasers for all of the
cable television systems of the Selling Partnerships, as well as eight other,
affiliated limited partnership cable operators of which the Corporate General
Partner is also the general partner. This effort was undertaken primarily
because, based on the Corporate General Partner's experience in the cable
television industry, it was concluded that generally applicable market
conditions and competitive factors were making (and would increasingly make) it
extremely difficult for smaller operators of rural cable systems (such as the
Partnership and the other affiliated Enstar partnerships) to effectively compete
and be financially successful. This determination was based on the anticipated
cost of electronics and additional equipment to enable the Partnership's systems
to operate on a two-way basis with improved technical capacity, insufficiency of
Partnership cash reserves and cash flows from operations to finance such
expenditures, limited customer growth potential due to the Partnership's
systems' rural location, and a general inability of a small cable system
operator such as the Partnership to benefit from economies of scale and the
ability to combine and integrate systems that large cable operators have.
Although significant plant upgrades have been made to increase channel capacity
and enhance the value of the Partnership's systems, the Corporate General
Partner projected that if the Partnership made the comprehensive additional
upgrades deemed necessary to enable enhanced and competitive services,
particularly activation of two-way capability, the Partnership would not recoup
the costs or regain its ability to operate profitably within the remaining term
of its franchises, and as a result, making these upgrades would not be
economically prudent.
As a result of marketing efforts using an independent broker experienced
in the sale of cable systems, the Partnership, together with certain affiliated
partnerships for which the Corporate General partner also served as a general
partner (collectively, the "Gans Selling Partnerships"), entered into a purchase
and sale agreement, dated as of August 8, 2000, as amended as of September 29,
2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of
Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to
acquire the assets comprising the Partnership's system, as well as certain
assets of the other Gans Selling Partnerships. Following a series of discussions
and meetings, the Partnership and Gans determined that they were not able to
agree on certain further amendments to the Gans Agreement required to satisfy
conditions precedent to close the transactions. In light of these conditions and
existing economic and financial market conditions, and their impact on Gans'
inability to arrange financing in order to close the acquisitions, on April 18,
2001, the parties agreed to terminate the Gans Agreement.
Following termination of the Gans Agreement, the broker once again
attempted to market the various Illinois systems of the affiliated partnerships,
including the Partnership's system. As a result of a "sealed-bid" auction
process, six bids were received and the bid submitted by certain affiliates of
the
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Corporate General Partner was the highest, and exceeded the next highest bid by
25%. Following this second sale process, the Partnership entered into the asset
purchase agreement for the Charter Sale.
After paying its debts and obligations and paying or providing for the
payment of the expenses of the Charter Sale, the Partnership will terminate and
dissolve, and the General Partner will make one or more liquidating
distributions to itself and the Unitholders of the Partnership's remaining
assets, in accordance with the Partnership Agreement. We currently estimate that
pre-tax liquidating distributions to the Unitholders from the Charter Sale will
total approximately $510 per Unit, after estimated closing adjustments and
closing and liquidation expenses. As the holder of a 1% interest in Enstar II-1,
the Corporate General Partner will receive a liquidating distribution of
approximately $154,300.
INVESTING ACTIVITIES
Significant additional capital would be required to complete a
comprehensive plant and headend upgrade. The estimated cost of making additional
upgrades to the Taylorville and Litchfield headends, including the electronics
to activate two-way capability in order to be able to offer high-speed internet
service from both headends, as well as to increase channel capacity and allow
additional video, would be an aggregate of approximately $2.7 million (for an
upgrade to 550 megahertz (MHz) capacity) to $3.1 million (for an upgrade to 870
MHz capacity). However, given the proposed sale of all of the Partnership's
systems and for the reasons previously stated in the section entitled "Proposed
Sale of Assets," the Corporate General Partner does not plan to proceed with
these additional upgrades.
FINANCING ACTIVITIES
At December 31, 2001, the Partnership had no debt outstanding. The
Partnership relies upon cash flows from operations to meet operating
requirements and fund necessary capital expenditures. Although the Partnership
currently has a significant cash balance, there can be no assurance that the
Partnership's cash flow will be adequate to meet its future liquidity
requirements.
We paid distributions totaling $378,000 during the year ended December 31,
2001. There can be no assurances regarding the level, timing or continuation of
future distributions.
CERTAIN TRENDS AND UNCERTAINTIES
Insurance coverage is maintained for all of the cable television
properties owned or managed by Charter to cover damage to cable distribution
system, customer connections and against business interruptions resulting from
such damage. This coverage is subject to a significant annual deductible which
applies to all of the cable television properties owned or managed by Charter,
including those of the Partnership.
All of our customers are served by our system in Taylorville and
Litchfield, Illinois, and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on our liquidity and cash flows. We continue to purchase
insurance coverage in amounts our management views as appropriate for all other
property, liability, automobile, workers' compensation and other insurable
risks.
Although we do not believe that the terrorist attacks on September 11,
2001 and the related events have resulted in any material changes to its
business and operations to date, it is difficult to assess the impact that these
events, combined with the general economic slowdown, will have on future
operations. These events could result in reduced spending by customers and
advertisers, which could reduce the Partnership's revenues and operating cash
flow, as well as the collectibility of accounts receivable.
-26-
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", No. 142,
"Goodwill and Other Intangible Assets" and No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting and was adopted by the Partnership on July 1, 2001. Management
believes that adoption of SFAS No. 141 did not have an impact on the financial
statements of the Partnership.
Under SFAS No. 142, goodwill and other indefinite lived intangible assets
are no longer subject to amortization over their useful lives, rather, they are
subject to at least annual assessments for impairment. Also, under SFAS No. 142,
an intangible asset should be recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights or if the intangible asset
can be sold, transferred, licensed, rented or exchanged. Such intangibles
continue to be amortized over their useful lives. SFAS 142 was implemented by
the Partnership on January 1, 2002. Management believes that adoption of SFAS
No. 142 did not have a material impact on the financial statements of the
Partnership.
Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation is required to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 was implemented by the Partnership on January 1, 2002. Management
believes that adoption of SFAS No. 143 did not have a material impact on the
financial statements of the Partnership.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No.
144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and resolves
implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by
the Partnership on January 1, 2002. The Partnership is currently in process of
assessing the impact of adoption of SFAS No. 144. See "Proposed Sale of Assets."
INFLATION
Certain of our expenses, such as those for wages and benefits, equipment
repair and replacement, and billing and marketing generally increase with
inflation. However, we do not believe that our financial results have been, or
will be, adversely affected by inflation in a material way, provided that we are
able to increase our prices periodically, of which there can be no assurance.
See "Regulation and Legislation."
Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to material market risks associated with financial
instruments.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the financial statements and related financial information
required to be filed hereunder is located on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported in Current Report on Form 8-K dated July 18, 2000.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988, acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General Partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993, pursuant to which, among other things, the Corporate General
Partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which had been previously granted to Falcon
Cablevision. Since its incorporation in Georgia in 1982, the Corporate General
Partner has been engaged in the cable/telecommunications business, both as a
general partner of 14 limited partnerships formed to own and operate cable
television systems and through a wholly-owned operating subsidiary.
The directors and executive officers of the Corporate General Partner as
of March 15, 2002, all of whom have their principal employment in a comparable
position with Charter, are named below:
NAME POSITION
Carl E. Vogel President and Chief Executive Officer
David G. Barford Executive Vice President and Chief Operating Officer
Kent D. Kalkwarf Executive Vice President and Chief Financial Officer
Steven A. Schumm Director of the Corporate General Partner, Executive
Vice President and Assistant to the President
Steven E. Silva Executive Vice President - Corporate Development and
Chief Technology Officer
David C. Andersen Senior Vice President - Communications
J. Christian Fenger Senior Vice President of Operations - Western Division
Eric A. Freesmeier Senior Vice President - Administration
Thomas R. Jokerst Senior Vice President - Advanced Technology Development
Ralph G. Kelly Senior Vice President - Treasurer
David L. McCall Senior Vice President of Operations - Eastern Division
Majid R. Mir Senior Vice President - Telephony and Advanced Services
John C. Pietri Senior Vice President - Engineering
Michael E. Riddle Senior Vice President and Chief Information Officer
William J. Schreffler Senior Vice President of Operations - Midwest Division
Curtis S. Shaw Senior Vice President, General Counsel and Secretary
Paul E. Martin Vice President, Corporate Controller and Principal
Financial Officer for Partnership Matters
Except for above-named executive officers who joined Charter after
November 1999, such officers were appointed to their position with the Corporate
General Partner following Charter's acquisition of
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control in November 1999, have been employees of Charter since November 1999,
and immediately prior to November 1999, were employees of Charter Investment,
Inc., an affiliate of Charter and the Corporate General Partner.
Carl E. Vogel, 44, President and Chief Executive Officer. Mr. Vogel has more
than 20 years of experience in telecommunications and the subscription
television business. Prior to joining Charter in October 2001, he was a Senior
Vice President of Liberty Media Corp., from November 1999 to October 2001, and
Chief Executive Officer of Liberty Satellite and Technology, from April 2000 to
October 2000. Prior to joining Liberty, Mr. Vogel was an Executive Vice
President and Chief Operating Officer of Field Operations for AT&T Broadband and
Internet Services, with responsibility of managing operations of all of AT&T's
cable broadband properties, from June 1999 to November 1999. From June 1998 to
June 1999, Mr. Vogel served as Chief Executive Officer of Primestar, Inc., a
national provider of subscription television services, and from 1997 to 1998, he
served as Chief Executive Officer of Star Choice Communications. From 1994
through 1997, Mr. Vogel served as the President and Chief Operating Officer of
EchoStar Communications. He began his career at Jones Intercable in 1983. Mr.
Vogel serves as a director of OnCommand Corporation, and holds a B.S. degree in
finance and accounting from St. Norbert College.
David G. Barford, 43 Executive Vice President and Chief Operating Officer. Mr.
Barford was promoted to his current position in July 2000, having previously
served as Senior Vice President of Operations-Western Division from June 1997 to
July 2000. Prior to joining Charter Investment (an affiliate of Charter) in
1995, Mr. Barford held various senior marketing and operating roles during nine
years at Comcast Cable Communications, Inc. He received a B.A. degree from
California State University, Fullerton, and an M.B.A. from National University.
Kent D. Kalkwarf, 42 Executive Vice President and Chief Financial Officer. Mr.
Kalkwarf was promoted to the position of Executive Vice President in July 2000,
having previously served as Senior Vice President. Prior to joining Charter
Investment in 1995, Mr. Kalkwarf was employed for 13 years by Arthur Andersen
LLP, where he attained the position of senior tax manager. He has extensive
experience in cable, real estate, and international tax issues. Mr. Kalkwarf has
a B.S. degree from Illinois Wesleyan University and is a certified public
accountant.
Steven A. Schumm, 49 Director of the Corporate General Partner, Executive Vice
President and Assistant to the President. Prior to joining Charter Investment in
1998, Mr. Schumm was Managing Partner of the St. Louis office of Ernst & Young
LLP for 14 years. He had joined Ernst & Young in 1974. He served as one of 10
members of the firm's National Tax Committee. Mr. Schumm earned a B.S. degree
from Saint Louis University.
Steven E. Silva, 42 Executive Vice President - Corporate Development and Chief
Technology Officer. Mr. Silva joined Charter Investment in 1995. Prior to his
promotion to Executive Vice President and Chief Technology Officer in October
2001, he was Senior Vice President - Corporate Development and Technology since
September 1999. Mr. Silva previously served in various management positions at
U.S. Computer Services, Inc., a billing service provider specializing in the
cable industry. He is a member of the board of directors of Diva Systems
Corporation.
David C. Andersen, 53 Senior Vice President - Communications. Mr. Andersen was
named to his current position in May 2000. Prior to this, he was Vice President
of Global Communications for CNBC, the worldwide cable and satellite business
news network subsidiary of NBC, from September 1999 through April 2000. He
worked for Cox communications, Inc. from 1982 to 1999, establishing their
communications department and advancing to Vice President of Public Affairs. He
held various management positions in communications with the General Motors
Corporation from 1971 to 1982. Mr. Andersen is a past recipient of the cable
industry's highest honor - the Vanguard Award. He serves on the Board of
KIDSNET, the educational non-profit clearinghouse of children's programming, and
is a former Chairman of the National Captioning Institute's Cable Advisory
Board.
-29-
J. Christian Fenger, 46 Senior Vice President of Operations - Western Division.
Mr. Fenger was promoted to his current position in January 2002, having served
as Vice President and Senior Vice President of Operations for our North Central
Region since 1998. From 1992 until joining us in 1998, Mr Fenger served as the
Vice President of Operations for Marcus Cable, and, prior to that, as Regional
Manager of Simmons Cable TV since 1986. Mr. Fenger received his bachelor's
degree and his master's degrees in communications management from Syracuse
University's Newhouse School of Public Communications.
Eric A. Freesmeier, 49 Senior Vice President - Administration. From 1986 until
joining Charter Investment in 1998, Mr. Freesmeier served in various executive
management positions at Edison Brothers Stores, Inc. Earlier he held management
and executive positions at Montgomery Ward. Mr. Freesmeier holds a bachelor's
degree from the University of Iowa and a master's degree from Northwestern
University's Kellogg Graduate School of Management.
Thomas R. Jokerst, 52 Senior Vice President - Advanced Technology Development.
Mr. Jokerst joined Charter Investment in 1994. Previously he served as a vice
president of Cable Television Laboratories and as a regional director of
engineering for Continental Cablevision. He is a graduate of Ranken Technical
Institute and of Southern Illinois University.
Ralph G. Kelly, 44 Senior Vice President - Treasurer. Prior to joining Charter
Investment in 1993, Mr. Kelly was controller and then treasurer of Cencom Cable
Associates between 1984 and 1992. He left Charter Investment in 1994, to become
chief financial officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly
received his bachelor's degree in accounting from the University of Missouri -
Columbia and his M.B.A. from Saint Louis University. Mr. Kelly is a certified
public accountant.
David L. McCall, 46 Senior Vice President of Operations - Eastern Division.
Prior to joining Charter Investment in 1995, Mr. McCall was associated with
Crown Cable and its predecessor company, Cencom Cable Associates, Inc., from
1983 to 1994. Mr. McCall is a member of the Southern Cable Association's Tower
Club.
Majid R. Mir, 51 Senior Vice President - Telephony and Advanced Services. Prior
to joining Charter in April 2001, Mr. Mir worked with GENUITY Networks, Inc. as
Vice President, Metro Network Engineering in Irving, Texas from June 2000 to
April 2001. Prior to that, Mr. Mir worked with GTE from 1979 to June 2000 in
various capacities of increasing responsibility, most recently as Assistant Vice
President of Core Network Engineering. Mr. Mir served as director, Business
Development for GTE, from 1996 to 1997. Mr. Mir earned a bachelor's of science
in systems science from the University of West Florida and holds a master's
degree in business administration from the University of South Florida.
John C. Pietri, 52 Senior Vice President - Engineering. Prior to joining Charter
Investment in 1998, Mr. Pietri was with Marcus Cable for nine years, most
recently serving as Senior Vice President and Chief Technical Officer. Earlier
he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
Michael E. Riddle, 43 Senior Vice President and Chief Information Officer. Prior
to joining Charter in December 1999, Mr. Riddle was Director, Applied
Technologies of Cox Communications for four years. Prior to that, he held
technical and management positions during 17 years at Southwestern Bell and its
subsidiaries. Mr. Riddle attended Fort Hays State University.
William J. Schreffler, 48 Senior Vice President of Operations - Midwest
Division. Mr Shreffler was promoted to his current position in January 2002,
having previously served as Vice President of Operations for the Michigan
region. Prior to joining Charter in 1999, Mr. Shreffler acted as a Managing
Director of Cablevision. Between 1995 and 1999, he held various positions with
Century Communications, mot recently as its Group Vice President. From 1985 to
1995, Mr. Shreffler acted as the Regional Controller for American Cable Systems
-30-
and following the acquisition of American by Continental Cablevision, as its
General Manager in its Chicago region. Mr. Shreffler holds degrees from Robert
Morris College and Duquesne University and is obtaining a master's degree in
business from Lewis University in Chicago.
Curtis S. Shaw, 53 Senior Vice President, General Counsel and Secretary. From
1988 until he joined Charter Investment in 1997, Mr. Shaw served as corporate
counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a corporate lawyer,
specializing in mergers and acquisitions, joint ventures, public offerings,
financings, and federal securities and antitrust law. Mr. Shaw received a B.A.
degree from Trinity College and a J.D. degree from Columbia University School of
Law.
Paul E. Martin, 41 Vice President, Corporate Controller and Principal Financial
Officer for Partnership Matters. Mr. Martin has been Vice President and
Corporate Controller with Enstar Communications since March 2000, and became
Principal Financial Officer for Partnership Matters in July 2001. Prior to
joining Charter in March 2000, Mr. Martin was Vice President and Controller for
Operations and Logistics for Fort James Corporation, a manufacturer of paper
products. From 1995 to February 1999, Mr. Martin was Chief Financial Officer of
Rawlings Sporting Goods Company, Inc. Mr. Martin is a certified public
accountant, having been with Arthur Andersen LLP for nine years. Mr. Martin
received a B.S. degree in accounting from University of Missouri- St. Louis.
The sole 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. Upon his resignation in September 2001, Jerald L. Kent resigned as
the sole director of Enstar Communications Corporation and was succeeded by Mr.
Schumm. Officers are appointed by and serve at the discretion of the directors
of the Corporate General Partner.
Item 11. EXECUTIVE COMPENSATION
Management Fee
The Partnership has a management agreement (the "Management Agreement")
with Enstar Cable Corporation ("Enstar Cable"), a wholly-owned subsidiary of the
Corporate General Partner, pursuant to which Enstar Cable manages our systems
and provides all operational support for our activities. For these services,
Enstar Cable receives a management fee of 5% of our gross revenues, excluding
revenues from the sale of cable television systems or franchises, which is
calculated and paid monthly. In addition, we reimburse Enstar Cable for
operating expenses incurred by Enstar Cable in the daily operation of our cable
systems. The Management Agreement also requires us to indemnify Enstar Cable
(including its officers, employees, agents and shareholders) against loss or
expense, absent negligence or deliberate breach by Enstar Cable of the
Management Agreement. The Management Agreement is terminable by the Partnership
upon 60 days written notice to Enstar Cable. Enstar Cable had, prior to November
12, 1999, engaged Falcon Communications, L.P. ("Falcon") to provide management
services for us and paid Falcon a portion of the management fees it received in
consideration of such services and reimbursed Falcon for expenses incurred by
Falcon on its behalf. Subsequent to November 12, 1999, Charter, as
successor-by-merger to Falcon, has provided such services and received such
payments. Additionally, we receive system operating management services from
affiliates of Enstar Cable in lieu of directly employing personnel to perform
those services. We reimburse the affiliates for our allocable share of their
operating costs. The Corporate General Partner also performs supervisory and
administrative services for the Partnership, for which it is reimbursed.
For the fiscal year ended December 31, 2001, Enstar Cable charged us
management fees of approximately $158,700. The Partnership also reimbursed
Enstar Cable, Charter and its affiliates approximately $347,200 or system
operating management services. In addition, programming services were purchased
through Charter. The Partnership was charged approximately $689,300 for these
programming services for fiscal year 2001.
-31-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 25, 2002, the only persons known by us to own beneficially
or that may be deemed to own beneficially more than 5% of the units were:
Amount and
Nature of
Beneficial Percent
Title of Class Name and Address of Beneficial Owner Ownership of Class
- ------------------------ --------------------------------------------------------------------------------
Units of limited Affiliated Madison Investor Unitholders 1,526 5.1%
partnership interest
Madison/OHI Liquidity Investors, LLC 20
Madison Liquidity Investors 110, LLC 20
Madison Liquidity Investors 103, LLC 24
Madison Liquidity Investors 104, LLC 412
Madison Liquidity Investors 111, LLC 412
Madison Liquidity Investors 100, LLC 32
Madison Value Fund, LLC 1,038
Madison/WP Value Fund IV, LLC 24
Madison/WP Value Fund V, LLC 412
Madison Liquidity Investors 11, LLC Madison Avenue 1,038
Investment Partners, LLC 1,506
The Harmony Group II, LLC 1,506
Bryan E. Gordon 1,506
P.O. Box 7533
Incline Village, Nevada 89452
First Equity Realty, LLC 1,506
Ronald M. Dickerman 1,506
555 Fifth Avenue, 9th Floor
New York, New York 10017
(1) As stated in Schedule 13G, as filed with the Securities and Exchange
Commission, all units are subject to shared power to vote and invest.
The Corporate General Partner is a wholly-owned subsidiary of Charter
Communications Holding Company, LLC. As of February 28, 2002, the common
membership units of Charter Communications Holding Company, LLC are owned 51.2%
by Charter, 16.7% by Vulcan Cable III Inc., and 32.1% by Charter Investment,
Inc. (assuming conversion of all convertible securities). Charter controls 100%
of the voting power of Charter Communications Holding Company. Paul G. Allen
owns approximately 3.7% of the outstanding common stock of Charter and controls
approximately 92.3% of the voting power of Charter's capital stock, and he is
the sole equity owner of Charter Investment, Inc. and Vulcan Cable III Inc.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Services
On November 12, 1999, Charter acquired ownership of Enstar Communications
Corporation from Falcon Holding Group, L.P. and assumed the management services
operations previously provided by affiliates of Falcon Communications, L.P.
Charter now manages the operations of the partnerships of which Enstar
Communications Corporation is the Corporate General Partner, including the
Partnership.
-32-
Commencing November 13, 1999, Charter began receiving management fees and
reimbursed expenses which had previously been paid by the Corporate General
Partner to Falcon.
Pursuant to the Management Agreement dated November 26, 1985 between the
Partnership and Enstar Cable Corporation ("Enstar Cable"), a subsidiary of the
Corporate General Partner, Enstar Cable provides financial, management,
supervisory and marketing services, as necessary to the Partnership's
operations. This Management Agreement provides that the Partnership shall pay
management fees equal to 5% of the Partnership's gross receipts from customers.
In addition, Enstar Cable is to be reimbursed for amounts paid to third parties,
the cost of administrative services in an amount equal to the lower of actual
cost or the amount the Partnership would be required to pay to independent
parties for comparable administrative services, salaries and benefits of
employees necessary for day-to-day operation of the Partnership's systems, and
an allocable shares of costs associated with facilities required to manage the
Partnership's systems. To provide these management services, Enstar Cable has
engaged Charter Communications Holding Company, an affiliate of the Corporate
General Partner and Charter, to provide management, consulting, programming and
billing services for the Partnership.
Since November 12, 1999, when Charter acquired control of the Corporate
General Partner and its subsidiary, Enstar Cable, as well as Falcon
Communications, L.P., the management fees payable have been limited to
reimbursement of an allocable share of Charter's management costs, which is less
than the fee permitted by the existing agreement. For the year ended December
31, 2001, accrued and unpaid management fees to Charter Communications Holding
Company LLC. were $169,700. In addition, the Partnership was charged directly
for the salaries and benefits of employees for daily operations, and where
shared by other Charter systems, an allocable share of facilities costs, with
programming and billing being charged to the Partnership at Charter's actual
cost. For the year ended December 31, 2001, service costs directly attributable
to providing cable services to customers which were incurred by Charter and
charged to the Partnership were $347,200.
Conflicts of Interest
The Partnership relies upon the Corporate General Partner and certain of
its affiliates to provide general management services, system operating
services, supervisory and administrative services and programming. See Item 11.
"Executive Compensation." The executive officers of the Corporate General
Partner have their personal employment with Charter, and, as a result, are
involved in the management of other cable ventures. Charter expects to continue
to enter into other cable ventures. These affiliations subject Charter and the
Corporate General Partner and their management to conflicts of interest. These
conflicts of interest relate to the time and services that management will
devote to the Partnership's affairs.
Proposed Sale of Assets
On August 29, 2001, the Partnership entered into an asset purchase
agreement providing for the sale of all of the Partnership's cable television
systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate
of the Corporate General Partner and an indirect subsidiary of Charter, for a
total sale price of approximately $14,706,800 in cash ($2,258 per customer
acquired), anticipated to result in a post-closing distribution of approximately
$510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The
Charter Sale is part of a larger transaction in which the Partnership and five
other affiliated partnerships (which, together with the Partnership are
collectively referred to as the "Selling Partnerships") would sell all of their
assets used in the operation of their respective Illinois cable television
systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the
"Purchasers") for a total cash sale price of $63,000,000. The total sale price
has been allocated among the Selling Partnerships based on the number of
customers served by each of the Selling Partnerships' respective Illinois cable
systems as of June 30, 2001. Each Selling Partnership will receive the same
value per customer. Closing of the Charter Sale is subject to closing sale price
adjustments, regulatory approvals, customary closing conditions and the approval
by the limited partners of the five other affiliated Selling Partnerships of the
sale of their respective Illinois cable systems. In
-33-
addition, unless waived by the Purchasers, the limited partners of each of the
Selling Partnerships must approve an amendment to their respective partnership
agreement to allow the sale of assets to an affiliate of such partnership's
general partner. The Purchasers are each indirect subsidiaries of the Corporate
General Partner's ultimate parent company, Charter, and, therefore, are
affiliates of the Partnership and each of the other Selling Partnerships. The
Purchasers have indicated that they may waive the requirement of limited partner
approval by all six Selling Partnerships. If the Purchasers do waive this
requirement, then they might purchase the Illinois systems in more than one
closing, and only with respect to those Selling Partnerships that have received
the approval of their limited partners. Although it is presently expected that
the sale of the Partnership's Illinois systems will be consummated in the second
quarter of 2002, there is no assurance regarding completion of the transaction.
The financial statements continue to be presented on a going concern basis. If
the sale is approved in accordance with the terms of the purchase agreement, the
Partnership will immediately change to a liquidation basis of accounting.
Fiduciary Responsibility and Indemnification of the General Partners
A general partner is accountable to a limited partnership as a fiduciary
and consequently must exercise good faith and integrity in handling partnership
affairs. Where the question has arisen, some courts have held that a limited
partner may institute legal action on his own behalf and on behalf of all other
similarly situated limited partners (a class action) to recover damages for a
breach of fiduciary duty by a general partner, or on behalf of the Partnership
(a partnership derivative action) to recover damages from third parties. Section
14-9-1001 of the Georgia Revised Uniform Limited Partnership Act also allows a
partner to maintain a partnership derivative action if general partners with
authority to do so have refused to bring the action or if an effort to cause
those general partners to bring the action is not likely to succeed. Some 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 the 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, we maintain, at our expense and in such reasonable
amounts as the Corporate General Partner determines, a liability insurance
policy which insures the Corporate General Partner, Charter and its affiliates,
officers and directors and persons determined by the Corporate General Partner,
against liabilities which they may incur with respect to claims made against
them for wrongful or allegedly wrongful acts, including certain errors,
misstatements, misleading statements, omissions, neglect or breaches of duty.
-34-
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.
2. Financial Statement Schedules
Reference is made to the Index to Financial Statements on page F-1.
3. Exhibits
Reference is made to the Exhibits Index on Page E-1.
(b) Reports on Form 8-K
On October 9, 2001, the registrant filed a current report on Form 8-K
announcing the resignation of Jerald L. Kent, Charter's former President
and Chief Executive Officer and the appointment of Steven A. Schumm,
Executive Vice President and Assistant to the President of Charter as sole
director of Enstar Communications Corporation, the Partnership's Corporate
General Partner.
-35-
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.
ENSTAR INCOME PROGRAM II-1, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
Dated: March 29, 2002 By: /s/ Steven A. Schumm
Steven A. Schumm
Director, Executive Vice President
and Assistant to the President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below.
Dated: March 29, 2002 By: /s/ Steven A. Schumm
Steven A. Schumm
Director, Executive Vice President
and Assistant to the President
(Principal Executive Officer) *
Dated: March 29, 2002 By: /s/ Paul E. Martin
Paul E. Martin
Vice President and Corporate Controller
(Principal Financial Officer and
Principal Accounting Officer) *
* Indicates position held with Enstar Communications Corporation, the Corporate
General Partner of the registrant.
-36-
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 2001 and 2000 F-3
Statements of Operations for the years ended December 31, 2001 and 2000 F-4
Statements of Partnership Capital (Deficit) for the years ended
December 31, 2001 and 2000 F-5
Statements of Cash Flows for the years ended December 31, 2001 and 2000 F-6
Notes to Financial Statements F-7
Report of Independent Auditors F-14
Statement of Operations for the year ended December 31, 1999 F-15
Statement of Partnership Capital (Deficit) for the year ended December 31, 1999 F-16
Statement of Cash Flows for the year ended December 31, 1999 F-17
Notes to Financial Statements F-18
All financial statement schedules have been omitted because they are either not
required, not applicable or the information has otherwise been supplied.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Enstar Income Program II-1, L.P.:
We have audited the accompanying balance sheets of Enstar Income Program II-1,
L.P. (a Georgia limited partnership) as of December 31, 2001 and 2000, and the
related statements of operations, partnership capital (deficit) and cash flows
for the years then ended. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program II-1,
L.P. as of December 31, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 29, 2002
F-2
ENSTAR INCOME PROGRAM II-1, L.P.
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
ASSETS
ASSETS:
Cash $1,083,500 $1,861,600
Accounts receivable 82,800 119,300
Due from affiliates 241,500 41,400
Prepaid expenses and other assets 11,300 37,000
Property, plant and equipment, net of accumulated depreciation
of $4,721,900 and $3,933,900, respectively 6,434,000 6,046,300
Franchise cost, less accumulated amortization of $72,500 and
$59,700, respectively 50,000 56,100
---------- ----------
Total assets $7,903,100 $8,161,700
========== ==========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 90,600 $ 633,100
Accrued liabilities 367,900 404,700
---------- ----------
Total liabilities 458,500 1,037,800
---------- ----------
PARTNERSHIP CAPITAL (DEFICIT):
General Partners 500 (2,700)
Limited Partners 7,444,100 7,126,600
---------- ----------
Total partnership capital 7,444,600 7,123,900
---------- ----------
Total liabilities and partnership capital $7,903,100 $8,161,700
========== ==========
See accompanying notes to financial statements.
F-3
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
REVENUES $3,173,700 $3,247,600
---------- ----------
OPERATING EXPENSES:
Service costs 886,900 930,100
General and administrative expenses 290,900 361,700
General partner management fees and reimbursed expenses 505,900 516,000
Depreciation and amortization 801,400 612,600
---------- ----------
2,485,100 2,420,400
---------- ----------
Operating income 688,600 827,200
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 38,900 129,400
Other expense (28,800) (39,200)
---------- ----------
10,100 90,200
---------- ----------
Net income $ 698,700 $ 917,400
========== ==========
NET INCOME ALLOCATED TO GENERAL PARTNERS $ 7,000 $ 9,200
========== ==========
NET INCOME ALLOCATED TO LIMITED PARTNERS $ 691,700 $ 908,200
========== ==========
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 23.11 $ 30.34
========== ==========
WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING
DURING THE YEAR 29,936 29,936
========== ==========
See accompanying notes to financial statements.
F-4
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General Limited
Partners Partners Total
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT), January 1, 2000 $(8,100) $6,592,600 $6,584,500
Distributions to partners (3,800) (374,200) (378,000)
Net income 9,200 908,200 917,400
------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 2000 (2,700) 7,126,600 7,123,900
Distributions to partners (3,800) (374,200) (378,000)
Net income 7,000 691,700 698,700
------- ---------- ----------
PARTNERSHIP CAPITAL, December 31, 2001 $ 500 $7,444,100 $7,444,600
======= ========== ==========
See accompanying notes to financial statements.
F-5
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 698,700 $ 917,400
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 801,400 612,600
Changes in:
Accounts receivable, prepaid expenses, other assets and
due to/from affiliates (137,900) (307,100)
Accounts payable and accrued liabilities (579,300) 770,600
---------- ----------
Net cash from operating activities 782,900 1,993,500
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,175,700) (2,060,900)
Change in intangible assets (7,300) (2,000)
---------- ----------
Net cash from investing activities (1,183,000) (2,062,900)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (378,000) (378,000)
---------- ----------
Net decrease in cash (778,100) (447,400)
CASH, beginning of year 1,861,600 2,309,000
---------- ----------
CASH, end of year $1,083,500 $1,861,600
========== ==========
See accompanying notes to financial statements.
F-6
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Enstar Income Program II-1, L.P., a Georgia limited partnership (the
"Partnership"), owns and operates cable television systems in small to medium
sized communities in Illinois.
The financial statements do not give effect to any assets that the
partners may have outside of their interest in the Partnership, nor to any
obligations of the partners, including income taxes.
Property, Plant and Equipment
Property, plant and equipment are reported at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the cable distribution system, and reconnects are
expensed as incurred. For financial reporting, depreciation is computed using
the straight-line method over the following estimated useful lives:
Cable distribution systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of life of lease or useful life of asset
Franchise Cost
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. 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. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are generally amortized using the straight-line
method over a period of up to 15 years. This period represents management's best
estimate of the useful lives of the franchises and assumes substantially all of
those franchises that expire during the period will be renewed by the
Partnership. Amortization expense related to franchises for the years ended
December 31, 2001 and 2000 was $12,900 and $11,800, respectively.
Long-Lived Assets
The Partnership reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest is less than the carrying amount of the asset, the carrying amount of
the asset is reduced to its estimated fair value and an impairment loss is
recognized.
Revenue Recognition
Cable television revenues from basic and premium services are recognized
when the related services are provided. Advertising revenues are recognized when
commercials are broadcast. Installation revenues are recognized to the extent of
direct selling costs incurred. The remainder, if any, is deferred and amortized
to income over the estimated average period that customers are expected to
remain connected to the cable system. As of December 31, 2001 and 2000, no
installation revenues have been deferred, as direct selling costs have exceeded
installation revenues.
Local governmental authorities impose franchise fees on the Partnership
ranging up to a federally mandated maximum of 5% of gross revenues. Such fees
are collected on a monthly basis from the
F-7
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Partnership's customers and are periodically remitted to local franchise
authorities. Franchise fees collected and paid are reported as revenues and
expenses.
Income Taxes
As a partnership, Enstar Income Program II-1, L.P. pays no income taxes.
All of the income, gains, losses, deductions and credits of the Partnership are
passed through to its partners. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. As of December 31,
2001 and 2000, the book basis of the Partnership's net assets exceeded its tax
basis by approximately $2,683,700 and $2,187,300, respectively. The accompanying
financial statements, which are prepared in accordance with accounting
principles generally accepted in the United States, differ from the financial
statements prepared for tax purposes due to the different treatment of various
items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for the years ended December 31, 2001
and 2000, in the financial statements is $583,300 and $309,600 more than tax
income of the Partnership for the same period, respectively, caused principally
by timing differences in depreciation expense.
Net Income per Unit of Limited Partnership Interest
Net income has been allocated 99% to the Limited Partners and 1% to the
General Partners. Net income per unit of limited partnership interest is based
on the weighted average number of units outstanding during the year. The General
Partners do not own units of partnership interest in the Partnership, but rather
hold a participation interest in the income, losses and distributions of the
Partnership.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to prior year amounts to conform to
current year presentation.
(2) PARTNERSHIP MATTERS
The Partnership was formed on July 3, 1984 by a partnership agreement, as
amended (the "Partnership Agreement"), to acquire, construct, improve, develop
and operate cable television systems. The Partnership Agreement provides for
Enstar Communications Corporation (the "Corporate General Partner") and Robert
T. Graff, Jr. to be the General Partners and for the admission of Limited
Partners through the sale of interests in the Partnership. The Partnership
continued to raise capital until $7,500,000 (the maximum) was raised during
1985.
On November 12, 1999, Charter Communications Holdings Company, LLC, an
entity controlled by Charter Communications, Inc. ("Charter"), acquired both the
Corporate General Partner, as well as Falcon Communications, L.P. ("Falcon"),
the entity that provided management and certain other services to the
Partnership. Charter is the nation's fourth largest cable operator, serving
approximately seven million customers and files periodic reports with the
Securities and Exchange Commission. Charter and its affiliates (principally CC
VII Holdings, LLC, the successor-by-merger to Falcon) provide management and
other services to the Partnership. Charter receives a management fee and
reimbursement of expenses from the Corporate General Partner for managing the
Partnership's cable television operations. See Item 11.
F-8
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
"Executive Compensation," Item 13. "Certain Relationships and Related
Transactions," and "Employees." The Corporate General Partner, Charter and
affiliated companies are responsible for the management of the Partnership and
its operations.
The amended Partnership Agreement generally provides that cash
distributions, all as defined, be allocated 1% to the General Partners and 99%
to the Limited Partners until the Limited Partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The Partnership Agreement also provides that all partnership profits, gains,
operational losses and credits, all as defined, be allocated 1% to the General
Partners and 99% to the Limited Partners until the Limited Partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the Limited Partners have received cash flow equal to their
initial investments, the General Partners will receive a 1% allocation of cash
flow from sale or liquidation of a system until the Limited Partners have
received an annual simple interest return of at least 18% of their initial
investments less any distributions from previous system sales and cash
distributions from operations. Thereafter, the respective allocations will be
made 15% to the General Partners and 85% to the Limited Partners. Any losses
from system sales or exchanges shall be allocated first to all partners having
positive capital account balances (based on their respective capital accounts)
until all such accounts are reduced to zero and thereafter to the Corporate
General Partner. All allocations to individual Limited Partners will be based on
their respective limited partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the Limited Partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the General Partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners. The Partnership Agreement limits the amount of debt the Partnership
may incur.
(3) PROPOSED SALE OF ASSETS
On August 29, 2001, the Partnership entered into an asset purchase
agreement providing for the sale of all of the Partnership's cable television
systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate
of the Corporate General Partner and an indirect subsidiary of Charter, for a
total sale price of approximately $14,706,800 in cash ($2,258 per customer
acquired) (the "Charter Sale"). The Charter Sale is part of a larger transaction
in which the Partnership and five other affiliated partnerships (which, together
with the Partnership are collectively referred to as the "Selling Partnerships")
would sell all of their assets used in the operation of their respective
Illinois cable television systems to CCE-1 and two of its affiliates (also
referred to, with CCE-1, as the "Purchasers") for a total cash sale price of
$63,000,000. The total sale price has been allocated among the Selling
Partnerships based on the number of customers served by each of the Selling
Partnerships' respective Illinois cable systems as of June 30, 2001. Each
Selling Partnership will receive the same value per customer. Closing of the
Charter Sale is subject to closing sale price adjustments, regulatory approvals,
customary closing conditions and the approval by the limited partners of the
five other affiliated Selling Partnerships of the sale of their respective
Illinois cable systems. In addition, unless waived by the Purchasers, the
limited partners of each of the Selling Partnerships must approve an amendment
to their respective partnership agreement to allow the sale of assets to an
affiliate of such partnership's general partner. The Purchasers are each
indirect subsidiaries of the Corporate General Partner's ultimate parent
company, Charter, and, therefore, are affiliates of the Partnership and each of
the other Selling Partnerships. The Purchasers have indicated that they may
waive the requirement of limited partner approval by all six Selling
Partnerships. If the Purchasers do waive this requirement, then they might
purchase the Illinois systems in more than one closing, and only with respect to
those Selling Partnerships that have received the approval of their limited
partners. Although it is presently expected that the sale of the Partnership's
Illinois systems will be consummated in the second quarter of 2002, there is no
assurance regarding completion of the transaction. The financial statements
continue to be presented on a going concern
F-9
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
basis. If the sale is approved in accordance with the terms of the purchase
agreement, the Partnership will immediately change to a liquidation basis of
accounting.
The proposed Charter Sale resulted from a sale process actively pursued
since 1999, when the Corporate General Partner sought purchasers for all of the
cable television systems of the Selling Partnerships, as well as eight other,
affiliated limited partnership cable operators of which the Corporate General
Partner is also the general partner. This effort was undertaken primarily
because, based on the Corporate General Partner's experience in the cable
television industry, it was concluded that generally applicable market
conditions and competitive factors were making (and would increasingly make) it
extremely difficult for smaller operators of rural cable systems (such as the
Partnership and the other affiliated Enstar partnerships) to effectively compete
and be financially successful. This determination was based on the anticipated
cost of electronics and additional equipment to enable the Partnership's systems
to operate on a two-way basis with improved technical capacity, insufficiency of
Partnership cash reserves and cash flows from operations to finance such
expenditures, limited customer growth potential due to the Partnership's
systems' rural location, and a general inability of a small cable system
operator such as the Partnership to benefit from economies of scale and the
ability to combine and integrate systems that large cable operators have.
Although significant plant upgrades have been made to increase channel capacity
and enhance the value of the Partnership's systems, the Corporate General
Partner projected that if the Partnership made the comprehensive additional
upgrades deemed necessary to enable enhanced and competitive services,
particularly activation of two-way capability, the Partnership would not recoup
the costs or regain its ability to operate profitably within the remaining term
of its franchises, and as a result, making these upgrades would not be
economically prudent.
As a result of marketing efforts using an independent broker experienced
in the sale of cable systems, the Partnership, together with certain affiliated
partnerships for which the Corporate General partner also served as a general
partner (collectively, the "Gans Selling Partnerships"), entered into a purchase
and sale agreement, dated as of August 8, 2000, as amended as of September 29,
2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of
Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to
acquire the assets comprising the Partnership's system, as well as certain
assets of the other Gans Selling Partnerships. Following a series of discussions
and meetings, the Partnership and Gans determined that they were not able to
agree on certain further amendments to the Gans Agreement required to satisfy
conditions precedent to close the transactions. In light of these conditions and
existing economic and financial market conditions, and their impact on Gans'
inability to arrange financing in order to close the acquisitions, on April 18,
2001, the parties agreed to terminate the Gans Agreement.
Following termination of the Gans Agreement, the broker once again
attempted to market the various Illinois systems of the affiliated partnerships,
including the Partnership's system. Following this second sale process, the
Partnership entered into the asset purchase agreement for the Charter Sale.
After paying its debts and obligations and paying or providing for the
payment of the expenses of the Charter Sale, the Partnership will terminate and
dissolve, and the General Partner will make one or more liquidating
distributions to itself and the Unitholders of the Partnership's remaining
assets, in accordance with the Partnership Agreement.
Other expense of $28,800 and $39,200 for the years ended December 31, 2001
and 2000, respectively, represents legal and proxy costs associated with the
proposed sales of the Partnership's assets.
F-10
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of the dates
presented:
December 31,
-----------------------------
2001 2000
------------ -----------
Cable distribution systems $ 10,598,600 $ 9,487,600
Land and improvements 32,500 32,500
Vehicles, furniture and equipment 524,800 460,100
------------ -----------
11,155,900 9,980,200
Less: accumulated depreciation (4,721,900) (3,933,900)
------------ -----------
$ 6,434,000 $ 6,046,300
============ ===========
Depreciation expense for the years ended December 31, 2001 and 2000 was
$788,000 and $600,100, respectively.
(5) COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership is a party to lawsuits and claims that arose
in the ordinary course of conducting its business. In the opinion of management,
after consulting with legal counsel, the outcome of these lawsuits and claims
will not have a material adverse effect on the Partnership's financial position
or results of operations.
Regulation in the Cable Television Industry
The operation of a cable system is extensively regulated by the Federal
Communications Commission (FCC), some state governments and most local
governments. The FCC has the authority to enforce its 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 used in connection
with cable operations. The 1996 Telecommunications Act ("1996 Telecom Act")
altered the regulatory structure governing the nation's communications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduced the scope
of cable rate regulation and encouraged additional competition in the video
programming industry by allowing local telephone companies to provide video
programming in their own telephone service areas.
The 1996 Telecom Act required the FCC to undertake a host of implementing
rulemakings. Moreover, Congress and the FCC have frequently revisited the
subject of cable regulation. Future legislative and regulatory changes could
adversely affect the Partnership's operations.
Insurance
Insurance coverage is maintained for all of the cable television
properties owned or managed by Charter to cover damage to cable distribution
systems, customer connections and against business interruptions resulting from
such damage. This coverage is subject to a significant annual deductible which
applies to all of the cable television properties owned or managed by Charter,
including those of the
F-11
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Partnership.
All of the Partnership's customers are served by its system in
Taylorville, Illinois, and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Partnership's liquidity and cash flow. The Partnership
continues to maintain insurance coverage in amounts its management views as
appropriate for all other property, liability, automobile, workers' compensation
and other insurable risks.
(6) EMPLOYEE BENEFIT PLAN
The Partnership participates in a cash or deferred profit sharing plan
(the "Profit Sharing Plan") sponsored by a subsidiary of the Corporate General
Partner, which covers substantially all of its employees. The Profit Sharing
Plan provides that each participant may elect to make a contribution in an
amount up to 15% of the participant's annual compensation which otherwise would
have been payable to the participant as salary. Effective January 1, 1999, the
Profit Sharing Plan was amended, whereby the Partnership would make an employer
contribution equal to 100% of the first 3% and 50% of the next 2% of the
participants' contributions. Contributions of $0 and $6,900 were made during
2001 and 2000, respectively.
(7) TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the "Management
Agreement") with Enstar Cable Corporation (the "Manager"), a wholly owned
subsidiary of the Corporate General Partner, for a monthly management fee of 5%
of revenues to the Manager, excluding revenues from the sale of cable television
systems or franchises. Management fee expense approximated $158,700 and $162,400
for the years ended December 31, 2001 and 2000, respectively. Management fees
are non-interest bearing.
In addition to the monthly management fee, the Management Agreement also
provides that the Partnership reimburse 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.
Additionally, Charter and its affiliates provide other management and
operational services for the Partnership. These expenses are charged to the
properties served based primarily on the Partnership's allocable share of
operational costs associated with the services provided. The total amount
charged to the Partnership for these services approximated $347,200 and $353,600
for the years ended December 31, 2001 and 2000, respectively.
Substantially all programming services have been purchased through
Charter. Charter charges the Partnership for these costs based on its costs. The
Partnership recorded programming fee expense of $689,300 and $653,900 for the
years ended December 31, 2001 and 2000, respectively. Programming fees are
included in service costs in the accompany statements of operations.
The Partnership provides cable television signals to certain cable systems
in neighboring communities that are owned by other partnerships managed by the
Manager. Such services are provided without fee.
(8) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", No. 142,
"Goodwill and Other Intangible Assets" and No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting and was adopted by the Partnership on July 1, 2001. Adoption of SFAS
No. 141 did not have an impact on the financial statements of the Partnership.
F-12
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
Under SFAS No. 142, goodwill and other indefinite lived intangible assets
are no longer subject to amortization over their useful lives, rather, they are
subject to at least annual assessments for impairment. Also, under SFAS No. 142,
an intangible asset should be recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights or if the intangible asset
can be sold, transferred, licensed, rented or exchanged. Such intangibles
continue to be amortized over their useful lives. SFAS 142 was implemented by
the Partnership on January 1, 2002. Management believes that adoption of SFAS
No. 142 did not have a material impact on the financial statements of the
Partnership.
Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation is required to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 was implemented by the Partnership on January 1, 2002. Management
believes that adoption of SFAS No. 143 did not have a material impact on the
financial statements of the Partnership.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No.
144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and resolves
implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by
the Partnership on January 1, 2002. The Partnership is currently in process of
assessing the impact of adoption of SFAS No. 144.
F-13
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Enstar Income Program II-1, L.P. (a Georgia limited partnership):
We have audited the accompanying statements of operations, partnership capital
(deficit), and cash flows of Enstar Income Program II-1, L.P. (a Georgia limited
partnership) for the year ended December 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Enstar Income
Program II-1, L.P. for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California,
March 24, 2000
F-14
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
REVENUES $3,200,400
----------
OPERATING EXPENSES:
Service costs 987,100
General and administrative expenses 359,700
General partner management fees and reimbursed expenses 495,700
Depreciation and amortization 472,400
----------
2,314,900
----------
Operating income 885,500
----------
OTHER INCOME (EXPENSE):
Interest expense (19,400)
Interest income 93,900
----------
74,500
----------
Net income $ 960,000
==========
NET INCOME ALLOCATED TO GENERAL PARTNERS $ 9,600
==========
NET INCOME ALLOCATED TO LIMITED PARTNERS $ 950,400
==========
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST
$ 31.75
==========
WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR
29,936
==========
See accompanying notes to financial statements.
F-15
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF PARTNERSHIP CAPITAL (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999
General Limited
Partners Partners Total
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT), January 1, 1999 $(13,900) $6,016,400 $6,002,500
Distributions to partners (3,800) (374,200) (378,000)
Net income for year 9,600 950,400 960,000
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 1999 $ (8,100) $6,592,600 $6,584,500
======== ========== ==========
See accompanying notes to financial statements.
F-16
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 960,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 472,400
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets (51,500)
Accounts payable and due to affiliates (41,200)
-----------
Net cash provided by operating activities 1,339,700
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (627,900)
Increase in intangible assets (15,500)
-----------
Net cash used in investing activities (643,400)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (378,000)
-----------
Net increase in cash 318,300
CASH, BEGINNING OF YEAR 1,990,700
-----------
CASH, END OF YEAR $2,309,000
===========
See accompanying notes to financial statements.
F-17
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program II-1, L.P., a Georgia limited partnership (the
"Partnership"), owns and operates cable television systems in rural areas of
Illinois.
The financial statements do not give effect to any assets that the
partners may have outside of their interest in the Partnership, nor to any
obligations, including income taxes of the partners.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs associated
with installations in homes not previously served by cable are capitalized as
part of the distribution system, and reconnects are expensed as incurred. For
financial reporting, depreciation and amortization is computed using the
straight-line method over the following estimated useful lives:
Cable distribution systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of life of lease or useful life of asset
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.
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method over two
years.
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Partnership also evaluates the amortization periods of
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives.
F-18
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system.
INCOME TAXES
As a partnership, Enstar Income Program II-1, L.P. pays no income taxes.
All of the income, gains, losses, deductions and credits of the Partnership are
passed through to its partners. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. At December 31,
1999, the book basis of the Partnership's net assets exceeded its tax basis by
$1,766,200.
The accompanying financial statements, which are prepared in accordance
with generally accepted accounting principles, differ from the financial
statements prepared for tax purposes due to the different treatment of various
items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for 1999 in the financial statements
is $468,400 more than tax income of the Partnership for the same period, caused
principally by timing differences in depreciation expense.
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 is based on the weighted average number of units outstanding during the
year. The General Partners do not own units of partnership interest in the
Partnership, but rather hold a participation interest in the income, losses and
distributions of the Partnership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed in 1984 to acquire, construct, improve, develop
and operate cable television systems. The Partnership Agreement provides for
Enstar Communications Corporation (the "Corporate General Partner") and Robert
T. Graff, Jr. to be the General Partners and for the admission of Limited
Partners through the sale of interests in the Partnership. The Partnership
raised capital of $7,500,000 (the maximum) during 1985.
F-19
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
On September 30, 1998, Falcon Holding Group, L.P. ("FHGLP") acquired
ownership of the Corporate General Partner from Falcon Cablevision.
Simultaneously with the closing of that transaction, FHGLP contributed all of
its existing cable television system operations to Falcon Communications, L.P.
("FCLP"), a California limited partnership and successor to FHGLP. FHGLP served
as the managing partner of FCLP, and the General Partner of FHGLP was Falcon
Holding Group, Inc., a California corporation ("FHGI"). On November 12, 1999,
Charter Communications Holding Company, LLC, ("Charter"), acquired the ownership
of FCLP and the Corporate General Partner. The Corporate General Partner,
Charter and affiliated companies are responsible for the day-to-day management
of the Partnership and its operations.
The Partnership Agreement generally provides that all partnership profits,
gains, losses, credits, and cash distributions (all as defined) from operations
or liquidation be allocated 1% to the General Partner and 99% to the Limited
Partners until the Limited Partners have received distributions of cash flow
from operations and/or cash flow from sales, refinancing, or liquidation of
systems equal to their initial investment. After the Limited Partners have
received cash flow equal to their initial investment, the General Partner will
only receive a one percent allocation of cash flow from liquidating a system
until the Limited Partners have received an annual simple interest return of at
least 18% of their initial investment less any distributions from previous
system liquidations. Thereafter, allocations will be made 15% to the General
Partner and 85% to the Limited Partners. All allocations to individual Limited
Partners will be based on their respective capital accounts. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the Limited Partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the General Partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
The Partnership Agreement limits the amount of debt the Partnership may
incur.
NOTE 3 - POTENTIAL SALE OF PARTNERSHIP ASSETS
In accordance with the Partnership Agreement, the Corporate General
Partner has implemented a plan for liquidating the Partnership. In connection
with that strategy, the Corporate General Partner has entered into an agreement
with a cable broker to market the Partnership's cable systems to third parties.
Should the Partnership receive offers from third parties for such assets, the
Corporate General Partner will prepare a proxy for submission to the Limited
Partners for the purpose of approving or disapproving such sale. Should such a
sale be approved, the Corporate General Partner will proceed to liquidate the
Partnership following the settlement of its final liabilities. The financial
statements do not reflect any adjustments that may result from the outcome of
this uncertainty. The Corporate General Partner can give no assurance, however,
that it will be able to generate a sale of the Partnership's cable assets. The
financial statements do not reflect any adjustments that may result from the
outcome of this uncertainty.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Pole rentals amounted to $7,100 in 1999. Rentals, other than pole rentals,
charged to operations amounted to $7,100 in 1999. The Partnership is not
individually committed under any lease
F-20
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
agreement for building space. A wholly-owned subsidiary of the Corporate General
Partner (the "Manager") provides management services to the Partnership and has
signed lease agreements for regional office space for which the Partnership is
charged its allocable portion.
Other commitments include approximately $1.0 million at December 31, 1999,
to begin an upgrade of the Partnership's Litchfield cable system. The
Partnership expects to complete the project by the required deadline of January
1, 2001.
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 prices 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 prices
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 price regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions.
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Partnership's cable distribution plant and Customer connections
against property damage as well as possible business interruptions caused by
such damage. The decision to self-insure was made due to significant increases
in the cost of insurance coverage and decreases in the amount of insurance
coverage available.
In October 1998, FCLP reinstated third party insurance coverage for all of
the cable television properties owned or managed by FCLP to cover damage to
cable distribution plant and Customer connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties formerly owned or managed by FCLP through November 12, 1999, and
currently managed by Charter.
All of the Partnership's customers are served by its system in
Taylorville, Illinois, and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Partnership's liquidity and cash flows. The Partnership
continues to purchase insurance coverage in amounts its management views as
appropriate for all other property, liability, automobile, workers' compensation
and other insurable risks.
In the state of Illinois, customers have filed a punitive class action
lawsuit on behalf of all persons residing in the state who are or were customers
of the Partnership's cable television service, and who have been charged a fee
for delinquent payment of their cable bill. The action challenges the legality
of the processing fee and seeks declaratory judgment, injunctive relief and
unspecified damages. At present, the Partnership is not able to project the
outcome of the action. All of the Partnership's basic customers reside in
Illinois where the claim has been filed.
F-21
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - EMPLOYEE BENEFIT PLAN
The Partnership participates in a cash or deferred profit sharing plan
(the "Profit Sharing Plan") sponsored by a subsidiary of the Corporate General
Partner, which covers substantially all of its employees. The Profit Sharing
Plan provides that each participant may elect to make a contribution in an
amount up to 15% of the participant's annual compensation which otherwise would
have been payable to the participant as salary. Prior to 1999, the Partnership's
contribution to the Profit Sharing Plan, as determined by management, was
discretionary but could not exceed 15% of the annual aggregate compensation (as
defined) paid to all participating employees. Effective January 1, 1999, the
Profit Sharing Plan was amended, whereby the Partnership would make an employer
contribution equal to 100% of the first 3% and 50% of the next 2% of the
participants' contributions. Contributions of $1,300 were made during 1999.
There were no contributions charged against operations for the Profit Sharing
Plan in 1998.
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with the Manager
for a monthly management fee of 5% of gross receipts, as defined, from the
operations of the Partnership. Management fee expense was $160,000 during 1999.
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. Charter and its affiliates provide management services for
the Partnership. Such services were provided by FCLP and its affiliates prior to
November 2, 1999. Corporate office allocations and district office expenses are
charged to the properties served based primarily on the respective percentage of
basic customers or homes passed (dwelling units within a system) within the
designated service areas. The total amount charged to the Partnership for these
services was $335,700 during 1999.
The Partnership also receives certain system operating management services
from an affiliate of the Corporate General Partner in addition to the Manager,
due to the fact that there are no such employees directly employed by the
Partnership's cable systems. The Partnership reimburses the affiliate for its
allocable share of the affiliate's operational costs. The total amount charged
to the Partnership for these costs approximated $18,200 in 1999. No management
fee is payable to the affiliate by the Partnership and there is no duplication
of reimbursed expenses and costs paid to the Manager.
Substantially all programming services have been purchased through FCLP,
and since November 12, 1999, have been purchased through Charter. FCLP charged
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. Charter
charges the Partnership for these costs based on its cost. The Partnership
recorded programming fee expense of $780,800 in 1999. Programming fees are
included in service costs in the statements of operations.
The Partnership provides cable television signals to certain cable systems
in neighboring communities which are owned by other partnerships managed by the
Corporate General Partner. Such services are provided without fee.
F-22
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended December 31, 1999, cash paid for interest amounted
to $19,400.
F-23
EXHIBIT INDEX
Exhibit
Number Description
2.1a Asset Purchase Agreement, dated August 29, 2001, by and between
Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions Partners,
LLC and Enstar Income Program II-1, L.P., Enstar Income Program
II-2, L.P., Enstar Income Program IV-3, L.P., Enstar
Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems
Venture, and Enstar Cable of Macoupin County. (Incorporated by
reference to the exhibits to the Current Report on Form 10-Q of
Enstar Income Program IV-1, L.P., File No. 000-15705 for the
quarter ended September 30, 2000.)
2.1b Letter of Amendment, dated September 10, 2001, by and between
Charter Communications Entertainment I, LLC, Interlink
communications Partners, LLC, and Rifkin Acquisitions Partners,
LLC and Enstar Income Program II-1, L.P., Enstar Income Program
II-2, L.P., Enstar Income Program IV-3, L.P., Enstar
Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems
Venture, and Enstar Cable of Macoupin County. (Incorporated by
reference to the exhibits to the Current Report on Form 10-Q of
Enstar Income Program IV-1, L.P., File No. 000-15705 for the
quarter ended September 30, 2000.)
2.1c Letter of Amendment, dated November 30, 2001, by and between
Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions Partners,
LLC and Enstar Income Program II-1, L.P., Enstar Income Program
II-2, L.P., Enstar Income Program IV-3, L.P., Enstar
Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems
Venture, and Enstar Cable of Macoupin County. (Incorporated by
reference to Exhibit C to Enstar Income/Growth program Six-A,
File No. 000-17687, Definitive Proxy Statement on Schedule 14A
as filed on February 4, 2002).
2.2a Asset Purchase Agreement, dated August 8, 2000, by and among
Multimedia Acquisition Corp., as Buyer, and Enstar Income
Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar
Income Program IV-3, L.P., Enstar Income/Growth Program Six-A,
L.P., Enstar IX, Ltd., Enstar XI, Ltd., Enstar IV/PBD Systems
Venture, Enstar Cable of Cumberland Valley and Enstar Cable of
Macoupin County, as Sellers. (Incorporated by reference to the
exhibits to the Registrant's Annual Report on Form 10-K, File
No. 000-14508 dated December 31, 1999.)
2.2b Amendment dated September 29, 2000, of the Asset Purchase
Agreement dated August 8, 2000, by and among Multimedia
Acquisition Corp., as Buyer, and Enstar Income Program II-1,
L.P., Enstar Income Program II-2, L.P., Enstar Income Program
IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IX,
Ltd., Enstar XI, Ltd., Enstar IV/PBD Systems Venture, Enstar
Cable of Cumberland Valley and Enstar Cable of Macoupin County,
as Sellers. (Incorporated by reference to the exhibits to the
Registrant's Quarterly Report on Form 10-Q, File No. 000-14508
for the quarter ended June 30, 2000.)
3 Second Amended and Restated Agreement of Limited Partnership
of Enstar Income Program II-1, L.P., dated as of August 1,
1988. (Incorporated by reference to the exhibits to the
Registrant's Annual Report on Form 10-K, File No. 000-14508
for the fiscal year ended December 31, 1988.)
10.1 Management Agreement between Enstar Income Program II-1 and
Enstar Cable Corporation. (Incorporated by reference to the
exhibits to the Registrant's Annual Report on Form 10-K, File
No. 000-14508 for the fiscal year ended December 31, 1986.)
**10.2 Management Services Agreement between Enstar Cable
Corporation and Falcon Communications, L.P. dated as of
September 30, 1998.
**10.3 Service agreement between Enstar Communications Corporation,
Enstar Cable Corporation and Falcon Communications, L.P. dated
as of September 30, 1998.
**10.4 Consulting Agreement between Enstar Communications
Corporation and Falcon Communications, L.P. dated as of
September 30, 1998.
10.5a Agreement with Respect to Franchise Fees and Reimbursable Fees
between Enstar Income Program II-1, L.P. and the City of
Taylorville, IL. (Incorporated by reference to the exhibits to
the Registrant's Quarterly Report on Form 10-Q, File No.
000-14508 for the quarter ended September 30, 1995.)
**10.5b Franchise Agreement granting a non-exclusive community antenna
television franchise for the City of Taylorville, IL.
**10.6 Franchise Ordinance granting a non-exclusive community antenna
television franchise for the City of Litchfield, IL.
21.1 Subsidiaries: None
**99.1 Letter responsive to Temporary Note 3T to Article 3 of
Regulation S-X.
** Exhibits attached