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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14508
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)
12444 POWERSCOURT DR., SUITE 100
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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities
held by non-affiliates of the registrant - all of the registrant's 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.
The Exhibit Index is located at Page E-1.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program II-1, L.P., a Georgia limited partnership,
is engaged in the ownership and operation of cable television systems in small
to medium-sized communities. The Partnership was formed on July 3, 1984. 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"). On November 12, 1999, Charter Communications
Holdings Company, LLC, an entity controlled by Charter Communications, Inc.,
acquired both the Corporate General Partner, as well as Falcon Communications,
L.P., the entity that provided management and certain other services to the
Partnership. Charter is the nation's fourth largest cable operator, serving 6.35
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 Communications, L.P.) now provide management and
other services to the Partnership. See Item 13., "Certain Relationships and
Related Transactions." See "Employees" below. In this annual report, the terms
"we" and "our" refer to the Partnership.
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Partnership. On
August 8, 2000 (as amended on September 29, 2000), the Partnership, together
with certain affiliates (collectively, the "Sellers") entered into a purchase
and sales agreement (the "Agreement") with Multimedia Acquisition Corp., an
affiliate of Gans Multimedia Partnership (the "Purchaser"). The Agreement
provides for the Purchaser to acquire the assets comprising the Partnership's
cable system serving Taylorville, Illinois, as well as certain assets of other
affiliates.
The aggregate purchase price payable to the Sellers pursuant to
the Agreement is $95,574,600 in cash (subject to normal closing adjustments). Of
that amount, $13,846,000 (subject to normal closing adjustments) is payable to
the Partnership. The allocation of the purchase price among each of the Sellers
was assigned by the Purchaser for each of the systems.
The Purchaser's obligation to acquire the cable systems is
subject to numerous closing conditions, including without limitation: (a)
receipt of the necessary governmental consents to transfer franchises covering
an aggregate of 90% of the subscribers of all the Sellers; (b) receipt of
certain other material consents and approvals required for the consummation of
the sale; (c) receipt of the necessary approvals of the limited partners of each
Seller; and (d) other standard closing conditions. With respect to clause (c)
above, completion of the transaction is contingent on the limited partners of
the Partnership and the other selling affiliates voting to approve the sale.
Furthermore, the Partnership is currently negotiating additional amendments to
the purchase and sale agreement with the Purchaser. Accordingly, there can be
no assurance that the sale will close.
A cable television system receives television, radio and data
signals at the system's "headend" site by means of over-the-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
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Our cable television systems offer customers various levels, or
"tiers," of cable services consisting of:
o broadcast television signals of local network, independent and
educational stations
o a limited number of television signals from so-called "super stations"
originating from distant cities, such as WGN
o various satellite - delivered, non-broadcast channels, such as
- Cable News Network, or "CNN"
- MTV: Music Television, or "MTV"
- The USA Network
- ESPN
- Turner Network Television, or "TNT" and
- The Disney Channel
o programming originated locally by the cable television system, such as
public, educational and government access programs, and
o information displays featuring news, weather, stock market and
financial reports, and public service announcements.
For an extra monthly charge, our cable television systems also
offer "premium" television services to their customers. These services, such as
Home Box Office, or "HBO," and Showtime are satellite channels that consist
principally of feature films, live sporting events, concerts and other special
entertainment features, usually presented without commercial interruption. See
"Legislation and Regulation."
A customer generally pays an initial installation charge and
fixed monthly fees for basic, expanded basic, other tiers of satellite services
and premium programming services. Such monthly service fees constitute the
primary source of revenues for our cable television systems. In addition to
customer revenues, our cable television systems receive revenue 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. Certain other
channels have also offered the cable systems managed by Charter, including those
of the Partnership, fees in return for carrying their service. Due to a general
lack of channel capacity available for adding new channels, our management
cannot predict the impact of such potential payments on our business. See Item
7., "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
We own and operate two cable television systems that provide
service to customers in the cities of Taylorville, Litchfield and Gillespie,
Illinois, and portions of unincorporated Christian County, Illinois. As of
December 31, 2000, we served approximately 6,645 basic subscribers in these
areas. We do not expect to make any additional acquisitions during the remaining
term of the Partnership.
Charter receives a management fee and reimbursement of expenses
from the Corporate General Partner for managing our cable television operations.
See Item 11., "Executive Compensation."
The Chief Executive Officer of the Corporate General Partner is
Jerald L. Kent. The Principal executive offices of the Partnership and the
general partner are located at 12444 Powerscourt Drive, Suite 100, St. Louis, MO
63131-0555 and their telephone number is (314) 965-0555. See Item 10.,
"Directors and Executive Officers of the Registrant."
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BUSINESS STRATEGY
Historically, the Partnership has followed a systematic approach
to acquiring, operating and developing cable television systems based on the
primary goal of increasing operating cash flow while maintaining the quality of
services offered by its cable television systems. Our business strategy has
focused on serving small to medium-sized communities. See "Competition."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 by the FCC has had a
negative impact on our revenues and cash flow. These rules are subject to
further amendment to give effect to the Telecommunications Act of 1996. Among
other changes, the Telecommunications Act of 1996 caused the regulation of
certain cable programming service tier rates to terminate 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. See "Legislation and Regulation" and Item 7., "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Capital Expenditures
As noted in "Technological Developments," certain of our cable
television systems have no available channel capacity with which to add new
channels or to provide pay-per-view offerings to customers. As a result,
significant amounts of capital for future upgrades will be required in order to
increase available channel capacity in those systems, improve quality of service
and facilitate the expansion of new services such as advertising, pay-per-view,
new unregulated tiers of satellite-delivered services and home shopping, so that
our cable television systems remain competitive within the industry.
Our management has selected a technical standard that
incorporates the use of fiber optic technology where applicable in its
engineering design for the majority of our cable television systems that are to
be rebuilt. A system built with this type of architecture can provide for future
channels of analog service as well as new digital services. Such a system will
also permit the introduction of high speed data transmission/Internet access and
telephony services in the future after incurring incremental capital
expenditures related to these services. We are also evaluating the use of
digital compression technology in our cable television systems. See
"Technological Developments" and "Digital Compression."
The Partnership has completed the rebuild of its cable system in
Taylorville, Illinois, and neighboring communities at a total cost of
approximately $4.7 million including approximately $1.6 million in 2000. Other
capital expenditures for 2000 were approximately $0.4 million for the
improvement and upgrade of other assets. See "Legislation and Regulation" and
Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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Decentralized Management
The Corporate General Partner manages the Partnership's cable
television systems on a decentralized basis. The Corporate General Partner
believes that its decentralized management structure, by enhancing management
presence at the system level, increases its sensitivity to the needs of its
customers, enhances the effectiveness of its customer service efforts,
eliminates the need for maintaining a large centralized corporate staff and
facilitates the maintenance of good relations with local governmental
authorities.
Marketing
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. We have employed a variety of targeted marketing techniques to
attract new customers by focusing on delivering value, choice, convenience and
quality. We employ direct mail, radio and local newspaper advertising,
telemarketing and door-to-door selling utilizing demographic "cluster codes" to
target specific messages to target audiences. In 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.
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 monthly internal training
programs for employees, including our regional managers, that focus on our
operations and employee interaction with customers. The effectiveness of our
training program as it relates to the 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 marketing promotions
to raise money and supplies for persons in need, and 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.
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DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's cable systems as of December 31, 2000.
Premium Average Monthly
Homes Basic Basic Service Premium Revenue Per Basic
System Passed(1) Subscribers Penetration(2) Units(3) Penetration(4) Subscriber(5)
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Taylorville, IL 11,354 6,645 58.5% 1,469 22.1% $41.52
(1) Homes passed refers to our estimates of the approximate number of
dwelling units in a particular community that can be connected to the
distribution system without any further extension of principal transmission
lines. Such estimates are based upon a variety of sources, including billing
records, house counts, city directories and other local sources.
(2) Basic subscribers as a percentage of homes passed by cable.
(3) Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
(4) Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
(5) Average monthly revenue per basic subscriber has been computed
based on revenue for the year ended December 31, 2000.
CUSTOMER RATES AND SERVICES
Our cable television systems offer customers packages of services
that include the local area network, independent and educational television
stations, a limited number of television signals from distant cities, numerous
satellite-delivered, non-broadcast channels such as CNN, MTV, USA, ESPN, TNT and
The Disney Channel and certain information and public access channels. For an
extra monthly charge, we also provide certain premium television services, such
as HBO and Showtime. We also offer other cable television services to our
customers. For additional charges, in most of our cable television systems, we
also rent remote control devices and VCR compatible devices, which are devices
that make it easier for a customer to tape a program from one channel while
watching a program on another.
Our service options vary from system to system, depending upon a
cable system's channel capacity and viewer interests. Rates for services also
vary from market to market and according to the type of services selected.
Under 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 FCC's definition. Currently, none
of our cable television systems are subject to effective competition. See
"Legislation and Regulation."
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At December 31, 2000, our monthly rates for basic cable
service for residential customers, including certain discounted rates, ranged
from $24.50 to $25.05 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.
EMPLOYEES
The various personnel required to operate our business are
employed by the Partnership, the Corporate General Partner, its subsidiary
corporation and Charter. As of December 31, 2000, we had one employee, the cost
of which is charged directly to the Partnership. The employment costs incurred
by the Corporate General Partner, its subsidiary corporation and Charter are
allocated and charged to the Partnership for reimbursement pursuant to the
partnership agreement and management agreement. The amounts of these
reimbursable costs are set forth below in Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of our commitment to customer service, we seek to apply
technological advances in the cable television industry to our cable television
systems on the basis of cost effectiveness, capital availability, enhancement of
product quality and service delivery and industry-wide acceptance. Currently,
our cable television systems have an average channel capacity of 87, 87% of
which is presently utilized. We believe that our cable television system
upgrades will enable us to provide customers with greater programming diversity,
better picture quality and alternative communications delivery systems made
possible by the introduction of fiber optic technology and by the application of
digital compression. See "Legislation and Regulation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial cable
is playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels and, accordingly, its
utilization is essential to the enhancement of a cable television system's
technical capabilities. Our current policy is to utilize fiber optic technology
where applicable in rebuild projects which we undertake. The benefits of fiber
optic technology over traditional coaxial cable distribution plant include lower
ongoing maintenance and power costs and improved picture quality and
reliability.
DIGITAL COMPRESSION
We have been closely monitoring developments in the area of
digital compression, a technology that enables cable operators to increase the
channel capacity of cable television systems by permitting a significantly
increased number of video signals to fit in a cable television system's existing
bandwidth. Depending on the technical characteristics of the existing system, we
believe that the utilization of digital compression technology will enable our
cable television systems to increase channel capacity in a manner that could, in
the short term, be more cost efficient than rebuilding such cable television
systems with higher capacity distribution plant. However, we believe that unless
the cable television system has sufficient unused channel capacity and
bandwidth, the use of digital compression to increase channel offerings is not a
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substitute for the rebuild of the cable television system, which will improve
picture quality, system reliability and quality of service. The use of digital
compression will expand the number and types of services these cable television
systems offer and enhance the development of current and future revenue sources.
This technology has been under frequent management review.
PROGRAMMING
We purchase basic and premium programming for our systems from
Charter. In turn, Charter charges the Partnership for these costs at its costs,
which are generally based on a fixed fee per customer or a percentage of the
gross receipts for the particular service. Prior to the acquisition of the
Corporate General Partner, Falcon Communications charged the Partnership for
these services based on an estimate of what the Corporate General Partner could
negotiate for such programming services for the 14 partnerships managed by the
Corporate General Partner as a group (approximately 76,046 basic subscribers at
December 31, 2000). Other channels have also offered Charter and the
Partnership's cable systems fees in return for carrying their service. Due to
our pending sale our management cannot predict the impact of such potential
payments on our business. In addition, the FCC may require that such payments
from programmers be offset against the programming fee increases which can be
passed through to subscribers under the FCC's rate regulations. 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 its, 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 and
are expected to continue to increase due to additional programming being
provided to basic customers, requirements to carry channels under retransmission
carriage agreements entered into with some programming sources, increased costs
to produce or purchase cable programming generally (including sports
programming), inflationary increases and other factors. The 1996 retransmission
carriage agreement negotiations were completed with essentially no change to the
previous agreements. Under the FCC's rate regulations, increases in programming
costs for regulated cable services occurring after the earlier of March 1, 1994,
or the date a system's basic cable service became regulated, may be passed
through to customers. Generally, programming costs are charged among systems on
a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated
under non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984, or the "1984 Cable
Act," the 1992 Cable Act and the 1996 Telecommunications Act. See "Legislation
and Regulation."
As of December 31, 2000, we operated cable systems in six
franchise areas. These franchises, all of which are non-exclusive, provide for
the payment of fees to the issuing authority. Annual franchise fees imposed on
our systems range up to 5% of the gross revenues generated by a system. The 1984
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Cable Act prohibits franchising authorities from imposing franchise fees in
excess of 5% of gross revenues and also permits the cable system operator to
seek renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The following table groups the franchises of 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
subscribers for each group as of December 31, 2000.
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
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Prior to 2002 2 5,325 80.1%
2002 - 2006 1 43 0.7%
2007 and after 3 1,277 19.2%
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Total 6 6,645 100.0%
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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 142 customers, representing approximately 2% of our customers,
are served by unfranchised portions of such systems. In certain instances,
where a single franchise comprises a large percentage of the customers in an
operating region, the loss of such franchise could decrease the economies of
scale achieved by our clustering strategy. 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.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise, but no value 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 "Legislation and
Regulation."
COMPETITION
We face competition in the areas of price, service offerings, and
service reliability. We compete with other providers of television signals and
other sources of home entertainment. In addition, as we expand into additional
services such as Internet access, interactive services and telephony, we will
face competition from other providers of each type of service.
To date, we believe that we have not lost a significant number of
customers, or a significant amount of revenue, to our competitors' systems.
However, competition from other providers of the technologies we expect to offer
in the future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications,
Inc. and AT&T, customers will come to expect a variety of services from a single
provider. While the TCI/AT&T merger has
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no direct or immediate impact on our business, it encourages providers of cable
and telecommunications services to expand their service offerings. It also
encourages consolidation in the cable industry as cable operators recognize the
competitive benefits of a large customer base and expanded financial resources.
Key competitors today include:
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.
DBS. Direct broadcast satellite, known as DBS, has emerged as
significant competition 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 approximately 15 million subscribers
nationwide. DBS service allows the subscriber to receive video 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, but a change
to the existing copyright laws in November 1999 eliminated this legal
impediment. After an initial six-month grace period, DBS companies will need to
secure retransmission consent from the popular broadcast stations they wish to
carry, and they will face mandatory carriage obligations of less popular
broadcast stations as of January 2002. In response to the legislation, DirecTV,
Inc. and EchoStar Communications Corporation already have initiated plans to
carry 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. It is, therefore, expected
that DBS companies will offer local broadcast programming only in the larger
U.S. markets for the foreseeable future. The same legislation providing for DBS
carriage of local broadcast stations reduced the compulsory copyright fees paid
by DBS companies and allows them to continue offering distant network signals to
rural customers.
DSL. The deployment of digital subscriber line technology, known
as DSL, will allow Internet access to subscribers at data transmission speeds
greater than those of modems over conventional telephone lines. Several
telephone companies and other companies are introducing DSL service. The FCC
recently released an order in which it mandated that incumbent telephone
companies grant access to the high frequency portion of the local loop over
which they provide voice services. This will enable competitive carriers to
provide DSL services over the same telephone lines simultaneously used by
incumbent telephone companies to provide basic telephone service. However, in a
separate order the FCC declined to mandate that incumbent telephone companies
unbundle their internal packet switching functionality or related equipment for
the benefit of competitive carriers. This functionality or equipment could
otherwise have been used by competitive carriers directly to provide DSL or
other high-speed broadband services. We are unable to predict whether the FCC's
decisions will be sustained upon administrative or judicial appeal, the
likelihood of success of the Internet access offered by our competitors or the
impact on our business and operations of these competitive ventures.
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
franchise might contain terms and conditions more favorable than those afforded
us. In addition, entities
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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 which already possess
fiber optic and other transmission lines in the areas they serve may over time
become competitors. There has been a recent increase in the number of cities
that have constructed their own cable systems, in a manner similar to
city-provided utility services. 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.
TELEPHONE COMPANIES AND UTILITIES. The competitive environment
has been significantly affected by both technological developments and
regulatory changes enacted in the 1996 Telecommunications Act, which were
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 television business. The 1996
Telecommunications 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.
If we expand our offerings to include Internet and other
telecommunications services, we will be subject to competition from other
telecommunications providers. 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. Moreover, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, local exchange
carriers and others may result in providers capable of offering cable
television, Internet, and telecommunications services in direct competition with
us.
Several telephone companies have obtained or are seeking cable
television franchises from local governmental authorities and are constructing
cable systems. Cross-subsidization by local exchange carriers of video and
telephony services poses a strategic advantage over cable operators seeking to
compete with local exchange carriers that provide video services. Some local
exchange carriers may choose to make broadband services available under the open
video regulatory framework of the FCC. In addition, local exchange carriers
provide facilities for the transmission and distribution of voice and data
services, including Internet services, in competition with our existing or
potential interactive services ventures and businesses, including Internet
service, as well as data and other non-video services. We cannot predict the
likelihood of success of the broadband services offered by our competitors or
the impact on us of such competitive ventures. The entry of telephone companies
as direct competitors in the video marketplace, however, is likely to become
more widespread and could adversely affect the profitability and valuation of
the systems.
Additionally, we are subject to competition from utilities which
possess fiber optic transmission lines capable of transmitting signals with
minimal signal distortion.
SMATV. 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 "MDU's," 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.
Such private cable systems can offer both improved reception of local television
stations and many of the same satellite-delivered program services
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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.
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.
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LEGISLATION AND REGULATION
The following summary addresses the key regulatory developments
and legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by the
FCC, some state governments and most local governments. The 1996
Telecommunications Act has altered the regulatory structure governing the
nation's communications providers. It removes barriers to competition in both
the cable television market and the local telephone market. Among other things,
it also reduces the scope of cable rate regulation and encourages additional
competition in the video programming industry by allowing local telephone
companies to provide video programming in their own telephone service areas.
The 1996 Telecommunications Act requires 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, and there have been calls in
Congress and at the FCC to maintain or even tighten cable regulation in the
absence of widespread effective competition.
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 are subject to rate regulation, unless they face "effective
competition" in their local franchise area. Federal law now defines "effective
competition" on a community-specific basis as requiring satisfaction of
conditions rarely satisfied in the current marketplace.
Although the FCC has 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--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, 2000, none of our local franchising
authorities were certified to regulate basic tier rates. The 1992 Cable Act
permits communities to certify and regulate rates at any time, so that it is
possible that localities served by the systems may choose to certify and
regulate rates in the future.
The FCC historically administered rate regulation of cable
programming service tiers, which is the expanded basic programming package that
offers services other than basic programming and which typically contains
satellite-delivered programming. As of December 31, 2000, we had no cable
programming service tier rate complaints pending at the FCC. Under the 1996
Telecommunications Act, however, the FCC's authority to regulate cable
programming service tier rates terminated on March 31, 1999. The FCC has taken
the position that it will still adjudicate pending cable programming service
tier complaints but will strictly limit its review, and possible refund orders,
to the time period predating the termination date. The elimination of cable
programming service tier regulation on a prospective basis affords us
substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were
required to reduce their basic service tier and cable programming service tier
rates in 1993 and 1994, and have since had their rate increases governed by a
complicated price cap scheme that allows for the recovery of inflation and
certain increased costs, as well as providing some incentive for expanding
channel carriage. The FCC has modified its rate adjustment regulations to allow
for annual rate increases and to minimize previous problems associated with
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regulatory lag. 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. The FCC
and Congress have provided various forms of rate relief for smaller cable
systems owned by smaller operators. Premium cable services offered on a
per-channel or per program basis remain unregulated. 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
terminates in 2002.
As noted above, FCC regulation of cable programming service tier
rates for all systems, regardless of size, terminated under the 1996
Telecommunications Act on March 31, 1999. As a result, the regulatory regime
just discussed is now essentially applicable only to basic services tier and
cable equipment. Some legislators, however, have called for new rate regulations
if unregulated rates increase dramatically. The 1996 Telecommunications 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. The 1996 Telecommunications
Act creates a more favorable environment for us to provide telecommunications
services beyond traditional video 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 Telecommunications 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, beginning in 2001, if the operator provides
telecommunications service, as well as cable service, over its plant. The FCC
recently clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access.
Cable entry into telecommunications will be affected by the
regulatory landscape now being developed by the FCC and state regulators. One
critical component of the 1996 Telecommunications Act to facilitate the entry of
new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. In July
1997, the Eighth Circuit Court of Appeals vacated certain aspects of the FCC
initial interconnection order but most of that decision was reversed by the U.S.
Supreme Court in January 1999. The Supreme Court effectively upheld most of the
FCC interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
subject to administrative and judicial appeal. If the FCC's current list of
unbundled network elements is upheld on appeal, it would make it easier for us
to provide telecommunications service.
INTERNET SERVICE. Although there is at present no significant
federal regulation of cable system delivery of Internet services, and the FCC
recently issued several reports finding no immediate need to impose such
regulation, this situation may change as cable systems expand their broadband
delivery of Internet services. In particular, proposals have been advanced at
the FCC and Congress that would require cable operators to provide access to
unaffiliated Internet service providers and online service providers. Certain
Internet service providers also are attempting to use existing modes of access
that are commercially leased to gain access to cable system delivery. A petition
on this issue is now pending before the FCC.
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Finally, some local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers. A federal district court in Portland, Oregon, recently upheld the
legal ability of local franchising authorities to impose such conditions, but an
appeal was filed with the Ninth Circuit Court of Appeals, oral argument has been
held and the parties are awaiting a decision. Other local authorities have
imposed or may impose mandatory Internet access requirements on cable operators.
These developments could, if they become widespread, burden the capacity of
cable systems and complicate our own plans for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996
Telecommunications Act allows telephone companies to compete directly with cable
operators by repealing the historic telephone company/cable cross-ownership ban.
Local exchange carriers, including the regional telephone companies, 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 providing video
programming services within their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire facilities
and the use of wireless transmission.
Under the 1996 Telecommunications 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. The Fifth Circuit Court of Appeals reversed certain of
the FCC's open video system rules, including its preemption of local
franchising. The FCC recently revised the applicable rules to eliminate this
general preemption, thereby leaving 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 co-located cable
systems. Co-located cable systems are cable systems serving an overlapping
territory. Cable operator buyouts of co-located local exchange carrier systems,
and joint ventures between cable operators and local exchange carriers in the
same market are also prohibited. The 1996 Telecommunications Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecommunications 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 Telecommunications Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services, including
cable television, despite restrictions in 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 Telecommunications
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.
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Under 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 under the 1992
Cable Act, the FCC has 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. However, this
provision has been stayed pending further judicial review.
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 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. A rulemaking is now pending at the FCC regarding
the imposition of dual digital and analog must carry.
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. A
new request has been forwarded to the FCC, however, requesting that unaffiliated
Internet service providers be found eligible for commercial leased access.
Although we do not believe such use is in accord with the governing statute, a
contrary ruling could lead to substantial leased activity by Internet service
providers and disrupt our own plans for Internet service.
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 posture, 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 programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. 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 to the program access requirements.
Terrestrially delivered programming is programming delivered other than by
satellite. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy.
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
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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 abrogating 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 antenna on rental property within the exclusive use of a 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 FCC. In addition to the FCC
regulations noted above, there are other regulations of the FCC covering such
areas as:
o equal employment opportunity,
o subscriber privacy,
o programming practices, including, among other things,
(1) syndicated program exclusivity, which is a FCC rule which
requires a cable system to delete particular programming
offered by a distant broadcast signal carried on the system
which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program non-duplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) 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 consumer electronics equipment compatibility, and
o emergency alert systems.
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The FCC recently ruled that cable customers must be allowed to
purchase cable converters 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 satisfied by third party vendors.
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.
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 non-broadcast 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. A prior voluntarily
negotiated agreement with Broadcast Music has now expired, and is subject to
further proceedings. The governing rate court recently set retroactive and
prospective cable industry rates for American Society of Composers music based
on the previously negotiated Broadcast Music rate. 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 television systems generally
are operated pursuant to non-exclusive 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
failed to comply with material provisions.
The specific terms and conditions of franchises vary materially
between jurisdictions. Each franchise generally contains provisions governing
cable operations, service rates, 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.
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
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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 Telecommunications Act, cable operators are not
required to obtain franchises for the provision of telecommunications services,
and local franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of such services. 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 Telecommunications 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.
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 periodically a party to various legal proceedings. These
legal proceedings are ordinary and routine litigation proceedings that are
incidental to our business. Management believes that the outcome of all pending
legal proceedings will not, in the aggregate, have a material adverse effect on
our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED 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 901 as of December
31, 2000. In addition to restrictions on the transferability of units contained
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 (although there is no
contractual obligation to do so) 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 1998, 1999 and 2000. The
Partnership will continue to determine the Partnership's ability to pay
distributions on a quarter-by-quarter basis.
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Our ability to pay distributions, the actual level 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 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, 2000. This data should be read in conjunction
with the Partnership's financial statements included in Item 8 hereof and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.
Year Ended December 31
--------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Revenues $ 2,797,500 $ 2,994,500 $ 3,158,400 $ 3,200,400 $ 3,247,600
Costs and expenses (1,525,400) (1,567,100) (1,743,300) (1,842,500) (1,807,800)
Depreciation and amortization (310,600) (326,000) (466,700) (472,400) (612,600)
------------ ------------ ------------ ------------ ------------
Operating income 961,500 1,101,400 948,400 885,500 827,200
Interest expense (9,100) (1,600) (15,100) (19,400) --
Interest income 118,000 128,800 81,900 93,900 129,400
Gain on sale of cable assets 2,700 -- -- -- --
Other -- -- -- -- (39,200)
------------ ------------ ------------ ------------ ------------
Net income $ 1,073,100 $ 1,228,600 $ 1,015,200 $ 960,000 $ 917,400
============ ============ ============ ============ ============
Distributions to partners $ 378,000 $ 378,000 $ 378,000 $ 378,000 $ 378,000
============ ============ ============ ============ ============
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Net income $ 35.49 $ 40.63 $ 33.57 $ 31.75 $ 30.34
============ ============ ============ ============ ============
Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash from operating activities $ 1,446,400 $ 1,505,100 $ 1,397,200 $ 1,339,700 $ 1,993,500
Net cash from investing activities (876,100) (2,198,400) (806,800) (643,000) (2,062,900)
Net cash from financing activities (378,000) (378,000) (378,000) (378,000) (378,000)
EBITDA(1) 1,272,100 1,427,400 1,415,100 1,357,900 1,439,800
EBITDA to revenues 45.5% 47.7% 44.8% 42.4% 44.3%
Capital expenditures $ 869,300 $ 2,182,700 $ 794,100 $ 627,900 $ 2,060,900
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As of December 31
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
Total assets $ 4,918,400 $ 6,015,100 $ 6,555,700 $ 7,096,500 $ 8,161,700
General partners' deficit (28,800) (20,300) (13,900) (8,100) (2,700)
Limited partners' capital 4,543,500 5,385,600 6,016,400 6,592,600 7,126,600
- ----------
(1) EBITDA is calculated as operating income before depreciation
and amortization. Based on our experience in the cable television industry, we
believe that EBITDA and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television companies
in several areas, such as liquidity, operating performance and leverage. EBITDA
is not a measurement determined under generally accepted accounting principles
("GAAP") and does not represent cash generated from operating activities in
accordance with GAAP. You should not consider EBITDA 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, our definition of EBITDA may not
be identical to similarly titled measures used by other companies.
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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 Federal Communications Commission
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on our revenues and cash flows. 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
2000 COMPARED TO 1999
Our revenues increased from $3,200,400 to $3,247,600, or by 1.5%,
for the year ended December 31, 2000, compared to 1999. Of the $47,200 increase,
$92,500 was due to increases in regulated service rates 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, we had
approximately 6,645 basic subscribers and 1,469 premium service units.
Effective with the acquisition of Falcon Communications, L.P.
(Falcon) by Charter Communications Holdings Company, LLC (Charter) on November
12, 1999, certain activities previously incurred at the Partnership and expensed
through service cost and general and administrative expense have been either
eliminated by Charter, or have 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 from
$1,842,500 to $1,807,800, or by 1.9%, for the year ended December 31, 2000, as
compared to 1999.
Our service costs decreased from $987,100 to $930,100, or by
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 discussed
above. Programming fees decreased as a result of lower rates that Charter has
extended to us and a decrease in subscribers.
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Our general and administrative expenses increased from $359,700
to $361,700, or by less than 1.0%, for the year ended December 31, 2000,
compared to 1999, primarily due to an increase in bad debt expense.
Our management fees and reimbursed expenses increased from
$495,700 to $516,000, or by 4.1%, for the year ended December 31, 2000, compared
to 1999. Management fees increased in direct relation to increased revenues as
described above. As discussed above, Charter now performs certain management and
operational functions formerly performed by the Partnership. This has resulted
in us having more reimbursable costs and lower service costs and general and
administrative expenses.
Our depreciation and amortization expense increased from $472,400
to $612,600, or by 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, our operating income
decreased from $885,500 to $827,200, or by 6.6%, for the year ended December 31,
2000, compared to 1999.
Our interest income, net of interest expense, increased from
$74,500 to $129,400, or by 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.
Our other expenses of $39,200 for the year ended December 31,
2000, consisted of legal and proxy costs associated with the sale of our
partnership assets.
Due to the factors described above, our net income decreased from
$960,000 to $917,400, or by 4.4%, for the year ended December 31, 2000, compared
to 1999.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 42.4% during 1999 to 44.3% in 2000. Due to
the factors described above, EBITDA increased from $1,357,900 to $1,439,800, or
by 6.0%, as a result.
1999 COMPARED TO 1998
Our revenues increased from $3,158,400 to $3,200,400, or by 1.3%,
for the year ended December 31, 1999, compared to 1998. Of the $42,000 increase,
$71,200 was due to increases in regulated service rates we implemented in 1999.
The increase was partially offset by a $15,500 decrease due to decreases in the
number of subscriptions for basic service and a $13,700 decrease in other
revenue producing items. As of December 31, 1999, we had approximately 7,100
basic subscribers and 1,400 premium service units.
Our service costs increased from $902,700 to $987,100, or by
9.3%, for the year ended December 31, 1999, compared to 1998. Service costs
represent costs directly attributable to providing cable services to customers.
The increase was primarily due to increases in programming fees. Programming
expense increased primarily due to increases in rates charged by program
suppliers and due to channel additions in our Taylorville, Illinois, cable
system.
Our general and administrative expenses increased from $343,300
to $359,700, or by 4.8%, for the year ended December 31, 1999, compared to 1998,
primarily due to increases in insurance premiums and customer billing expenses.
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Our management fees and reimbursed expenses decreased from
$497,300 to $495,700, or by less than 1.0%, for the year ended December 31,
1999, compared to 1998. Management fees increased in direct relation to
increased revenues as described above. Reimbursed expenses decreased due to
lower allocated personnel costs.
Our depreciation and amortization expense increased from $466,700
to $472,400, or by 1.2%, for the year ended December 31, 1999, compared to 1998,
primarily due to the rebuild of our plant in Taylorville, Illinois. Depreciation
expense increased as portions of the system rebuild were placed into service.
Our operating income decreased from $948,400 to $885,500, or by
6.6%, for the year ended December 31, 1999, compared to 1998, primarily due to
increases in programming fees and insurance premiums as described above.
Our interest income, net of interest expense, increased from
$66,800 to $74,500, or by 11.5%, for the year ended December 31, 1999, compared
to 1998, primarily due to higher average cash balances available for investment.
Due to the factors described above, our net income decreased from
$1,015,200 to $960,000, or by 5.4%, for the year ended December 31, 1999,
compared to 1998.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 44.8% during 1998 to 42.4% in 1999. The
decrease was primarily caused by higher programming fees and insurance premiums
as described above. EBITDA decreased from $1,415,100 to $1,357,900, or by 4.0%,
as a result.
DISTRIBUTIONS TO PARTNERS
Partnership operations generated income exclusive of depreciation
and amortization of $1,481,900, $1,453,200 and $1,530,000 in 1998, 1999 and
2000, 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 1998, 1999 and 2000,
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 capital requirements relating to the expansion,
improvement and upgrade of its cable systems.
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Partnership. On
August 8, 2000 (as amended on September 29, 2000), the Partnership, together
with certain affiliates (collectively, the "Sellers") entered into a purchase
and sales agreement (the "Agreement") with Multimedia Acquisition Corp., an
affiliate of Gans Multimedia Partnership (the "Purchaser"). The Agreement
provides for the Purchaser to acquire the assets comprising the Partnership's
cable system serving Taylorville, Illinois, as well as certain assets of other
affiliates.
The aggregate purchase price payable to the Sellers pursuant to
the Agreement is $95,574,600 in cash (subject to normal closing adjustments). Of
that amount, $13,846,000 (subject to normal closing adjustments) is payable to
the Partnership. The allocation of the purchase price among each of the Sellers
was assigned by the Purchaser for each of the systems.
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The Purchaser's obligation to acquire the cable systems is
subject to numerous closing conditions, including without limitation: (a)
receipt of the necessary governmental consents to transfer franchises covering
an aggregate of 90% of the subscribers of all the Sellers; (b) receipt of
certain other material consents and approvals required for the consummation of
the sale; (c) receipt of the necessary approvals of the limited partners of each
Seller; and (d) other standard closing conditions. With respect to clause (c)
above, completion of the transaction is contingent on the limited partners of
the Partnership and the other selling affiliates voting to approve the sale.
Furthermore, the Partnership is currently negotiating additional amendments to
the purchase and sale agreement with the Purchaser. Accordingly, there can be
no assurance that the sale will close.
At December 31, 2000, 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. During 1999, the Partnership completed the rebuild of its
Taylorville, Illinois, and neighboring communities cable system at a total cost
of approximately $3.5 million under a provision of its franchise agreement.
Rebuild construction costs approximated $1.6 million during the year ended
December 31, 2000. Other capital expenditures in 2000 included approximately
$0.4 million for the improvement and upgrade of other assets.
On September 30, 1997, Enstar Finance Company, LLC ("EFC"), a
subsidiary of the Corporate General Partner, obtained a secured bank facility of
$35 million from two agent banks in order to obtain funds that would in turn be
advanced to us and certain of the other partnerships managed by the Corporate
General Partner. Our maximum loan commitment was approximately $799,600 through
November 12, 1999. After that date, we have no commitment available under the
EFC facility, which was reduced to $15 million.
We paid distributions totaling $378,000 during the year ended
December 31, 2000, and expect to continue to pay distributions at this level
during 2001. There can, however, be no assurances regarding the level, timing or
continuation of future distributions.
Beginning in August 1997, the Corporate General Partner elected
to self-insure our cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to significant increases in the
cost of insurance coverage and decreases in the amount of insurance coverage
available.
In October 1998, Falcon Communications, L.P. reinstated third
party insurance coverage for all of the cable television properties owned or
managed by it to cover damage to cable distribution plant and subscriber
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 formerly managed by FCLP through
November 12, 1999, and currently managed by Charter, including those of the
Partnership.
All of our subscribers are served by our 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 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 types of insurable risks.
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2000 VS. 1999
Our 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 expenditures for tangible assets
partially offset by a $13,500 decrease in spending for intangible assets.
1999 VS. 1998
Our operating activities provided $57,500 less cash in 1999 than
in 1998. Changes in receivables, prepaid expenses and other assets used $63,400
more cash in 1999 due to differences in the timing of receivable collections and
in the payment of prepaid expenses. We used $55,400 less cash to pay liabilities
owed to affiliates and third party creditors in 1999 than in 1998 due to
differences in the timing of payments.
We used $163,400 less cash in investing activities during 1999
than in 1998, due to a $166,200 decrease in expenditures for tangible assets
partially offset by a $2,800 increase in spending for intangible 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 service rates periodically, of which there can be no
assurance. See "Legislation and Regulation."
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 financial statements and related financial information
required to be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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. As of
December 31, 2000, the Corporate General Partner managed cable television
systems serving approximately 76,046 basic subscribers.
Following the acquisition of the Corporate General Partner in
November 1999 by a Charter Communications-controlled entity, the directors and
executive officers of the Corporate General Partner have been changed to the
persons named below all of whom have their principal employment in a comparable
position with Charter Communications, Inc.:
NAME POSITION
---- --------
Jerald L. Kent Director, President and Chief Executive Officer
David C. Andersen Senior Vice President - Communications
David G. Barford Executive Vice President and Chief Operating Officer
Mary Pat Blake Senior Vice President - Marketing and Programming
Eric A. Freesmeier Senior Vice President - Administration
Thomas R. Jokerst Senior Vice President - Advanced Technology Development
Kent D. Kalkwarf Executive Vice President and Chief Financial Officer
Ralph G. Kelly Senior Vice President - Treasurer
David L. McCall Senior Vice President of Operations - Eastern Division
John C. Pietri Senior Vice President - Engineering
Michael E. Riddle Senior Vice President and Chief Information Officer
Steven A. Schumm Executive Vice President, Assistant to the President
Curtis S. Shaw Senior Vice President, General Counsel and Secretary
Steven E. Silva Senior Vice President - Corporate Development and Technology
James (Trey) H. Smith, III Senior Vice President of Operations - Western Division
Except for Mr. Andersen, Mr. Riddle and Mr. Smith, our executive
officers were appointed to their position following our formation in July 1999,
and became employees of Charter Communications, Inc., upon completion of our
initial public offering. Prior to that time, they were employees of Charter
Investment, Inc. All of our executive officers simultaneously serve in the same
capacity with Charter Investment, Inc.
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JERALD L. KENT, 44 Director, President and Chief Executive Officer. Mr. Kent
co-founded Charter Communications Investment, Inc. in 1993. Mr. Kent was
executive vice president and chief financial officer of Cencom Cable Associates,
Inc. Mr. Kent, a certified public accountant, attained the position of tax
manager with Arthur Andersen LLP. Mr. Kent received a bachelor's degree and
M.B.A. from Washington University.
DAVID C. ANDERSEN, 51 Senior Vice President - Communications. Prior to joining
Charter Communications, Inc. in May 2000, Mr. Andersen served as Vice President
of Communications for CNBC, the worldwide cable and satellite business news
network subsidiary of NBC. Before that, starting in 1982 when he established
their public relations department, Mr. Andersen served in various management
positions at Cox Communications, Inc., most recently as Vice President of Public
Affairs. Mr. Andersen serves on the Board of KIDSNET, and is a former Chairman
of the National Captioning Institute's Cable Advisory Board. He received a B.S.
degree in Journalism from the University of Kansas.
DAVID G. BARFORD, 42 Executive Vice President and Chief Operating Officer. Prior
to joining Charter Communications Investment, Inc. in 1995, Mr. Barford held
various senior marketing and operating roles during nine years at Comcast Cable
Communications, Inc. He received a B.A. from California State University,
Fullerton, and an M.B.A. from National University.
MARY PAT BLAKE, 45 Senior Vice President - Marketing and Programming. Prior to
joining Charter Communications Investment, Inc. in 1995, Ms. Blake was active in
the emerging business sector and formed Blake Investments, Inc. in 1993. She has
18 years of experience with senior management responsibilities in marketing,
sales, finance, systems, and general management. Ms. Blake received a B.S. from
the University of Minnesota and an M.B.A. from the Harvard Business School.
ERIC A. FREESMEIER, 47 Senior Vice President - Administration. From 1986 until
joining Charter Investment, Inc. 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
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, 51 Senior Vice President - Advanced Technology Development.
Mr. Jokerst joined Charter Investment, Inc. 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.
KENT D. KALKWARF, 41 Executive Vice President and Chief Financial Officer. Prior
to joining Charter Investment, Inc. 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. from Illinois Wesleyan University and is a
certified public accountant.
RALPH G. KELLY, 44 Senior Vice President - Treasurer. Prior to joining Charter
Investment, Inc. in 1993, Mr. Kelly was controller and then treasurer of Cencom
Cable Associates. He left Charter 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.
DAVID L. MCCALL, 45 Senior Vice President of Operations - Eastern Division.
Prior to joining Charter Investment, Inc. in 1995, Mr. McCall was associated
with Crown Cable and its predecessor company, Cencom Cable Associates, Inc. from
1983 to 1994. Earlier he was system manager of Coaxial Cable Developers. Mr.
McCall has served as a director of the South Carolina Cable Television
Association for the past 10 years.
JOHN C. PIETRI, 51 Senior Vice President - Engineering. Prior to joining Charter
Investment, Inc. in 1998, Mr. Pietri was with Marcus Cable for eight 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.
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MICHAEL E. RIDDLE, 42 Senior Vice President and Chief Information Officer. Prior
to joining Charter Investment, Inc. in 1999, Mr. Riddle was director, applied
technologies of Cox Communications for four years. Prior to that, he held
technical and management positions during four years at Southwestern Bell and
its subsidiaries. Mr. Riddle attended Fort Hays State University.
STEVEN A. SCHUMM, 48 Executive Vice President and Assistant to the President.
Prior to joining Charter Investment, Inc. in 1998, Mr. Schumm was managing
partner of the St. Louis office of Ernst & Young LLP, where he was a partner for
14 of 24 years. 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.
CURTIS S. SHAW, 52 Senior Vice President, General Counsel and Secretary. Prior
to joining Charter Investment, Inc. in 1997, Mr. Shaw served as corporate
counsel to NYNEX since 1988. He has over 25 years of experience 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. from Trinity College and a J.D. from Columbia University School
of Law.
STEVEN E. SILVA, 41 Senior Vice President - Corporate Development and
Technology. From 1983 until joining Charter Investment, Inc. in 1995, Mr. Silva
served in various management positions at U.S. Computer Services, Inc. He is a
member of the board of directors of High Speed Access Corp.
JAMES (TREY) H. SMITH, III, 52 Senior Vice President of Operations - Western
Division. Mr. Smith was appointed to his current position in September 2000,
previously serving as a Division President of AT&T Broadband. Before that, he
was President and CEO of Rogers Cablesystems Ltd., Senior Vice President of the
Western Region for MediaOne/Continental Cable and Executive Vice President of
Operations for Times Mirror Cable TV, Inc. He received B.B.A. and M.B.A. degrees
from Georgia State University and is a certified public accountant.
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. 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 with Enstar Cable
Corporation, 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, calculated and paid monthly. In
addition, we reimburse Enstar Cable for operating expenses incurred by Enstar
Cable in the day-to-day 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. to provide management services for us and paid Falcon
Communications, L.P. a portion of the management fees it received in
consideration of such services and reimbursed Falcon Communications, L.P. for
expenses incurred by Falcon Communications, L.P. on its behalf. Subsequent to
November 12, 1999, Charter, as successor-by-merger to Falcon Communications,
L.P.,
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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, 2000, Enstar Cable charged
us management fees of approximately $162,400. We also reimbursed Enstar Cable,
Charter and its affiliates approximately $353,600 for system operating
management services. In addition, programming services were purchased through
Charter. We paid Charter approximately $653,900 for these programming services
for fiscal year 2000.
PARTICIPATION IN DISTRIBUTIONS
The general partners are entitled to share in distributions from,
and profit and losses in, the Partnership. See Item 5., "Market for the
Registrant's Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Partnership believes that no person beneficially owns more
than 5% of the units. The Corporate General Partner is a wholly-owned subsidiary
of Charter Communications Holding Company, LLC. Charter Communications Holding
Company, LLC, through a subsidiary, owns a 100% interest in CC VII. Charter
Communications Holding Company, LLC is beneficially controlled by Paul G. Allen
through his ownership and control of Charter Communications, Inc., Charter
Investment, Inc. and Vulcan Cable III, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
On November 12, 1999, Charter acquired ownership of Enstar
Communications Corporation from Falcon Holding Group, L.P. and assumed the
management services operations 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.
Commencing November 13, 1999, Charter began receiving management fees and
reimbursed expenses which had previously been paid by the Corporate General
Partner to Falcon Communications, L.P.
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" and Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The executive
officers of the Corporate General Partner have their personal employment with
Charter Communications, Inc., 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.
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
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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
(which include CC VII), 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. To the extent that the exculpatory provisions purport to
include indemnification for liabilities arising under the Securities Act of
1933, it is the opinion of the Securities and Exchange Commission that such
indemnification is contrary to public policy and therefore unenforceable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements on page
F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial Statements on page
F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits on Page E-1.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
30, 2001.
ENSTAR INCOME PROGRAM II-1, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Jerald L. Kent
-----------------------------------
Jerald L. Kent
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March 2001.
Signatures Title(*)
---------- --------
/s/ Jerald L. Kent Director, President and Chief Executive Officer
-------------------- (Principal Executive Officer)
Jerald L. Kent
/s/ Kent D. Kalkwarf Executive Vice President and Chief Financial Officer
-------------------- (Principal Financial Officer and
Kent D. Kalkwarf Principal Accounting Officer)
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the Registrant.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants F-2
Balance Sheet as of December 31, 2000 F-3
Financial Statements for the year ended December 31, 2000:
Statement of Operations F-4
Statement of Partnership Capital (Deficit) F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
Report of Independent Auditors F-15
Balance Sheet - December 31, 1999 F-16
Financial Statements for each of the two years in the period ended December 31, 1999:
Statements of Operations F-17
Statements of Partnership Capital (Deficit) F-18
Statements of Cash Flows F-19
Notes to Financial Statements F-20
All schedules have been omitted because they are either not required, not applicable or the information
has otherwise been supplied.
F-1
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Enstar Income Program II-1, L.P.:
We have audited the accompanying balance sheet of Enstar Income Program II-1,
L.P. (a Georgia Limited Partnership) as of December 31, 2000, and the related
statements of operations, partnership capital (deficit) and cash flows for the
year 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 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 financial position of Enstar Income Program II-1,
L.P. as of December 31, 2000, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 23, 2001
F-2
37
ENSTAR INCOME PROGRAM II-1, L.P.
BALANCE SHEET AS OF DECEMBER 31, 2000
ASSETS
ASSETS:
Cash and cash equivalents $ 1,861,600
Accounts receivable 119,300
Due from affiliates 41,400
Prepaid expenses and other assets 37,000
Property, plant and equipment, net 6,046,300
Franchise cost, less accumulated amortization of $59,700 56,100
-----------
$ 8,161,700
===========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 633,100
Accrued liabilities 404,700
-----------
Total liabilities 1,037,800
-----------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (2,700)
Limited partners 7,126,600
-----------
Total partnership capital 7,123,900
-----------
$ 8,161,700
===========
The accompanying notes are an integral part of this statement.
F-3
38
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
REVENUES $ 3,247,600
-------------
OPERATING EXPENSES:
Service costs 930,100
General and administrative expenses 361,700
General partner management fees and reimbursed expenses 516,000
Depreciation and amortization 612,600
-------------
2,420,400
-------------
Operating income 827,200
-------------
OTHER INCOME (EXPENSE):
Interest income 129,400
Other (39,200)
-------------
90,200
-------------
Net income $ 917,400
=============
NET INCOME ALLOCATED TO GENERAL PARTNERS $ 9,200
=============
NET INCOME ALLOCATED TO LIMITED PARTNERS $ 908,200
=============
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 30.34
=============
WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,936
=============
The accompanying notes are an integral part of this statement.
F-4
39
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF PARTNERSHIP CAPITAL (DEFICIT)
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
============ ============ ============
The accompanying notes are an integral part of this statement.
F-5
40
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 917,400
Adjustments to reconcile net income to net cash from operating activities-
Depreciation and amortization 612,600
Changes in-
Accounts receivable, prepaid expenses and other assets (20,900)
Accounts payable, accrued liabilities and due to/from affiliates 484,400
-------------
Net cash from operating activities 1,993,500
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,060,900)
Change in intangible assets (2,000)
-------------
Net cash from investing activities (2,062,900)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (378,000)
-------------
Net decrease in cash and cash equivalents (447,400)
CASH AND CASH EQUIVALENTS, beginning of year 2,309,000
-------------
CASH AND CASH EQUIVALENTS, end of year $ 1,861,600
=============
CASH PAID FOR INTEREST $ --
=============
The accompanying notes are an integral part of this statement.
F-6
41
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS 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.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. These
investments are carried at cost, which approximates fair market value. The
Partnership has no cash equivalents at December 31, 2000.
PROPERTY, PLANT AND EQUIPMENT
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 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 Life of lease
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. The period of up to 15
years is 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.
F-7
42
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be
impaired, the carrying value is reviewed. If a review indicates that the
carrying value of such asset is not recoverable based on projected undiscounted
net cash flows related to the asset over its remaining life, the carrying value
of such asset is reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are
recognized when the related services are provided.
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, 2000, no installation revenue
has been deferred, as direct selling costs have exceeded installation revenue.
Local governmental authorities impose franchise fees on the
Partnership ranging up to a federally mandated maximum of 5.0% of gross
revenues. Such fees are collected on a monthly basis from the Partnership's
customers and are periodically remitted to local franchise authorities.
Franchise fees collected and paid are reported as revenues and expenses.
ADVERTISING COSTS
The Partnership expenses all advertising costs as incurred.
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, 2000, the book basis of the Partnership's net assets exceeded its
tax basis by approximately $2,187,300.
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 year
ended December 31, 2000, in the financial statements is $309,600 more than tax
income of the Partnership for the same period, caused principally by timing
differences in depreciation expense.
F-8
43
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
SEGMENTS
The Partnership has one segment, cable services.
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.
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed on July 3, 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 continued to raise capital until $7,500,000 (the
maximum) was sold during 1985.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner. 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.
F-9
44
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
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.
NOTE 3 - SALE OF PARTNERSHIP ASSETS
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Partnership. On
August 8, 2000 (as amended on September 29, 2000), the Partnership, together
with certain affiliates (collectively, the "Sellers"), entered into a purchase
and sales agreement (the "Agreement") with Multimedia Acquisition Corp., an
affiliate of Gans Multimedia Partnership (the "Purchaser"). The Agreement
provides for the Purchaser to acquire the assets comprising the Partnership's
cable system serving Taylorville, Illinois, as well as certain assets of other
affiliates.
The aggregate purchase price payable to the Sellers pursuant to
the Agreement is $95,574,600 in cash (subject to normal closing adjustments). Of
that amount, $13,846,000 (subject to normal closing adjustments) is payable to
the Partnership. The allocation of the purchase price among each of the Sellers
was assigned by the Purchaser for each of the systems.
The Purchaser's obligation to acquire the cable systems is
subject to numerous closing conditions, including without limitation: (a)
receipt of the necessary governmental consents to transfer franchises covering
an aggregate of 90% of the subscribers of all of the Sellers; (b) receipt of
certain other material consents and approvals required for the consummation of
the sale; (c) receipt of the necessary approvals of the limited partners of each
Seller; and (d) other standard closing conditions. With respect to clause (c)
above, completion of the transaction is contingent on the limited partners of
the Partnership and the other selling affiliates voting to approve the sale.
Furthermore, the Partnership is currently negotiating additional amendments to
the purchase and sale agreement with the Purchaser. Accordingly, there can be
no assurance that the sale will close.
F-10
45
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of
December 31, 2000:
Cable distribution systems $ 9,487,600
Land and improvements 32,500
Vehicles, furniture and equipment 460,100
-------------
9,980,200
Less- Accumulated depreciation (3,933,900)
-------------
$ 6,046,300
=============
Depreciation expense for the year ended December 31, 2000, was
$600,100.
NOTE 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 result of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation
at the federal, local and, in some instances, state levels. The Cable
Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and
together with the 1984 Cable Act, the "Cable Acts,"), and the Telecommunications
Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the
development and regulation of cable television systems. The Federal
Communications Commission (FCC) has principal responsibility for implementing
the policies of the Cable Acts. Many aspects of such regulation are currently
the subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and the Partnership cannot
predict the impact of future developments on the cable television industry.
F-11
46
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The 1992 Cable Act and the FCC's rules implementing that act
generally have increased the administrative and operational expenses of cable
television systems and have resulted in additional regulatory oversight by the
FCC and local or state franchise authorities. The Cable Acts and the
corresponding FCC regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising
authorities to order refunds of basic service tier rates paid in the previous
12-month period determined to be in excess of the maximum permitted rates.
During 2000, the amounts refunded by the Partnership have been insignificant.
The Partnership may be required to refund additional amounts in the future.
The Partnership believes that it has complied in all material
respects with the provisions of the 1992 Cable Act, including the rate setting
provisions promulgated by the FCC. However, in jurisdictions that have chosen
not to certify, refunds covering the previous 12-month period may be ordered
upon certification if the Partnership is unable to justify its basic rates. The
Partnership is unable to estimate at this time the amount of refunds, if any,
that may be payable by the Partnership in the event certain of its rates are
successfully challenged by franchising authorities or found to be unreasonable
by the FCC. The Partnership does not believe that the amount of any such refunds
would have a material adverse effect on the financial position or result of
operations of the Partnership.
The 1996 Telecom Act, among other things, immediately deregulated
the rates for certain small cable operators and in certain limited circumstances
rates on the basic service tier, and as of March 31, 1999, deregulated rates on
the cable programming service tier (CPST). The FCC has taken the position that
it will still adjudicate pending CPST complaints but will strictly limit its
review, and possible refund orders, to the time period predating the sunset
date, March 31, 1999. The Partnership does not believe any adjudication
regarding their pre-sunset complaints will have a material adverse effect on the
Partnership's financial position or result of operations.
A number of states subject cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. State
governmental agencies are required to follow FCC rules when prescribing rate
regulation, and thus, state regulation of cable television rates is not allowed
to be more restrictive than the federal or local regulation.
INSURANCE
The Partnership has third party insurance coverage for all of the
cable television properties owned or managed by FCLP to cover damage to cable
distribution plant and subscriber 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.
All of the Partnership's subscribers 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 types of insurable risks.
F-12
47
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 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 $6,900 were made during 2000.
NOTE 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 $162,400
for the year ended December 31, 2000. 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 $353,600 for the year
ended December 31, 2000. There is no duplication of reimbursed expenses to the
Manager.
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 $653,900 for the year
ended December 31, 2000. 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 that are owned by other partnerships
managed by the Manager. Such services are provided without fee.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Board (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, is effective for
the Partnership as of January 1, 2001. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
F-13
48
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Partnership has no derivative instruments.
Adoption of these new accounting standards did not impact the financial
statements of the Partnership.
F-14
49
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Enstar Income Program II-1, L.P. (A Georgia Limited Partnership):
We have audited the accompanying balance sheet of Enstar Income Program II-1,
L.P. (a Georgia Limited Partnership) as of December 31, 1999, and the related
statements of operations, partnership capital (deficit), and cash flows for each
of the two years in the period 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 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. at December 31, 1999, and the results of its operations and its cash flows
for each of the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California,
March 24, 2000
F-15
50
ENSTAR INCOME PROGRAM II-1, L.P.
BALANCE SHEET - AS OF DECEMBER 31, 1999
ASSETS:
Cash and cash equivalents $ 2,309,000
Accounts receivable, less allowance of $2,000 for possible losses 57,600
Prepaid expenses and other assets 77,800
Property, plant and equipment, less accumulated depreciation and amortization 4,585,500
Franchise cost, less accumulated amortization of $47,900 65,900
Deferred charges, net 700
-------------
$ 7,096,500
=============
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 267,200
Due to affiliates 244,800
-------------
Total liabilities 512,000
-------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (8,100)
Limited partners 6,592,600
-------------
Total partnership capital 6,584,500
-------------
$ 7,096,500
=============
See accompanying notes to financial statements.
F-16
51
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF OPERATIONS
Year Ended December 31
------------------------------
1998 1999
------------- -------------
REVENUES $ 3,158,400 $ 3,200,400
------------- -------------
OPERATING EXPENSES:
Service costs 902,700 987,100
General and administrative expenses 343,300 359,700
General Partner management fees and reimbursed expenses 497,300 495,700
Depreciation and amortization 466,700 472,400
------------- -------------
2,210,000 2,314,900
------------- -------------
Operating income 948,400 885,500
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (15,100) (19,400)
Interest income 81,900 93,900
------------- -------------
66,800 74,500
------------- -------------
Net income $ 1,015,200 $ 960,000
============= =============
NET INCOME ALLOCATED TO GENERAL PARTNERS $ 10,200 $ 9,600
============= =============
NET INCOME ALLOCATED TO LIMITED PARTNERS $ 1,005,000 $ 950,400
============= =============
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 33.57 $ 31.75
============= =============
WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,936 29,936
============= =============
See accompanying notes to financial statements.
F-17
52
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
General Limited
Partners Partners Total
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT), January 1, 1998 $ (20,300) $ 5,385,600 $ 5,365,300
Distributions to partners (3,800) (374,200) (378,000)
Net income for year 10,200 1,005,000 1,015,200
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 1998 (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-18
53
ENSTAR INCOME PROGRAM II-1, L.P.
STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,015,200 $ 960,000
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 466,700 472,400
Increase (decrease) from changes in-
Accounts receivable, prepaid expenses and other assets 11,900 (51,500)
Accounts payable and due to affiliates (96,600) (41,200)
------------- -------------
Net cash provided by operating activities 1,397,200 1,339,700
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (794,100) (627,900)
Increase in intangible assets (12,700) (15,500)
------------- -------------
Net cash used in investing activities (806,800) (643,400)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (378,000) (378,000)
------------- -------------
Net increase in cash and cash equivalents 212,400 318,300
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,778,300 1,990,700
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,990,700 $ 2,309,000
============= =============
See accompanying notes to financial statements.
F-19
54
ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
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.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of these
instruments.
The Partnership has no cash equivalents at December 31, 1999.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and the renewal of existing franchises. These costs are
amortized using the straight-line method over the lives of the franchises,
ranging up to 15 years. The Partnership periodically evaluates the amortization
periods of these intangible assets to determine whether events or circumstances
warrant revised estimates of useful lives. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful.
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method
over two years.
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the recoverability
of intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Partnership also evaluates the amortization periods of
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system.
INCOME TAXES
As a partnership, Enstar Income 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.
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the 1999 presentation.
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.
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.
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
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 - PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1999, property, plant and equipment consisted
of:
Cable television systems $ 7,454,500
Vehicles, furniture and equipment, and leasehold improvements 474,900
-------------
7,929,400
Less accumulated depreciation and amortization (3,343,900)
-------------
$ 4,585,500
=============
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Pole rentals amounted to $32,600 and $7,100 in 1998 and 1999,
respectively. Rentals, other than pole rentals, charged to operations amounted
to $4,300 and $7,100 in 1998 and 1999, respectively. The Partnership is not
individually committed under any lease 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 rates charged for basic cable service,
cable programming service tiers ("CPSTs") and equipment and installation
services. Regulations issued in 1993 and significantly amended in 1994 by the
Federal Communications Commission (the "FCC") have resulted in changes in the
rates charged for the Partnership's cable services. The Partnership believes
that compliance with the 1992 Cable Act has had a significant negative impact on
its operations and cash flow. It also believes that any potential future
liabilities for refund claims or other related actions would not be material.
The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law
on February 8, 1996. As it pertains to cable television, the 1996 Telecom Act,
among other things, (i) ends the regulation of certain CPSTs in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions.
Beginning in August 1997, the Corporate General Partner elected
to self-insure the Partnership's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
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 subscriber 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 subscribers 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 types of insurable risks.
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 subscribers
reside in Illinois where the claim has been filed.
NOTE 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. 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 7 - 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 $157,900 and
$160,000 during 1998 and 1999, respectively.
In addition to the monthly management fee, the Partnership
reimburses the Manager for direct expenses incurred on behalf of the Partnership
and for the Partnership's allocable share of operational costs associated with
services provided by the Manager. All cable television properties managed by the
Corporate General Partner and its subsidiaries are charged a proportionate share
of these expenses. 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 $339,400 and $335,700 during 1998 and 1999, respectively.
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 $15,700 and $18,200 in
1998 and 1999, respectively. No management fee is payable to the affiliate by
the Partnership and there is no duplication of reimbursed expenses and costs
paid to the Manager.
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ENSTAR INCOME PROGRAM II-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONTINUED)
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 $687,600 and $780,800 in 1998 and 1999,
respectively. 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.
NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1998 and 1999, cash paid for
interest amounted to $15,100 and $19,400, respectively.
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3 Second Amended and Restated Agreement of Limited Partnership of
Enstar Income Program II-1, L.P., dated as of August 1, 1988.(3)
10.1 Management Agreement between Enstar Income Program II-1 and
Enstar Cable Corporation.(1)
10.2 Revolving Credit and Term Loan Agreement dated February 28, 1986,
between Enstar Income Program II-1 and Rhode Island Hospital
Trust National Bank.(2)
10.3 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City
of Taylorville, IL.(2)
10.4 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City
of Litchfield, IL.(2)
10.5 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City
of Gillespie, IL.(2)
10.6 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the
County of Christian, IL.(2)
10.7 Service agreement between Enstar Communications Corporation,
Enstar Cable Corporation and Falcon Holding Group, Inc. dated as
of October 1, 1988.(4)
10.8 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated
February 28, 1986 between Enstar Income Program 1984-1 and Rhode
Island Hospital Trust National Bank, dated October 15, 1990.(5)
10.9 A resolution of the City Council of Taylorville, Illinois,
extending the Cable Television Franchise of Enstar Income Program
II 1. Passed and adopted January 4, 1993.(6)
10.10 Ordinance No. 92-9 of the City Council of Gillespie, Illinois,
authorizing an extension of the Cable Television Franchise
between the City of Gillespie and Enstar Cable Corporation.
Passed and approved November 9, 1992.(6)
10.11 Ordinance No. 2497 of the City of Taylorville, Illinois,
extending the Cable Television Franchise of Enstar Income Program
II-1. Passed and adopted June 14, 1993.(7)
10.12 A resolution of the County Board of Christian County extending
the Cable Television Franchise of Enstar Income Program II-1.
Passed and adopted November 15, 1994.(8)
10.13 A resolution of the City Council of Litchfield, Illinois,
extending the Cable Television Franchise of Enstar Income Program
II-1. Passed and adopted December 8, 1994.(8)
10.14 Ordinance No. 94-16 of the City of Gillespie, Illinois, granting
a non-exclusive community antenna television system franchise to
Enstar Income Program II-1. Passed and adopted December 12,
1994.(8)
10.15 Franchise agreement between Enstar Income Program II-1, L.P. and
the City of Taylorville, IL.(9)
10.16 Agreement with Respect to Franchise Fees and Reimbursable Fees
between Enstar Income Program II-1, L.P. and the City of
Taylorville, IL. (9)
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EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.17 Franchise ordinance granting a non-exclusive community antenna
television franchise for the City of Taylorville, IL. (9)
10.18 Franchise agreement between Enstar Communications Corporation and
County of Christian, Illinois. (10)
10.19 Franchise ordinance granting a non-exclusive community antenna
television franchise for the City of Litchfield, IL. (11)
10.20 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.(12)
10.21 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.(13)
21.1 Subsidiaries: None
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1986.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1987.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1988.
(4) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1989.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1990.
(6) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1991.
(7) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended September
30, 1993.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 for the fiscal year ended
December 31, 1994.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended September
30, 1995.
(10) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended September
30, 1997.
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63
(11) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14508 dated December 31, 1999.
(12) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14508 for the quarter ended June 30,
2000.
(13) Incorporated by reference to the exhibits to the Current Report on Form
10-Q of Enstar Income Program IV-1, L.P., File No. 0-15705 for the
quarter ended September 30, 2000.
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