1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to_______________
Commission File Number 0-16779
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1712898
- -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
- --------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
-----------------------------
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
------------------- -------------------
UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant. 59,646 of the registrant's 59,766 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.
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income/Growth Program Five-A, L.P., a Georgia limited
partnership (the "Partnership"), is engaged in the ownership, operation and
development, and, when appropriate, sale or other disposition, of cable
television systems in small to medium-sized communities. The Partnership was
formed on September 4, 1986. The general partners of the Partnership are Enstar
Communications Corporation, a Georgia corporation (the "Corporate General
Partner"), and Robert T. Graff, Jr. (the "Individual General Partner" and,
together with the Corporate General Partner, the "General Partners"). On
September 30, 1988, ownership of the Corporate General Partner was acquired by
Falcon Cablevision, a California limited partnership that has been engaged in
the ownership and operation of cable television systems since 1984 ("Falcon
Cablevision"). The general partner of Falcon Cablevision is Falcon Holding
Group, L.P. ("FHGLP"), which provides certain management services to the
Partnership. The general partner of FHGLP is Falcon Holding Group, Inc., a
California corporation ("FHGI"). See Item 13., "Certain Relationships and
Related Transactions." The General Partner, FHGLP and affiliated companies are
responsible for the day to day management of the Partnership and its operations.
See "Employees" below.
A cable television system receives television, radio and data signals
at the system's "headend" site by means of over-the-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The systems offer customers various levels (or "tiers") of cable
services consisting of broadcast television signals of local network,
independent and educational stations, a limited number of television signals
from so-called "super stations" originating from distant cities (such as WGN),
various satellite-delivered, non-broadcast channels (such as Cable News Network
("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN, Turner
Network Television ("TNT") and The Disney Channel), programming originated
locally by the cable television system (such as public, educational and
governmental access programs) and informational displays featuring news,
weather, stock market and financial reports, and public service announcements. A
number of the satellite services are also offered in certain packages. For an
extra monthly charge, the systems also offer "premium" television services to
their customers. These services (such as Home Box Office ("HBO") and Showtime)
are satellite channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption. See "Legislation and Regulation."
A customer generally pays an initial installation charge and fixed
monthly fees for basic, expanded basic, other tiers of satellite services and
premium programming services. Such monthly service fees constitute the primary
source of revenues for the systems. In addition to customer revenues, the
systems receive revenue from the sale of available advertising spots on
advertiser-supported programming. The systems also offer to their customers home
shopping services, which pay the systems a share of revenues from sales of
products in the systems' service areas, in addition to paying the systems a
separate fee in return for carrying their shopping service. Certain other new
channels have also recently offered the cable systems managed by FHGLP,
including those of the Partnership, fees in return for carrying their service.
Due to a general lack of channel capacity available for adding new channels, the
Partnership's management cannot predict the impact of such potential payments on
the Partnership's business. See Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
-2-
3
All of the Partnership's cable television business operations are
conducted through its participation as a co-general partner with a 50% interest
in Enstar Cable of Cumberland Valley (the "Joint Venture"), the other general
partner of which is also a limited partnership sponsored by the General Partners
of the Partnership. The Joint Venture was formed in order to enable each of its
partners to participate in the acquisition and ownership of a more diverse pool
of systems by combining certain of its financial resources. Because all of the
Partnership's operations are conducted through its participation in the Joint
Venture, much of the discussion in this report relates to the Joint Venture and
its activities. References to the Partnership include the Joint Venture, where
appropriate.
The Joint Venture began its cable television business operations in
January 1988 with the acquisition of certain cable television systems located in
Kentucky and Tennessee and expanded its operations during February 1989 with the
acquisition of certain cable television systems located in Arkansas and
Missouri. The Kentucky systems provide service to customers in and around the
Cumberland Valley area. The Missouri systems provide service to customers in and
around the municipality of Hermitage. As of December 31, 1997, the Joint Venture
served approximately 17,000 basic subscribers in these areas. In February 1993,
the systems serving Noel, Missouri and Sulphur Springs, Arkansas were sold. The
Joint Venture does not expect to make any additional material acquisitions
during the remaining term of the Joint Venture.
FHGLP receives a management fee and reimbursement of expenses from the
Corporate General Partner for managing the Partnership's cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of FHGLP is Marc B. Nathanson. Mr.
Nathanson has managed FHGLP or its predecessors since 1975. Mr. Nathanson is a
veteran of more than 28 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices of
the Partnership, the Corporate General Partner and FHGLP are located at 10900
Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and their
telephone number is (310) 824-9990. See Item 10., "Directors and Executive
Officers of the Registrant."
BUSINESS STRATEGY
Historically, the Joint Venture has followed a systematic approach to
acquiring, operating and developing cable television systems based on the
primary goal of increasing operating cash flow while maintaining the quality of
services offered by its cable television systems. The Joint Venture's business
strategy has focused on serving small to medium-sized communities. The Joint
Venture believes that given a similar rate, technical, and channel
capacity/utilization profile, its cable television systems generally involve
less risk of increased competition than systems in large urban cities. In the
Joint Venture's markets, consumers have access to only a limited number of
over-the-air broadcast television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. As a result,
the Joint Venture's cable television systems generally have a higher basic
penetration rate (the number of homes subscribing to cable service as a
percentage of homes passed by cable) with a more stable customer base than
similar systems in large cities. Nonetheless, the Joint Venture believes that
all cable operators will face increased competition in the future from
alternative providers of multi-channel video programming services. See
"Competition."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") by the Federal Communications Commission (the "FCC") has had a negative
impact on the Joint Venture's revenues and cash flow. These rules are subject to
further amendment to give effect to the Telecommunications Act of 1996 (the
"1996 Telecom Act"). Among other changes, the 1996 Telecom Act provides that the
regulation of certain cable programming service tier ("CPST") rates will be
phased out altogether in 1999. Because cable service rate increases have
-3-
4
continued to outpace inflation under the FCC's existing regulations, the
Partnership and Joint Venture expect Congress and the FCC to explore additional
methods of regulating cable service rate increases, including deferral or repeal
of the March 31, 1999 sunset of CPST rate regulations and legislation recently
was introduced in Congress to repeal the sunset provision. There can be no
assurance as to what, if any, further action may be taken by the FCC, Congress
or any other regulatory authority or court, or the effect thereof on the Joint
Venture's business. See "Legislation and Regulation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Clustering
The Joint Venture has sought to acquire cable television operations in
communities that are proximate to other owned or affiliated systems in order to
achieve the economies of scale and operating efficiencies associated with
regional "clusters." The Joint Venture believes clustering can reduce marketing
and personnel costs and can also reduce capital expenditures in cases where
cable service can be delivered to a number of systems within a single region
through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments," the Joint Venture's systems
have almost 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, improve quality of service and facilitate the expansion of new
services such as advertising, pay-per-view, new unregulated tiers of
satellite-delivered services and home shopping, so that the systems remain
competitive within the industry.
The Joint Venture's management has selected a technical standard that
incorporates the use of fiber optic technology where applicable in its
engineering design for the majority of its systems that are to be rebuilt. A
system built with this type of architecture can provide for future channels of
analog service as well as new digital services. Such a system will also permit
the introduction of high speed data transmission and telephony services in the
future after incurring incremental capital expenditures related to these
services. The Joint Venture is also evaluating the use of digital compression
technology in its systems. See "Technological Developments" and "Digital
Compression."
As discussed in prior reports, the Joint Venture postponed a number of
rebuild and upgrade projects because of the uncertainty related to
implementation of the 1992 Cable Act and the negative impact thereof on the
Joint Venture's business and access to capital. As a result, the Joint Venture's
systems are significantly less technically advanced than had been expected prior
to the implementation of reregulation. On September 30, 1997, the Joint Venture
entered into a loan agreement with an affiliate for a revolving loan facility
(the "Facility") of $9,181,000 of which $2,600,000 was advanced to the Joint
Venture at closing. The Joint Venture's management expects to increase
borrowings under the Facility to meet system upgrade and other liquidity
requirements. Capital expenditures in 1997 approximated $610,800, primarily for
equipment upgrades. The Joint Venture has budgeted capital expenditures of
approximately $3.5 million in 1998 to extend and upgrade its systems, including
approximately $900,000 to replace and upgrade cable plant in Kentucky that
sustained storm damage in February 1998. In addition, the Joint Venture is
budgeted to begin a $400,000 upgrade of its cable system in Campbell County,
Tennessee as required under a provision of its franchise agreement. The Joint
Venture expects to complete the project by October 2000 as mandated by the
agreement. Additionally, the Joint Venture expects to upgrade its cable systems
in surrounding communities at a total estimated cost of approximately $520,000
beginning in 1999. See Note 7 of the Notes to Financial Statements for the Joint
Venture, "Legislation and Regulation" and Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
-4-
5
Decentralized Management
The Corporate General Partner manages the Joint Venture's systems on a
decentralized basis. The Corporate General Partner believes that its
decentralized management structure, by enhancing management presence at the
system level, increases its sensitivity to the needs of its customers, enhances
the effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
Marketing
The Joint Venture has made substantial changes in the way in which it
packages and sells its services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Pursuant to the FCC's rules, the Joint Venture has set rates for cable
related equipment (e.g., converter boxes and remote control devices) and
installation services based upon actual costs plus a reasonable profit and has
unbundled these charges from the charges for the provision of cable service. In
addition, in some systems, the Joint Venture began offering programming services
on an a la carte basis that were previously offered only as part of a package.
Services offered on an a la carte basis typically were made available for
purchase both individually and on a combined basis at a lower rate than the
aggregate a la carte rates. The FCC subsequently amended its rules to exclude
from rate regulation newly created packages of program services consisting only
of programming new to a cable system. The FCC also decided that newly-created
packages containing previously offered non-premium programming services will
henceforth be subject to rate regulation, whether or not the services also are
available on an existing a la carte basis. With respect to a la carte
programming packages created by the Joint Venture and numerous other cable
operators, the FCC decided that where only a few services had been moved from
regulated tiers to a non-premium programming package, the package will be
treated as if it were a tier of new program services, and thus not subject to
rate regulation. Substantially all of the a la carte programming packages
offered by the Joint Venture have received this desirable treatment. These
amendments to the FCC's rules have allowed the Joint Venture to resume its core
marketing strategy and reintroduce program service packaging. As a result, in
addition to the basic service package, customers in substantially all of the
systems may purchase an expanded group of regulated services, additional
unregulated packages of satellite-delivered services, and premium services. The
premium services may be purchased on either an a la carte or a discounted
packaged basis. See "Legislation and Regulation."
The Joint Venture has employed a variety of targeted marketing
techniques to attract new customers by focusing on delivering value, choice,
convenience and quality. The Joint Venture employs direct mail, radio and local
newspaper advertising, telemarketing and door-to-door selling utilizing
demographic "cluster codes" to target specific messages to target audiences. In
certain systems, the Joint Venture offers discounts to customers who purchase
premium services on a limited trial basis in order to encourage a higher level
of service subscription. The Joint Venture also has a coordinated strategy for
retaining customers that includes televised retention advertising to reinforce
the initial decision to subscribe and encourage customers to purchase higher
service levels.
Customer Service and Community Relations
The Joint Venture places a strong emphasis on customer service and
community relations and believes that success in these areas is critical to its
business. FHGLP has developed and implemented a wide range of monthly internal
training programs for its employees, including its regional managers, that focus
on the Joint Venture's operations and employee interaction with customers. The
effectiveness of FHGLP's training program as it relates to the employees'
interaction with customers is monitored on an ongoing basis, and a portion of
the regional managers' compensation is tied to achieving customer service
targets. FHGLP conducts an extensive customer survey on a periodic basis and
uses the information in its efforts to enhance service and better address the
needs of the Joint Venture's customers. In addition, the Joint Venture is
-5-
6
participating in the industry's Customer Service Initiative which emphasizes an
on-time guarantee program for service and installation appointments. FHGLP's
corporate executives and regional managers lead the Joint Venture's involvement
in a number of programs benefiting the communities the Joint Venture serves,
including, among others, Cable in the Classroom, Drug Awareness, Holiday Toy
Drive and the Cystic Fibrosis Foundation. Cable in the Classroom is the cable
television industry's public service initiative to enrich education through the
use of commercial-free cable programming. In addition, a monthly publication,
Cable in the Classroom magazine provides educational program listings by
curriculum area, as well as feature articles on how teachers across the country
use the programs.
DESCRIPTION OF THE JOINT VENTURE'S SYSTEMS
The table below sets forth certain operating statistics for the Joint
Venture's cable systems as of December 31, 1997.
Average
Monthly
Premium Revenue
Homes Basic Basic Service Premium Per Basic
System Passed1 Subscribers Penetration2 Units3 Penetration4 Subscriber5
- ------ ------- ----------- ------------ ------ ------------ -----------
Monticello, KY and
Jellico, TN 21,167 15,870 75.0% 2,562 16.1% $35.71
Pomme De Terre, MO 3,583 1,097 30.6% 194 17.7% $30.21
------ ------ ----- -------
Total 24,750 16,967 68.6% 2,756 16.2% $35.35
====== ====== ===== =======
1 Homes passed refers to estimates by the Joint Venture of the
approximate number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
2 Basic subscribers as a percentage of homes passed by cable.
3 Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
4 Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
5 Average monthly revenue per basic subscriber has been computed based
on revenue for the year ended December 31, 1997.
-6-
7
CUSTOMER RATES AND SERVICES
The Joint Venture's cable television systems offer customers packages
of services that include the local area network, independent and educational
television stations, a limited number of television signals from distant cities,
numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA,
ESPN, TNT and The Disney Channel) and certain information and public access
channels. For an extra monthly charge, the systems provide certain premium
television services, such as HBO and Showtime. The Joint Venture also offers
other cable television services to its customers. For additional charges, in
most of its systems, the Joint Venture also rents remote control devices and VCR
compatible devices (devices that make it easier for a customer to tape a program
from one channel while watching a program on another).
The service options offered by the Joint Venture vary from system to
system, depending upon a system's channel capacity and viewer interests. Rates
for services also vary from market to market and according to the type of
services selected.
Pursuant to the 1992 Cable Act, most cable television systems are
subject to rate regulation of the basic service tier, the non-basic service
tiers other than premium (per channel or program) services, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of the Joint Venture's systems not deemed to be
subject to effective competition under the FCC's definition. See "Legislation
and Regulation."
At December 31, 1997, the Joint Venture's monthly rates for basic cable
service for residential customers, excluding special senior citizen discount
rates, ranged from $19.00 to $24.06 and its premium service rate was $11.95,
excluding special promotions offered periodically in conjunction with the Joint
Venture's marketing programs. A one-time installation fee, which the Joint
Venture may wholly or partially waive during a promotional period, is usually
charged to new customers. Commercial customers, such as hotels, motels and
hospitals, are charged a negotiated, non-recurring fee for installation of
service and monthly fees based upon a standard discounting procedure. Most
multi-unit dwellings are offered a negotiated bulk rate in exchange for
single-point billing and basic service to all units. These rates are also
subject to regulation.
EMPLOYEES
The Joint Venture has no employees. The various personnel required to
operate the Joint Venture's business are employed by the Corporate General
Partner, its subsidiary corporation and FHGLP. The cost of such employment is
allocated and charged to the Joint Venture for reimbursement pursuant to the
partnership agreement and management agreement. Other personnel required to
operate the Joint Venture's business are employed by affiliates of the Corporate
General Partner. The cost of such employment is allocated and charged to the
Joint Venture. The amounts of these reimbursable costs are set forth below in
Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Joint Venture seeks
to apply technological advances in the cable television industry to its cable
television systems on the basis of cost effectiveness, capital availability,
enhancement of product quality and service delivery and industry wide
acceptance. Currently, the Joint Venture's systems have an average channel
capacity of 36 and, on average, 99% of the channel capacity of the systems was
utilized at December 31, 1997. The Joint Venture believes that system upgrades
would enable it to provide customers with greater programming diversity, better
picture quality and alternative communications delivery systems made possible by
the introduction of fiber optic technology and by the possible future
application of digital compression. See "Business Strategy - Capital
Expenditures,"
-7-
8
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial cable is
playing a major role in expanding channel capacity and improving the performance
of cable television systems. Fiber optic cable is capable of carrying hundreds
of video, data and voice channels and, accordingly, its utilization is essential
to the enhancement of a cable television system's technical capabilities. The
Joint Venture's current policy is to utilize fiber optic technology where
applicable in rebuild projects which it undertakes. The benefits of fiber optic
technology over traditional coaxial cable distribution plant include lower
ongoing maintenance and power costs and improved picture quality and
reliability.
DIGITAL COMPRESSION
The Joint Venture has been closely monitoring developments in the area
of digital compression, a technology that is expected to enable cable operators
to increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. Depending on the technical characteristics of the
existing system, the Joint Venture believes that the utilization of digital
compression technology in the future could enable its systems to increase
channel capacity in certain systems in a manner that could, in the short term,
be more cost efficient than rebuilding such systems with higher capacity
distribution plant. However, unless the system has sufficient unused channel
capacity and bandwidth, the use of digital compression to increase channel
offerings is not a substitute for the rebuild of the system, which will improve
picture quality, system reliability and quality of service. The use of digital
compression in the systems also could expand the number and types of services
these systems offer and enhance the development of current and future revenue
sources. Equipment vendors are beginning to market products to provide this
technology, but the Joint Venture's management has no plans to install it at
this time based on the current technological profile of its systems and its
present understanding of the costs as compared to the benefits of the digital
equipment currently available. This issue is under frequent management review.
PROGRAMMING
The Joint Venture purchases basic and premium programming for its
systems from Falcon Cablevision. In turn, Falcon Cablevision charges the Joint
Venture for these costs based on an estimate of what the Corporate General
Partner could negotiate for such services for the 15 partnerships managed by the
Corporate General Partner as a group (approximately 92,700 basic subscribers at
December 31, 1997), which is generally based on a fixed fee per customer or a
percentage of the gross receipts for the particular service. Certain other new
channels have also recently offered Cablevision and the Joint Venture's systems
fees in return for carrying their service. Due to a lack of channel capacity
available for adding new channels, the Joint Venture's management cannot predict
the impact of such potential payments on its business. In addition, the FCC may
require that certain such payments from programmers be offset against the
programming fee increases which can be passed through to subscribers under the
FCC's rate regulations. Falcon Cablevision's programming contracts are generally
for a fixed period of time and are subject to negotiated renewal. Falcon
Cablevision does not have long-term programming contracts for the supply of a
substantial amount of its programming. Accordingly, no assurance can be given
that its, and correspondingly the Joint Venture's programming costs will not
continue to increase substantially in the near future, or that other materially
adverse terms will not be added to Falcon Cablevision's programming contracts.
Management believes, however, that Falcon Cablevision's relations with its
programming suppliers generally are good.
The Joint Venture's cable programming costs have increased in recent
years and are expected to continue to increase due to additional programming
being provided to basic customers, requirements to carry channels under
retransmission carriage agreements entered into with certain programming
sources,
-8-
9
increased costs to produce or purchase cable programming generally (including
sports programming), inflationary increases and other factors. The 1996
retransmission carriage agreement negotiations resulted in the Joint Venture
agreeing to carry one new service in its Monticello system, for which it expects
to receive reimbursement of certain costs related to launching the service. All
other negotiations were completed with essentially no change to the previous
agreements. Under the FCC's rate regulations, increases in programming costs for
regulated cable services occurring after the earlier of March 1, 1994, or the
date a system's basic cable service became regulated, may be passed through to
customers. See "Legislation and Regulation - Federal Regulation - Carriage of
Broadcast Television Signals." Generally, programming costs are charged among
systems on a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and
Regulation."
As of December 31, 1997, the Joint Venture held 19 franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Joint Venture
systems range up to 5% of the gross revenues generated by a system. The 1984
Cable Act prohibits franchising authorities from imposing franchise fees in
excess of 5% of gross revenues and also permits the cable system operator to
seek re-negotiation and modification of franchise requirements if warranted by
changed circumstances.
The following table groups the franchises of the Joint Venture's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 1997.
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
- -------------------- ---------- ----------- -----------
Prior to 1999 10 9,750 57.5%
1999 - 2003 7 5,381 31.7%
2004 and after 2 997 5.9%
-- ------ ----
Total 19 16,128 95.1%
== ====== ====
The Joint Venture operates cable television systems which serve
multiple communities and, in some circumstances, portions of such systems extend
into jurisdictions for which the Joint Venture believes no franchise is
necessary. In the aggregate, approximately 839 customers, comprising
approximately 4.9% of the Joint Venture's customers, are served by unfranchised
portions of such systems. In certain instances, however, where a single
franchise comprises a large percentage of the customers in an operating region,
the loss of such franchise could decrease the economies of scale achieved by the
Joint Venture's clustering strategy. The Joint Venture has never had a franchise
revoked for any of its systems and believes that it has satisfactory
relationships with substantially all of its franchising authorities.
-9-
10
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise, but no value attributed to the franchise itself. In
addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merit and not as part of a
comparative process with competing applications. See "Legislation and
Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over-the-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. Cable systems
also face competition from alternative methods of distributing and receiving
television signals and from other sources of entertainment such as live sporting
events, movie theaters and home video products, including videotape recorders
and videodisc players. In recent years, the FCC has adopted policies providing
for authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources.
Individuals presently have the option to purchase home satellite
dishes, which allow the direct reception of satellite-delivered broadcast and
nonbroadcast program services formerly available only to cable television
subscribers. Most satellite-distributed program signals are being electronically
scrambled to permit reception only with authorized decoding equipment for which
the consumer must pay a fee. The 1992 Cable Act enhances the right of cable
competitors to purchase nonbroadcast satellite-delivered programming. See
"Legislation and Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if, as is the case with DIRECTV,
multiple satellites are placed in the same orbital position. Unlike cable
television systems, however, DBS satellites are limited by law in their ability
to deliver local broadcast signals. One DBS provider, EchoStar, has announced
plans to deliver a limited number of local broadcast signals in a limited number
of markets. DBS service can be received virtually anywhere in the continental
United States through the installation of a small rooftop or side-mounted
antenna, and it is more accessible than cable television service where cable
plant has not been constructed or where it is not cost effective to construct
cable television facilities. DBS service is being heavily marketed on a
nationwide basis by several service providers. In addition, medium-power
fixed-service satellites can be used to deliver direct-to-home satellite
services over small home satellite dishes, and one provider, PrimeStar,
currently provides service to subscribers using such a satellite.
Multichannel multipoint distribution systems ("wireless cable") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. Wireless cable systems are less capital
intensive, are not required to obtain local franchises or to pay franchise fees,
and are subject to fewer regulatory requirements than cable television systems.
To date, the ability of wireless cable services to compete with cable television
systems has been limited by channel capacity (35-channel maximum) and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few
-10-
11
wireless cable systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The use of digital compression technology may enable wireless cable systems to
deliver more channels.
Private cable television systems compete for service to condominiums,
apartment complexes and certain other multiple unit residential developments.
The operators of these private systems, known as satellite master antenna
television ("SMATV") systems, often enter into exclusive agreements with
apartment building owners or homeowners' associations which preclude franchised
cable television operators from serving residents of such private complexes.
However, the 1984 Cable Act gives franchised cable operators the right to use
existing compatible easements within their franchise areas upon
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to the terms and conditions of access to
those easements. There have been conflicting judicial decisions interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property. Under the 1996
Telecom Act, SMATV systems can interconnect non-commonly owned buildings without
having to comply with local, state and federal regulatory requirements that are
imposed upon cable systems providing similar services, as long as they do not
use public rights-of-way.
The FCC has initiated a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC has allocated spectrum in the 28 GHz range for a new
multichannel wireless service that can be used to provide video and
telecommunications services. The FCC is in the process of awarding licenses to
use this spectrum via a market-by-market auction. It cannot be predicted at this
time whether such a service will have a material impact on the operations of
cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, wireless cable,
SMATV or as traditional franchised cable system operators. Alternatively, the
1996 Telecom Act authorizes local telephone companies to operate "open video
systems" without obtaining a local cable franchise, although telephone companies
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Up to two-thirds of the channel capacity
on an "open video system" must be available to programmers unaffiliated with the
local telephone company. The open video system concept replaces the FCC's video
dialtone rules. The 1996 Telecom Act also includes numerous provisions designed
to make it easier for cable operators and others to compete directly with local
exchange telephone carriers.
The cable television industry competes with radio, television, print
media and the Internet for advertising revenues. As the cable television
industry continues to develop programming designed specifically for distribution
by cable, advertising revenues may increase. Premium programming provided by
cable systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services may
depend largely upon the continued availability of attractive programming at
competitive prices.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry. See
"Legislation and Regulation."
-11-
12
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected, and
may in the future materially affect, the Partnership and the cable television
industry. The following is a summary of federal laws and regulations affecting
the growth and operation of the cable television industry and a description of
certain state and local laws. The Partnership believes that the regulation of
its industry remains a matter of interest to Congress, the FCC and other
regulatory authorities. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the effect
thereof on the Partnership and Joint Venture.
FEDERAL REGULATION
The primary federal statute dealing with the regulation of the cable
television industry is the Communications Act of 1934 (the "Communications
Act"), as amended. The three principal amendments to the Communications Act that
shaped the existing regulatory framework for the cable television industry were
the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act.
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
The 1992 Cable Act replaced the FCC's previous standard for determining
effective competition, under which most cable systems were not subject to local
rate regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to local rate regulation of basic service.
The 1996 Telecom Act expanded the definition of effective competition to include
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except DBS. A finding of effective competition exempts both
basic and nonbasic tiers from regulation. Additionally, the 1992 Cable Act
required the FCC to adopt a formula, enforceable by franchising authorities, to
assure that basic cable rates are reasonable; allowed the FCC to review rates
for nonbasic service tiers (other than per-channel or per-program services) in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring subscribers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of doing so; required the FCC to adopt regulations
to establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allowed
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances. The 1996 Telecom Act limits the
class of complainants regarding nonbasic tier rates to franchising authorities
only and ends FCC regulation of nonbasic tier rates on March 31, 1999. Because
cable service rate increases have continued to outpace inflation under the FCC's
existing regulations, Congress and the FCC can be expected to explore additional
methods of addressing this issue, including deferral or repeal of the March 31,
1999 sunset of CPST rate regulations and legislation recently was introduced in
Congress to repeal the sunset provision.
The FCC's regulations contain standards for the regulation of basic and
nonbasic cable service rates (other than per-channel or per-program services).
Local franchising authorities and/or the FCC are empowered to order a reduction
of existing rates which exceed the maximum permitted level for either
-12-
13
basic and/or nonbasic cable services and associated equipment, and refunds can
be required. The rate regulations adopt a benchmark price cap system for
measuring the reasonableness of existing basic and nonbasic service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. In addition, new product
tiers consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met such as not moving services
from existing tiers to the new tier. These provisions currently provide limited
benefit to the Joint Venture's systems due to the lack of channel capacity
previously discussed. There is also a streamlined cost-of-service methodology
available to justify a rate increase on basic and regulated nonbasic tiers for
"significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the Joint Venture for basic cable service and for
associated basic cable service equipment.
The Joint Venture has adjusted its regulated programming service rates
and related equipment and installation charges in substantially all of its
service areas so as to bring these rates and charges into compliance with the
applicable benchmark or equipment and installation cost levels.
FCC regulations adopted pursuant to the 1992 Cable Act require cable
systems to permit customers to purchase video programming on a per channel or a
per program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the cable system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act adopted new television station carriage
requirements. These rules allow commercial television broadcast stations which
are "local" to a cable system, i.e., the system is located in the station's Area
of Dominant Influence, to elect every three years whether to require the cable
system to carry the station, subject to certain exceptions, or whether the cable
system will have to negotiate for "retransmission consent" to carry the station.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B contour
(a measure of signal strength). Unlike commercial stations, noncommercial
stations are not given the option to negotiate retransmission consent for the
carriage of their signal. In addition, cable systems will have to obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WGN. The Joint Venture has thus
far not been required to pay cash compensation to broadcasters for
retransmission consent or been required by broadcasters to remove broadcast
stations from the cable television channel line-ups. The Joint Venture has,
however, agreed to carry some services in specified markets pursuant to
retransmission consent arrangements which it believes are comparable to those
entered into by most other large cable operators, and for which it pays monthly
fees to the service providers, as it does with other satellite providers. The
second election between must-carry and retransmission consent for local
commercial television broadcast stations was October 1, 1996, and the Joint
Venture has agreed to carry one new service in specified markets pursuant to
these retransmission consent arrangements. The next election between must-carry
and retransmission consent for local commercial television broadcast stations
will be October 1, 1999.
-13-
14
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of certain lower priority distant
stations affiliated with the same network as the local station.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety.
PROGRAM ACCESS
The 1992 Cable Act contains provisions that are intended to foster the
development of competition to traditional cable systems by regulating the access
of competing video providers to vertically integrated, satellite-distributed
cable programming services. The FCC has commenced a rulemaking proceeding to
seek comment on proposed modifications to its existing rules implementing the
statute, including: (1) establishing specific deadlines for resolving program
access complaints; (2) improving the discovery process, such as requiring the
disclosure of the rates that vertically integrated programmers charge cable
operators; (3) imposing monetary damages for program access violations; (4)
possibly applying the program access rules to certain situations in which
programming is moved from satellite delivery to terrestrial delivery; and (5)
revising the manner in which the rules apply to program buying cooperatives. It
is not clear to what extent, if any, the provisions of the 1992 Cable Act cover
programming distributed by means other than satellite or by programmers
unaffiliated with multiple system operators. Legislation also is expected to be
introduced shortly in Congress to strengthen the program access provisions of
the 1992 Cable Act.
FRANCHISE FEES
Franchising authorities may impose franchise fees, but such payments
cannot exceed 5% of a cable system's annual gross revenues. Under the 1996
Telecom Act, franchising authorities may not exact franchise fees from revenues
derived from telecommunications services.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. While a cable operator
must still submit its request to commence renewal proceedings within thirty to
thirty-six months prior to franchise expiration to invoke the formal renewal
process, the request must be in writing and the franchising authority must
commence renewal proceedings not later than six months after receipt of such
notice. The four-month period for the franchising authority to grant or deny the
renewal now
-14-
15
runs from the submission of the renewal proposal, not the completion of the
public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
For alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC. The FCC has
recently changed the formula in order to produce lower rates and thereby
encourage the use of leased access.
COMPETING FRANCHISES
The 1992 Cable Act prohibits franchising authorities from unreasonably
refusing to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
OWNERSHIP
The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against
local exchange telephone companies ("LECs") providing video programming directly
to customers within their local telephone exchange service areas. However, with
certain limited exceptions, a LEC may not acquire more than a 10% equity
interest in an existing cable system operating within the LEC's service area.
The 1996 Telecom Act also authorized LECs and others to operate "open video
systems" without obtaining a local cable franchise. See "Competition."
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's signal strength as defined by the FCC's rules) covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminates the
statutory ban and directs the FCC to review its rule within two years. Finally,
in order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and wireless cable facilities having
overlapping service areas, except in very limited circumstances. The 1992 Cable
Act codified this restriction and extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992 are grandfathered. The
1996 Telecom Act exempts cable systems facing effective competition from the
wireless cable and SMATV restriction. In addition, a cable operator can purchase
a SMATV system serving the same area and technically integrate it into the cable
system. The 1992 Cable Act permits states or local franchising authorities to
adopt certain additional restrictions on the ownership of cable television
systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder of
more than 50% of the voting stock),
-15-
16
officerships, directorships and general partnership interests. The FCC has
stayed the effectiveness of these rules pending the outcome of the appeal from a
U.S. District Court decision holding the multiple ownership limit provision of
the 1992 Cable Act unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which owns
the cable system has an attributable interest. The limit is 40% of the first 75
activated channels.
The FCC also recently commenced a rulemaking proceeding to examine,
among other issues, whether any limitations on cable-DBS cross-ownership are
warranted in order to prevent anticompetitive conduct in the video services
market.
FRANCHISE TRANSFERS
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
TECHNICAL REQUIREMENTS
The FCC has imposed technical standards applicable to the cable
channels on which broadcast stations are carried, and has prohibited franchising
authorities from adopting standards which are in conflict with or more
restrictive than those established by the FCC. Those standards are applicable to
all classes of channels which carry downstream National Television System
Committee (NTSC) video programming. The FCC also has adopted additional
standards applicable to cable television systems using frequencies in the
108-137 MHz and 225-400 MHz bands in order to prevent harmful interference with
aeronautical navigation and safety radio services and has also established
limits on cable system signal leakage. Periodic testing by cable operators for
compliance with the technical standards and signal leakage limits is required
and an annual filing of the results of these measurements is required. The 1992
Cable Act requires the FCC to periodically update its technical standards to
take into account changes in technology. Under the 1996 Telecom Act, local
franchising authorities may not prohibit, condition or restrict a cable system's
use of any type of subscriber equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. Among other things, these regulations, inter
alia, generally prohibit cable operators from scrambling their basic service
tier. The 1996 Telecom Act directs the FCC to set only minimal standards to
assure compatibility between television sets, VCRs and cable systems, and to
rely on the marketplace. The FCC must adopt rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable systems and other multichannel
video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. The state of Kentucky where the Joint Venture
operates cable systems has certified to the FCC that it regulates the rates,
terms and conditions for pole attachments. In the absence of state regulation,
the FCC administers such pole attachment rates through use of a formula which it
has devised. As directed by the 1996 Telecom Act, the FCC has adopted a new rate
formula for any attaching party, including cable systems, which offer
telecommunications services. This new
-16-
17
formula will result in significantly higher attachment rates for cable systems
which choose to offer such services, but does not begin to take effect until
2001.
OTHER MATTERS
Other matters subject to FCC regulation include certain restrictions on
a cable system's carriage of local sports programming; rules governing political
broadcasts; customer service standards; obscenity and indecency; home wiring;
EEO; privacy; closed captioning; sponsorship identification; system
registration; and limitations on advertising contained in nonbroadcast
children's programming.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations. Any future adjustment to the copyright royalty rates will be done
through an arbitration process supervised by the U.S. Copyright Office.
Cable operators are liable for interest on underpaid and unpaid royalty
fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves, e.g., on local
origination channels or in advertisements inserted locally on cable networks,
must also be licensed. Cable industry negotiations with ASCAP, BMI and SESAC,
Inc. (a third and smaller performing rights organization) are in progress.
LOCAL REGULATION
Because a cable television system uses local streets and rights-of-way,
cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain procedural
protections, there can be no assurance that renewals will be granted or that
renewals will be made on similar terms and conditions. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome. The specific terms
and conditions of a franchise and the laws and regulations under which it was
granted directly affect the profitability of the cable television system. Cable
franchises generally contain provisions governing charges for basic cable
television services, fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy of
public streets and number
-17-
18
and types of cable services provided. The 1996 Telecom Act prohibits a
franchising authority from either requiring or limiting a cable operator's
provision of telecommunications services.
The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system operator and the
courts have from time to time reviewed the constitutionality of several general
franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992 Cable
Act prohibits exclusive franchises, and allows franchising authorities to
exercise greater control over the operation of franchised cable television
systems, especially in the area of customer service and rate regulation.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
ITEM 2. PROPERTIES
The Joint Venture owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and owns or leases its service vehicles. The Joint Venture believes
that its properties, both owned and leased, are in good condition and are
suitable and adequate for the Joint Venture's business operations.
The Joint Venture owns substantially all of the assets related to its
cable television operations, including its program production equipment, headend
(towers, antennae, electronic equipment and satellite earth stations), cable
plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is periodically a party to various legal proceedings.
Such legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business and management believes that the
outcome of all pending legal proceedings will not, in the aggregate, have a
material adverse effect on the financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-18-
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
LIQUIDITY
While the Partnership's equity securities, which consist of units of
limited partnership interests, are publicly held, there is no established public
trading market for the units and it is not expected that a market will develop
in the future. The approximate number of equity security holders of record was
1,765 as of December 31, 1997. In addition to restrictions on the
transferability of units contained in the partnership agreement, the
transferability of units may be affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all Partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 10% of their initial
investments less any distributions from previous system sales or refinancing of
systems. Thereafter, the respective allocations will be made 20% to the general
partners and 80% to the limited partners. Any losses from system sales or
exchanges shall be allocated first to all partners having positive capital
account balances (based on their respective capital accounts) until all such
accounts are reduced to zero and thereafter to the Corporate General Partner.
All allocations to individual limited partners will be based on their respective
limited partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
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 the Joint
Venture operations. The amount of such distributions, if any, will vary from
quarter to quarter depending upon the Joint Venture's results of operations and
the Corporate General Partner's determination of whether otherwise available
funds are needed for the Joint Venture's ongoing working capital and liquidity
requirements. However, on February 22, 1994, the FCC announced significant
amendments to its rules implementing certain provisions of the 1992 Cable Act.
Compliance with these rules has had a negative impact on the Partnership's
revenues and cash flow.
The Partnership began making periodic cash distributions to limited
partners from operations in February 1988. The distributions were funded
primarily from distributions received by the Partnership from the Joint Venture.
No distributions were made during 1995, 1996 or 1997.
-19-
20
The Partnership's ability to pay distributions in the future, the
actual level of any such distributions and the continuance of distributions if
commenced, will depend on a number of factors, including the amount of cash flow
from operations, projected capital expenditures, provision for contingent
liabilities, availability of bank refinancing, regulatory or legislative
developments governing the cable television industry, and growth in customers.
Some of these factors are beyond the control of the Partnership, and
consequently, no assurances can be given regarding the level or timing of future
distributions, if any. The Joint Venture's Facility does not restrict the
payment of distributions to partners unless an event of default exists
thereunder or the Maximum Leverage Ratio, as defined, is greater than 4 to 1.
However, because management believes it is critical to conserve cash and
borrowing capacity to fund anticipated capital expenditures, the Partnership
does not anticipate a resumption of distributions to unitholders at this time.
See Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
-20-
21
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership and of
the Joint Venture for the five years ended December 31, 1997. This data should
be read in conjunction with the Partnership's and Joint Venture's financial
statements included in Item 8 hereof and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7.
I. THE PARTNERSHIP
Year Ended December 31,
-----------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
Costs and expenses $ (44,300) $ (49,800) $ (32,000) $ (27,100) $ (34,400)
Interest expense (2,000) (1,700) (500) (500) (1,300)
Equity in net loss of joint
venture (601,600) (642,500) (555,100) (311,000) (41,100)
----------- ----------- ----------- ----------- -----------
Net loss $ (647,900) $ (694,000) $ (587,600) $ (338,600) $ (76,800)
=========== =========== =========== =========== ===========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net loss $ (10.73) $ (11.50) $ (9.73) $ (5.61) $ (1.27)
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash used in operating
activities $ (131,200) $ (45,700) $ (57,100) $ (10,400) $ (39,400)
Net cash provided by investing
activities 132,000 79,100 9,000 31,500 30,000
As of December 31,
-----------------------------------------------------------------------------------
BALANCE SHEET DATA 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
Total assets $ 5,948,000 $ 5,259,800 $ 4,663,400 $ 4,326,200 $ 4,245,700
General partners' deficit (64,900) (71,800) (77,700) (81,100) (81,900)
Limited partners' capital 5,993,100 5,306,000 4,724,300 4,389,100 4,313,100
-21-
22
II. ENSTAR CABLE OF CUMBERLAND VALLEY
Year Ended December 31,
-----------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
Revenues $ 6,243,400 $ 6,173,900 $ 6,241,700 $ 6,728,900 $ 7,217,900
Costs and expenses (3,471,600) (3,657,600) (3,526,300) (3,881,000) (4,127,100)
Depreciation and amortization (3,012,700) (3,158,600) (3,104,900) (2,841,600) (2,672,700)
----------- ----------- ----------- ----------- -----------
Operating income (loss) (240,900) (642,300) (389,500) 6,300 418,100
Interest expense (439,100) (664,800) (779,300) (699,400) (578,600)
Interest income 15,700 22,100 58,600 71,100 78,300
Loss on sale of cable
television system (538,900) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss $(1,203,200) $(1,285,000) $(1,110,200) $ (622,000) $ (82,200)
----------- ----------- ----------- ----------- -----------
Distributions paid to venturers $ 264,000 $ 158,200 $ 18,000 $ 63,000 $ 60,000
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash provided by operating
activities $ 1,884,800 $ 1,882,400 $ 2,045,900 $ 2,750,200 $ 2,939,300
Net cash provided by (used in)
investing activities 353,200 (773,300) (1,996,800) (673,000) (622,200)
Net cash used in financing
activities (2,435,500) (205,600) (18,000) (763,000) (3,661,000)
EBITDA(1) 2,771,800 2,516,300 2,715,400 2,847,900 3,090,800
EBITDA to revenues 44.4% 40.8% 43.5% 42.3% 42.8%
Total debt to EBITDA 2.4x 2.7x 2.5x 2.1x 0.8x
Capital expenditures $ 532,900 $ 763,400 $ 1,975,800 $ 662,100 $ 610,800
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
Total assets $19,406,000 $18,232,200 $17,049,700 $15,832,600 $12,392,100
Total debt 6,767,200 6,767,200 6,767,200 6,067,200 2,600,000
Venturers' capital 11,844,400 10,401,200 9,273,000 8,588,000 8,445,800
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry, the
Joint Venture believes that EBITDA and related measures of cash flow serve as
important financial analysis tools for measuring and comparing cable television
companies in several areas, such as liquidity, operating performance and
leverage. In addition, the covenants in the primary debt instrument of the Joint
Venture use EBITDA-derived calculations as a measure of financial performance.
EBITDA should not be considered by the reader as an alternative to net income,
as an indicator of the Joint Venture's financial performance or as an
alternative to cash flows as a measure of liquidity.
-22-
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The 1992 Cable Act required the FCC to, among other things, implement
extensive regulation of the rates charged by cable television systems for basic
and programming service tiers, installation, and customer premises equipment
leasing. Compliance with those rate regulations has had a negative impact on the
Joint Venture's revenues and cash flow. The 1996 Telecom Act substantially
changed the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will be phased out altogether in
1999. Because cable service rate increases have continued to outpace inflation
under the FCC's existing regulations, the Partnership and Joint Venture expect
Congress and the FCC to explore additional methods of regulating cable service
rate increases, including deferral or repeal of the March 31, 1999 sunset of
CPST rate regulations and legislation recently was introduced in Congress to
repeal the sunset provision. There can be no assurance as to what, if any,
further action may be taken by the FCC, Congress or any other regulatory
authority or court, or the effect thereof on the Joint Venture's business.
Accordingly, the Joint Venture's historical financial results as described below
are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership and the Joint Venture. Such forward looking statements involve risks
and uncertainties including, without limitation, the uncertainty of legislative
and regulatory changes and the rapid developments in the competitive environment
facing cable television operators such as the Joint Venture, as discussed more
fully elsewhere in this Report.
All of the Partnership's cable television business operations are
conducted through its participation as a partner with a 50% interest in Enstar
Cable of Cumberland Valley. The Partnership participates equally with its
affiliated partner (Enstar Income/Growth Program Five-B, L.P.) under the Joint
Venture Agreement with respect to capital contributions, obligations and
commitments, and results of operations. Accordingly in considering the financial
condition and results of operations of the Partnership, consideration must also
be made of those matters as they relate to the Joint Venture. The following
discussion reflects such consideration and provides a separate discussion for
each entity.
RESULTS OF OPERATIONS
THE PARTNERSHIP
All of the Partnership's cable television business operations, which
began in January 1988, are conducted through its participation as a partner in
the Joint Venture. The Joint Venture distributed an aggregate of $9,000, $31,500
and $30,000 to the Partnership, representing the Partnership's pro rata (i.e.,
50%) share of the cash flow distributed from the Joint Venture's operations,
during 1995, 1996 and 1997, respectively. The Partnership did not pay
distributions to its partners during 1995, 1996 or 1997.
THE JOINT VENTURE
1997 COMPARED TO 1996
The Joint Venture's revenues increased from $6,728,900 to $7,217,900,
or by 7.3%, for the year ended December 31, 1997 as compared to 1996. Of the
$489,000 increase, $575,100 was due to increases in regulated service rates that
were implemented by the Joint Venture in the second, third and fourth quarters
of 1996 and the fourth quarter of 1997, $94,700 was due to the July 1, 1996
restructuring of The
-23-
24
Disney Channel from a premium channel to a tier channel and $30,800 was due to
increases in other revenue producing items including installation revenue and
charges for franchise fees the Joint Venture passed through to its customers.
These increases were partially offset by a decrease of $211,600 due to decreases
in the number of subscriptions for basic, premium, tier and equipment rental
services. As of December 31, 1997, the Joint Venture had approximately 17,000
basic subscribers and 2,800 premium service units.
Service costs increased from $2,394,700 to $2,553,400, or by 6.6%, for
the year ended December 31, 1997 as compared to 1996. Service costs represent
costs directly attributable to providing cable services to customers. The
increase was principally due to increases in programming expense and franchise
fees, and decreases in capitalization of labor and overhead costs resulting from
fewer capital projects in 1997. The increase in programming fees was primarily
due to higher rates charged by program suppliers. Franchise fees increased in
direct relation to the increase in revenues as discussed above.
General and administrative expenses increased from $877,700 to
$920,800, or by 4.9%, for the year ended December 31, 1997 as compared to 1996,
primarily due to increases in bad debt expense and marketing expense, partially
offset by lower insurance costs.
Management fees and reimbursed expenses increased from $608,600 to
$652,900, or by 7.3%, for the year ended December 31, 1997 as compared to 1996.
Management fees increased in direct relation to increased revenues as described
above. Reimbursable expenses increased primarily as a result of higher allocated
personnel costs resulting from staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues increased from
42.3% during 1996 to 42.8% in 1997. The increase was primarily due to increased
revenues as discussed above. EBITDA increased from $2,847,900 to $3,090,800, or
by 8.5%, for the year ended December 31, 1997 as compared with 1996. EBITDA
should be considered in addition to and not as a substitute for net income and
cash flows determined in accordance with generally accepted accounting
principles as an indicator of financial performance and liquidity.
Depreciation and amortization expense decreased from $2,841,600 to
$2,672,700, or by 5.9%, for the year ended December 31, 1997 as compared to
1996, due to the effect of certain intangible assets becoming fully amortized.
Operating income increased from $6,300 to $418,100 for the year ended
December 31, 1997 as compared to 1996, primarily due to increases in revenues
and decreases in depreciation and amortization expense.
Interest expense decreased from $699,400 to $578,600, or by 17.3%, for
the year ended December 31, 1997 as compared to 1996, due to a decrease in
average borrowings.
Interest income increased from $71,100 to $78,300, or by 10.1%, for the
year ended December 31, 1997 as compared to 1996, due to a change in investment
policy that yielded a greater return on invested cash.
Due to the factors described above, the Joint Venture's net loss
decreased from $622,000 to $82,200, or by 86.8%, for the year ended December 31,
1997 as compared to 1996.
-24-
25
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $6,241,700 to $6,728,900,
or by 7.8%, for the year ended December 31, 1996 as compared to 1995. Of the
$487,200 increase, $406,900 was due to increases in regulated service rates that
were implemented by the Joint Venture in the second, third and fourth quarters
of 1996, $108,400 was due to the July 1, 1996 restructuring of The Disney
Channel from a premium channel to a tier channel and $76,100 was due to
increases in other revenue producing items including rebates from programmers,
charges for franchise fees the Joint Venture passed through to its customers and
installation revenues. These increases were partially offset by a decrease of
$104,200 due to decreases in the number of subscriptions for services. As of
December 31, 1996, the Joint Venture had approximately 17,100 basic subscribers
and 3,400 premium service units.
Service costs increased from $2,177,600 to $2,394,700, or by 10.0%, for
the year ended December 31, 1996 as compared to 1995. Service costs represent
costs directly attributable to providing cable services to customers. Higher
programming fees, personnel costs and franchise fees accounted for the majority
of the increase. Programming fees increased primarily as a result of higher
rates charged by program suppliers and due to the restructuring of The Disney
Channel discussed above. Franchise fees increased due to revenue increases as
described above.
General and administrative expenses increased from $786,100 to
$877,700, or by 11.7%, for the year ended December 31, 1996 as compared to 1995,
primarily due to higher insurance premiums.
Management fees and reimbursed expenses increased from $562,600 to
$608,600, or by 8.2%, for the year ended December 31, 1996 as compared to 1995.
Management fees increased in direct relation to increased revenues as described
above. Reimbursable expenses increased primarily due to higher allocated
personnel costs resulting from wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
43.5% during 1995 to 42.3% in 1996. The decrease was primarily due to increases
in programming fees, insurance premiums and personnel costs. EBITDA increased
from $2,715,400 to $2,847,900, or by 4.9%, for the year ended December 31, 1996
as compared with 1995. EBITDA should be considered in addition to and not as a
substitute for net income and cash flows determined in accordance with generally
accepted accounting principles as an indicator of financial performance and
liquidity.
Depreciation and amortization expense decreased from $3,104,900 to
$2,841,600, or by 8.5%, for the year ended December 31, 1996 as compared to
1995, due to the effect of certain tangible assets becoming fully depreciated
and certain intangible assets becoming fully amortized.
The Joint Venture generated operating income of $6,300 for the year
ended December 31, 1996 as compared to an operating loss of $389,500 in 1995,
primarily due to increases in revenues and decreases in depreciation and
amortization expense.
Interest expense decreased from $779,300 to $699,400, or by 10.3%, for
the year ended December 31, 1996 as compared to 1995, due to lower average
interest rates and a decrease in average borrowings.
Interest income increased from $58,600 to $71,100, or by 21.3%, for the
year ended December 31, 1996 as compared to 1995, due to higher cash balances
available for investment.
-25-
26
Due to the factors described above, the Joint Venture's net loss
decreased from $1,110,200 to $622,000, or by 44.0%, for the year ended December
31, 1996 as compared to 1995.
DISTRIBUTIONS MADE BY THE CUMBERLAND VALLEY JOINT VENTURE
The Joint Venture distributed $18,000, $63,000 and $60,000 equally
between its two partners during 1995, 1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in the Joint Venture, is to distribute to its partners distributions of
cash flow received from the Joint Venture's operations and proceeds from the
sale of the Joint Venture's cable systems, if any, after providing for expenses,
debt service and capital requirements relating to the expansion, improvement and
upgrade of such cable systems. The Joint Venture relies upon the availability of
cash generated from operations and possible borrowings to fund its ongoing
expenses, debt service and capital requirements. The Joint Venture spent
$610,800 in 1997, primarily for equipment upgrades. The Joint Venture is
required to upgrade its system in Campbell County, Tennessee under a provision
of its franchise agreement. Upgrade expenditures are budgeted at a total
estimated cost of approximately $400,000 beginning in 1998. The franchise
agreement requires the project be completed by October 2000. Additionally, the
Joint Venture expects to upgrade its systems in surrounding communities at a
total estimated cost of approximately $570,000 beginning in 1999. Capital
expenditures of $2.7 million are budgeted for the 1998 upgrade of other assets
and extension of the Joint Venture's cable systems to pass new serviceable homes
in their franchise areas. The Joint Venture also is budgeted for expenditures of
approximately $900,000 to replace and upgrade cable plant in Kentucky that
sustained storm damage in February 1998. Such losses are not covered by
insurance. See discussion below.
Management believes that cash generated by operations of the Joint
Venture, together with available cash and proceeds from borrowings, will be
adequate to fund capital expenditures, debt service and other liquidity
requirements in 1998. As a result, the Corporate General Partner intends to use
its cash for such purposes.
In December 1993, the Joint Venture obtained a $9,000,000 reducing
revolving credit facility maturing on September 30, 1999. The Corporate General
Partner had engaged in discussions with a number of possible financing sources
regarding the availability and terms of a replacement bank facility for the
Joint Venture. These discussions were not successful. The Corporate General
Partner was generally advised that an individual facility of the size needed by
the Joint Venture is too small to interest most banks which lend to the cable
television industry. Accordingly, on June 6, 1997, the Corporate General Partner
and an affiliated partnership formed Enstar Finance Company, LLC ("EFC"). On
September 30, 1997, EFC obtained a secured bank facility of $35 million from two
agent banks in order to obtain funds that would in turn be advanced to the Joint
Venture and certain of the other partnerships managed by the Corporate General
Partner. The Joint Venture entered into a loan agreement with EFC for a
revolving loan facility of $9,181,000 of which $2,600,000 was advanced to the
Joint Venture at closing. Such funds together with available cash were used to
repay the Joint Venture's previous note payable balance of $4,067,200 and
related interest expense. The Joint Venture's management expects to increase
borrowings under the Facility for system upgrades and other liquidity
requirements.
Based on discussions with prospective lenders, the Corporate General
Partner believes that this structure provides capital to the Joint Venture on
terms more favorable than could be obtained on a "stand-alone" basis. Advances
by EFC under its partnership loan facilities are independently collateralized by
the individual partnership borrowers so that no partnership is liable for
advances made to other partnerships. The Joint Venture's Facility will mature on
August 31, 2001, at which time all funds previously advanced will be due in
full. Borrowings bear interest at the lender's base rate (8.5% at December 31,
1997), as defined,
-26-
27
plus 0.625%, or at an offshore rate, as defined, plus 1.875%. The Joint Venture
is permitted to prepay amounts outstanding under the Facility at any time
without penalty, and is able to reborrow throughout the term of the Facility up
to the maximum commitment then available so long as no event of default exists.
If the Joint Venture has "excess cash flow" (as defined in its loan agreement)
and has leverage, as defined, in excess of 4.25 to 1, or receives proceeds from
sales of its assets in excess of a specified amount, the Joint Venture is
required to make mandatory prepayments under the Facility. Such prepayments
permanently reduce the maximum commitment under the Facility. The Joint Venture
is also required to pay a commitment fee of 0.5% per annum on the unused portion
of its Facility, and an annual administrative fee. At closing, the Joint Venture
paid to EFC a $93,400 facility fee. This represented the Joint Venture's pro
rata portion of a similar fee paid by EFC to its lenders.
The Facility contains certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sales of assets, acquisitions and other covenants, defaults and
conditions. The Corporate General Partner believes the Joint Venture was in
compliance with the covenants at December 31, 1997.
The Facility does not restrict the payment of distributions to partners
unless an event of default exists thereunder or the Maximum Leverage Ratio, as
defined, is greater than 4 to 1. The Corporate General Partner believes it is
critical for the Joint Venture to conserve cash and borrowing capacity to fund
its anticipated capital expenditures. Accordingly, the Joint Venture does not
anticipate an increase in distributions to the Partnership in order to fund
distributions to unitholders at this time.
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Joint Venture's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
While the Corporate General Partner has made the election to
self-insure for these risks based upon a comparison of historical damage
sustained over the past five years with the cost and amount of insurance
currently available, there can be no assurance that future self-insured losses
will not exceed prior costs of maintaining insurance for these risks.
Approximately 94% of the Joint Venture's subscribers are served by its system in
Monticello, Kentucky and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Joint Venture's liquidity and cash flows. In February
1998, the Joint Venture's Monticello, Kentucky system incurred damage as a
result of an ice storm. The Corporate General Partner estimates costs to replace
and upgrade the damaged system will approximate $900,000. The Joint Venture
continues to purchase insurance coverage in amounts its management views as
appropriate for all other property, liability, automobile, workers' compensation
and other types of insurable risks.
The "Year 2000" issue refers to certain contingencies that could result
from computer programs being written using two digits rather than four to define
the year. Many existing computer systems, including certain systems of the
Partnership and Joint Venture, process transactions based on two digits for the
year of the transaction (for example, "97" for 1997). These computer systems may
not operate effectively when the last two digits become "00," as will occur on
January 1, 2000.
The Corporate General Partner has commenced an assessment of its Year
2000 business risks and its exposure to computer systems, to operating equipment
which is date sensitive and to its vendors and service providers. Based on a
preliminary study, the Corporate General Partner has concluded that certain of
its information systems were not Year 2000 compliant and has elected to replace
such software and hardware with Year 2000 compliant applications and equipment,
although the decision to replace major portions of such software and hardware
had previously been made without regard to the Year 2000 issue based on
operating and performance criteria. The Corporate General Partner expects to
install substantially all of the
-27-
28
new systems in 1998, with the remaining systems to be installed in the first
half of 1999. The total anticipated cost, including replacement software and
hardware, will be borne by FHGLP.
In addition to evaluating its internal systems, the Corporate General
Partner has also initiated communications with its third party vendors and
service suppliers to determine the extent to which the Partnership's and Joint
Venture's interface systems are vulnerable should those third parties fail to
solve their own Year 2000 problems on a timely basis. There can be no assurance
that the systems of other companies on which the Joint Venture's systems rely
will be timely converted and that the failure to do so would not have an adverse
impact on the Joint Venture's systems. The Partnership and Joint Venture
continue to closely monitor developments with their vendors and service
suppliers.
1997 VS. 1996
The Partnership used $29,000 more cash in operating activities during
the year ended December 31, 1997 than in 1996. The change was primarily due to a
$15,800 reduction in the collection of non recurring receivables from affiliates
during 1997 as compared to 1996. Partnership expenses used $8,100 more cash
during 1997 than in 1996. Cash from investing activities decreased by $1,500 due
to decreased distributions from the Joint Venture.
1996 VS. 1995
The Partnership used $46,700 less cash in operating activities during
the year ended December 31, 1996 than in 1995, primarily due to the timing of
collections of receivables from affiliates ($31,600 cash increase) and the
payment of recurring liabilities to the Corporate General Partner and third
party creditors ($10,200 cash increase). Partnership expenses used $4,900 less
cash during 1996 than in 1995. Cash provided by investing activities increased
by $22,500 during 1996 as compared to 1995 due to increased distributions from
the Joint Venture.
INFLATION
Certain of the Joint Venture's expenses, such as those for equipment
repair and replacement, billing and marketing, generally increase with
inflation. However, the Partnership does not believe that its financial results
have been, or will be, adversely affected by inflation in a material way,
provided that the Joint Venture is able to increase its service rates
periodically, of which there can be no assurance. See "Legislation and
Regulation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-28-
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partners of the Partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988 acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General Partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993 pursuant to which, among other things, the Corporate General
Partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which was originally granted to Falcon
Cablevision. Since its incorporation in Georgia in 1982, the Corporate General
Partner has been engaged in the cable/telecommunications business, both as a
general partner of 15 limited partnerships formed to own and operate cable
television systems and through a wholly-owned operating subsidiary. As of
December 31, 1997 the Corporate General Partner managed cable television systems
with approximately 92,700 basic subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP currently
operates cable systems through a series of subsidiaries and also controls the
general partners of 15 other limited partnerships which operate under the Enstar
name (including the Partnership). Although these limited partnerships are
affiliated with FHGLP, their assets are owned by legal entities separate from
the Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner:
NAME POSITION
- ---- --------
Marc B. Nathanson Director, Chairman of the Board and Chief Executive
Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General Counsel
Michael K. Menerey Director, Executive Vice President, Chief Financial
Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Thomas J. Hatchell Executive Vice President - Operations
Jon W. Lunsford Executive Vice President - Finance
Abel C. Crespo Controller
MARC B. NATHANSON, 52, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995
also served as President. He has been Chairman of the Board and Chief Executive
Officer of Enstar Communications Corporation since October 1988, and also served
as its President prior to September 1995. Prior to 1975, Mr. Nathanson was Vice
President of Marketing for Teleprompter Corporation, at that time the largest
multiple-system cable operator in the United States. He also held executive
positions with Warner Cable and Cypress Communications Corporation. He is a
former President of the California Cable Television Association and a member of
Cable Pioneers. He is currently a Director of the National Cable Television
Association ("NCTA"). At the 1986 NCTA convention, Mr. Nathanson was honored by
being named the recipient of the Vanguard Award for outstanding
-29-
30
contributions to the growth and development of the cable television industry.
Mr. Nathanson is a 28-year veteran of the cable television industry. He is a
founder of the Cable Television Administration and Marketing Society ("CTAM")
and the Southern California Cable Television Association. Mr. Nathanson is also
a Director of TV Por Cable Nacional, S.A. de C.V., an Advisory Board Member of
TVA, (Brazil) and a Director of GRB Entertainment. Mr. Nathanson is also
Chairman of the Board and Chief Executive Officer of Falcon International
Communications, LLC ("FIC"). Mr. Nathanson was appointed by President Clinton
and confirmed by the U.S. Senate on August 14, 1995 for a three year term on the
Board of Governors of International Broadcasting of the United States
Information Agency. He also serves on the Board of Radio Free Asia, Radio Free
Europe and Radio Liberty. Mr. Nathanson is a trustee of the Annenburg School of
Communications at the University of Southern California and a member of the
Board of Visitors of the Anderson School of Management at the University of
California, Los Angeles ("UCLA"). In addition, he serves on the Board of the
UCLA Foundation and the UCLA Center for Communications Policy and is on the
Board of Governors of AIDS Project Los Angeles and Cable Positive. Mr. Nathanson
received the "Entrepreneur of the Year Award" from Inc. Magazine in 1994.
FRANK J. INTISO, 51, was appointed President and Chief Operating Officer of FHGI
in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. He has been President and
Chief Operating Officer of Enstar Communications Corporation since September
1995, and between October 1988 and September 1995 held the positions of
Executive Vice President and Chief Operating Officer. Mr. Intiso is responsible
for the day-to-day operations of all cable television systems under the
management of FHGI. Mr. Intiso has a Masters Degree in Business Administration
from UCLA and is a Certified Public Accountant. He serves as chair of the
California Cable Television Association, and is on the boards of Cable
Advertising Bureau, Cable In The Classroom, Community Antenna Television
Association and California Cable Television Association. He is a member of the
American Institute of Certified Public Accountants, the American Marketing
Association, the American Management Association, and the Southern California
Cable Television Association.
STANLEY S. ITSKOWITCH, 59, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been Executive Vice President and General Counsel of Enstar Communications
Corporation since October 1988. He has been President and Chief Executive
Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a
marketer of chemical products, since 1980. He is a Certified Public Accountant
and a former tax partner in the New York office of Touche Ross & Co. (now
Deloitte & Touche). He has a J.D. Degree and an L.L.M. Degree in Tax from New
York University School of Law. Mr. Itskowitch is also Executive Vice President
and General Counsel of FIC.
MICHAEL K. MENEREY, 46, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI and Enstar Communications Corporation since
February 1998. Prior to that time, he had been Chief Financial Officer and
Secretary of FHGI and its predecessors since 1984 and of Enstar Communications
Corporation since October 1988. Mr. Menerey is a Certified Public Accountant and
is a member of the American Institute of Certified Public Accountants and the
California Society of Certified Public Accountants.
JOE A. JOHNSON, 53, has been Executive Vice President - Operations of FHGI since
September 1995. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. He was a Divisional Vice
President of FHGI between 1989 and 1992. From 1982 to 1989, he held the
positions of Vice President and Director of Operations for Sacramento Cable
Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr.
Johnson held cable system and regional manager positions with Warner Amex and
Teleprompter.
THOMAS J. HATCHELL, 48, has been Executive Vice President - Operations of FHGI
and Enstar Communications Corporation since February 1998. From October 1995 to
February 1998, he was Senior Vice President of Operations of Falcon
International Communications, L.P. and its predecessor company and
-30-
31
was a Senior Vice President of FHGI from January 1992 to September 1995. Mr.
Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From
1981 to 1989, he served as Vice President and Regional Manager for Falcon's San
Luis Obispo, California region. He was Vice President - Construction of an
affiliate of Falcon from June 1980 to June 1981. In addition, he served as a
General Manager of the cable system in Tulare County, California, from 1977 to
1980. Prior to that time, Mr. Hatchell served as a cable executive with the
Continental Telephone Company.
JON W. LUNSFORD, 38, has been Executive Vice President - Finance of FHGI and
Enstar Communications Corporation since February 1998. Prior to that time, he
had been Vice President - Finance and Corporate Development of FHGI since
September 1994 and of Enstar Communications Corporation since January 1996. From
1991 to 1994, he served as Director of Corporate Finance at Continental
Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice President with Crestar
Bank.
ABEL C. CRESPO, 38, has been Controller of FHGI and Enstar Communications
Corporation since January 1997. Mr. Crespo joined Falcon in December 1984, and
has held various accounting positions during that time, most recently that of
Senior Assistant Controller. Mr. Crespo holds a Bachelor of Science degree in
Business Administration from California State University, Los Angeles.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1997, biographical
information about certain officers of FHGI who share certain responsibilities
with the officers of the Corporate General Partner with respect to the operation
and management of the Partnership.
LYNNE A. BUENING, 44, has been Vice President of Programming of FHGI since
November 1993. From 1989 to 1993, she served as Director of Programming for
Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening
held programming and marketing positions in the cable, broadcast, and newspaper
industries.
OVANDO COWLES, 44, has been Vice President of Advertising Sales and Production
of FHGI since January 1992. From 1988 to 1991, he served as a Director of
Advertising Sales and Production at Cencom Cable Television in Pasadena,
California. He was an Advertising Sales Account Executive at Choice TV, an
affiliate of Falcon, from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in
various sales and advertising positions.
HOWARD J. GAN, 51, has been Vice President of Regulatory Affairs of FHGI and its
predecessors since 1988. He was General Counsel at Malarkey-Taylor Associates, a
Washington, DC based telecommunications consulting firm, from 1986 to 1988. He
was Vice President and General Counsel at the Cable Television Information
Center from 1978 to 1983. In addition, he was an attorney and an acting Branch
Chief of the Federal Communications Commission's Cable Television Bureau from
1975 to 1978.
R.W. ("SKIP") HARRIS, 50, has been Vice President of Marketing of FHGI since
June 1991. He is a member of the CTAM Premium Television Committee. Mr. Harris
was National Director of Affiliate Marketing for The Disney Channel from 1985 to
1991. He was also a sales manager, regional marketing manager and director of
marketing for Cox Cable Communications from 1978 to 1985.
JOAN SCULLY, 62, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. From 1987 to May 1988, she was self-employed as a
Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in the
entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.
-31-
32
RAYMOND J. TYNDALL, 50, has been Vice President of Engineering of FHGI since
October 1989. From 1975 to September 1989, he held various technical positions
with Choice TV and its predecessors. From 1967 to 1975, he held various
technical positions with Sammons Communications. He is a certified National
Association of Radio and Television Engineering ("NARTE") engineer in lightwave,
microwave, satellite and broadband and is a member of Cable Pioneers.
In addition, FHGI has six Divisional Vice Presidents who are based in
the field. They are Donald L. Amick, Daniel H. DeLaney, Ron L. Hall, Michael E.
Kemph, Michael D. Singpiel and Robert S. Smith.
Each director of the Corporate General Partner is elected to a one-year
term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected and
qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership has a management agreement (the "Management Agreement")
with Enstar Cable Corporation, a wholly owned subsidiary of the Corporate
General Partner (the "Manager"), pursuant to which Enstar Cable Corporation
manages the Joint Venture's systems and provides all operational support for the
activities of the Partnership and Joint Venture. For these services, the Manager
receives a management fee of 4% of gross revenues, excluding revenues from the
sale of cable television systems or franchises, calculated and paid monthly. In
addition, the Joint Venture is required to distribute 1% of its gross revenues
to the Corporate General Partner in respect of its interest as the Corporate
General Partner of the Partnership. The Management Agreement also requires the
Partnership to indemnify the Manager (including its officers, employees, agents
and shareholders) against loss or expense, absent negligence or deliberate
breach by the Manager of the Management Agreement. The Management Agreement is
terminable by the Partnership upon sixty (60) days written notice to the
Manager. The Manager has engaged FHGLP to provide certain management services
for the Joint Venture and pays FHGLP a portion of the management fees it
receives in consideration of such services and reimburses FHGLP for expenses
incurred by FHGLP on its behalf. Additionally, the Joint Venture receives
certain system operating management services from affiliates of the Manager in
lieu of directly employing personnel to perform such services. The Joint Venture
reimburses the affiliates for its allocable share of their operating costs. The
Corporate General Partner also performs certain supervisory and administrative
services for the Partnership, for which it is reimbursed.
For the fiscal year ended December 31, 1997, the Manager charged the
Joint Venture management fees of approximately $288,700 and reimbursed expenses
of $292,000. In addition, the Joint Venture paid the Corporate General Partner
approximately $72,200 in respect of its 1% special interest. The Joint Venture
also reimbursed affiliates approximately $565,000 for system operating
management services. Certain programming services are purchased through Falcon
Cablevision. The Joint Venture paid Falcon Cablevision approximately $1,332,100
for these programming services for fiscal year 1997.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5, "Market for Registrant's
Equity Securities and Related Security Holder Matters."
-32-
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1998, the common stock of FHGI was owned as follows:
78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In 1989, FHGI issued to Hellman &
Friedman Capital Partners, A California Limited Partnership ("H&F"), a
$1,293,357 convertible debenture due 1999 convertible under certain
circumstances into 10% of the common stock of FHGI and entitling H&F to elect
one director to the board of directors of FHGI. H&F elected Marc B. Nathanson
pursuant to such right. In 1991 FHGI issued to Hellman & Friedman Capital
Partners II, A California Limited Partnership ("H&FII"), additional convertible
debentures due 1999 in the aggregate amount of $2,006,198 convertible under
certain circumstances into approximately 6.3% of the common stock of FHGI and
entitling H&FII to elect one director to the board of directors of FHGI. As of
March 3, 1998, H&FII had not exercised this right. FHGLP also held 12.1% of the
interests in the General Partner, and Falcon Cable Trust, Frank Intiso and H&FII
held 58.9%, 12.1% and 16.3% of the General Partner, respectively. Such interests
entitle the holders thereof to an allocable share of cash distributions and
profits and losses of the General Partner in proportion to their ownership. Greg
A. Nathanson is Marc B. Nathanson's brother.
As of March 3, 1998, Marc B. Nathanson and members of his family owned,
directly or indirectly, outstanding partnership interests (comprising both
general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P. ("Falcon
Classic") and 2.58% of Falcon Video Communications ("Falcon Video"). In
accordance with the respective partnership agreements of these two partnerships,
after the return of capital to and the receipt of certain preferred returns by
the limited partners of such partnerships, FHGLP and certain of its officers and
directors had rights to future profits greater than their ownership interests of
capital in such partnerships. See Item 13., "Certain Relationships and Related
Transactions."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Classic, Falcon Video and,
through its management of the operation of Falcon Cablevision (a subsidiary of
FHGLP), the partnerships of which Enstar Communications Corporation is the
Corporate General Partner, including the Partnership. On September 30, 1988,
Falcon Cablevision acquired all of the outstanding stock of Enstar
Communications Corporation. Certain members of management of the Corporate
General Partner have also been involved in the management of other cable
ventures. FHGLP contemplates entering into other cable ventures, including
ventures similar to the Partnership.
On March 6, 1998, FHGLP acquired four of the five Falcon Classic cable
systems. FHGLP intends to acquire the fifth system as soon as regulatory
approvals can be obtained, at which point Falcon Classic will be liquidated.
FHGLP executed various agreements on December 30, 1997 related to a series of
transactions that, if successfully consummated in 1998, would involve the
contribution by Falcon Video of its assets into the newly-formed entity of which
FHGLP would be the managing general partner. The consummation of transactions is
subject to, among other things, the satisfaction of customary closing conditions
and obtaining required regulatory and other third-party consents, including the
consent of franchising authorities, and to obtaining satisfactory financing
arrangements on acceptable terms.
-33-
34
Accordingly, there can be no assurance that the transactions will be
successfully completed, or if successfully completed, when they might be
completed. The Corporate General Partner cannot determine at this time the
potential impact from these Falcon Classic and Falcon Video transactions on the
Partnership or the Joint Venture, but it is possible that certain programming
costs could increase.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the Corporate General Partner and
their management to certain conflicts of interest. Such conflicts of interest
relate to the time and services management will devote to the Partnership's
affairs and to the acquisition and disposition of cable television systems.
Management or its affiliates may establish and manage other entities which could
impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that a
limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of the
partnership (a partnership derivative action) to recover damages from third
parties. Section 14-9-1001 of the Georgia Revised Uniform Limited Partnership
Act also allows a partner to maintain a partnership derivative action if general
partners with authority to do so have refused to bring the action or if an
effort to cause those general partners to bring the action is not likely to
succeed. Certain cases decided by federal courts have recognized the right of a
limited partner to bring such actions under the Securities and Exchange
Commission's Rule 10b-5 for recovery of damages resulting from a breach of
fiduciary duty by a general partner involving fraud, deception or manipulation
in connection with the limited partner's purchase or sale of partnership units.
The partnership agreement provides that the General Partners will be
indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partners (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that their conduct was negligent. In addition, the
partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited partners
will have a more limited right of action than they would have absent such
provisions. In addition, the Partnership maintains, at its expense and in such
reasonable amounts as the Corporate General Partner shall determine, a liability
insurance policy which insures the Corporate General Partner, FHGI and its
affiliates (which includes FHGLP), officers and directors and such other persons
as the Corporate General Partner shall determine, against liabilities which they
may incur with respect to claims made against them for certain wrongful or
allegedly wrongful acts, including certain errors, misstatements, misleading
statements, omissions, neglect or breaches of duty. To the extent that the
exculpatory provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, it is the opinion of the Securities
and Exchange Commission that such indemnification is contrary to public policy
and therefore unenforceable.
-34-
35
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.
-35-
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 30, 1998.
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
-------------------------------
Marc B. Nathanson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on the 30th day of March 1998.
Signatures Title(*)
------------------------------- -------------------------------------------------
/s/ Marc B. Nathanson Chairman of the Board and Chief Executive Officer
------------------------------- (Principal Executive Officer)
Marc B. Nathanson
/s/ Michael K. Menerey Executive Vice President, Chief Financial Officer,
------------------------------- Secretary and Director
Michael K. Menerey (Principal Financial and Accounting Officer)
/s/ Frank J. Intiso President, Chief Operating Officer
------------------------------- and Director
Frank J. Intiso
/s/ Stanley S. Itskowitch Executive Vice President, General Counsel
------------------------------- and Director
Stanley S. Itskowitch
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the Registrant.
-36-
37
INDEX TO FINANCIAL STATEMENTS
Page
-------------------------------------------------
Enstar Income/Growth Enstar Cable of
Program Five-A, L.P. Cumberland Valley
-------------------- -----------------
Reports of Independent Auditors F-2 F-10
Balance Sheets - December 31, 1996
and 1997 F-3 F-11
Financial Statements for each of
the three years in the period
ended December 31, 1997:
Statements of Operations F-4 F-12
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-13
Statements of Cash Flows F-6 F-14
Notes to Financial Statements F-7 F-15
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
38
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Five-A, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income/Growth Program
Five-A, L.P. (A Georgia Limited Partnership) as of December 31, 1996 and 1997,
and the related statements of operations, partnership capital (deficit), and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income/Growth Program
Five-A, L.P. at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1998
F-2
39
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
BALANCE SHEETS
=========================================
December 31,
-----------------------------------
1996 1997
-------------- --------------
ASSETS:
Cash $ 32,200 $ 22,800
Equity in net assets of joint venture 4,294,000 4,222,900
-------------- --------------
$ 4,326,200 $ 4,245,700
============== ==============
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 15,000 $ 14,500
Due to affiliates 3,200 --
-------------- --------------
TOTAL LIABILITIES 18,200 14,500
-------------- --------------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (81,100) (81,900)
Limited partners 4,389,100 4,313,100
-------------- --------------
TOTAL PARTNERSHIP CAPITAL 4,308,000 4,231,200
============== ==============
$ 4,326,200 $ 4,245,700
============== ==============
See accompanying notes to financial statements.
F-3
40
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF OPERATIONS
=========================================
Year Ended December 31,
--------------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
OPERATING EXPENSES:
General and administrative expenses $ (32,000) $ (27,100) $ (34,400)
-------------- -------------- --------------
INTEREST EXPENSE (500) (500) (1,300)
-------------- -------------- --------------
Loss before equity in net loss of joint venture (32,500) (27,600) (35,700)
EQUITY IN NET LOSS OF JOINT VENTURE (555,100) (311,000) (41,100)
-------------- -------------- --------------
NET LOSS $ (587,600) $ (338,600) $ (76,800)
============== ============== ==============
Net loss allocated to General Partners $ (5,900) $ (3,400) $ (800)
============== ============== ==============
Net loss allocated to Limited Partners $ (581,700) $ (335,200) $ (76,000)
============== ============== ==============
NET LOSS PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (9.73) $ (5.61) $ (1.27)
============== ============== ==============
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 59,766 59,766 59,766
============== ============== ==============
See accompanying notes to financial statements.
F-4
41
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
===========================================
General Limited
Partners Partners Total
-------------- -------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1995 $ (71,800) $ 5,306,000 $ 5,234,200
Net loss for year (5,900) (581,700) (587,600)
-------------- -------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 (77,700) 4,724,300 4,646,600
Net loss for year (3,400) (335,200) (338,600)
-------------- -------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 (81,100) 4,389,100 4,308,000
Net loss for year (800) (76,000) (76,800)
-------------- -------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 $ (81,900) $ 4,313,100 $ 4,231,200
============== ============== ==============
See accompanying notes to financial statements.
F-5
42
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
STATEMENTS OF CASH FLOWS
=========================================
Year Ended December 31,
-----------------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Cash flows from operating activities:
Net loss $ (587,600) $ (338,600) $ (76,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of joint venture 555,100 311,000 41,100
Increase (decrease) from changes in:
Due from affiliates (15,800) 15,800 -
Accounts payable and due to affiliates (8,800) 1,400 (3,700)
--------------- --------------- ---------------
Net cash used in operating activities (57,100) (10,400) (39,400)
--------------- --------------- ---------------
Cash flows from investing activities:
Distributions from joint venture 9,000 31,500 30,000
--------------- --------------- ---------------
Net increase (decrease) in cash (48,100) 21,100 (9,400)
Cash at beginning of year 59,200 11,100 32,200
--------------- --------------- ---------------
Cash at end of year $ 11,100 $ 32,200 $ 22,800
=============== =============== ===============
See accompanying notes to financial statements.
F-6
43
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income/Growth Program Five-A, L.P. is a Georgia limited
partnership (the "Partnership") whose principal business is derived from its 50%
ownership interest in the operations of Enstar Cable of Cumberland Valley, a
Georgia general partnership (the "Joint Venture"). The financial statements
include the operations of the Partnership and its equity ownership interest in
the Joint Venture. The separate financial statements of the Joint Venture are
included on pages F-10 to F-21 of this report on Form 10-K, and should be read
in conjunction with these financial statements.
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.
INVESTMENT IN JOINT VENTURE
The Partnership's investment and share of the income or loss in a Joint
Venture is accounted for on the equity method of accounting.
INCOME TAXES
The Partnership pays no income taxes as an entity. All of the income,
gains, losses, deductions and credits of the Partnership are passed through to
the general partners and the limited partners. Nominal taxes are assessed by
certain state jurisdictions. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. At December 31,
1997, the book basis of the Partnership's investment in the Joint Venture
exceeds its tax basis by $1,637,600.
The accompanying financial statements, which are prepared in accordance
with generally accepted accounting principles, differ from the financial
statements prepared for tax purposes due to the different treatment of various
items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that the net loss for 1997 in the financial statements
is $202,900 less than the tax loss of the Partnership for the same period,
caused principally by timing differences in depreciation and amortization
expense reported by the Joint Venture.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses have been allocated 99% to the limited partners and
1% to the general partners. Earnings and losses per unit of limited partnership
interest are based on the weighted average number of units outstanding during
the year. The General Partners do not own units of partnership interest in the
Partnership, but rather hold a participation interest in the income, losses and
distributions of the Partnership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
44
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed on September 4, 1986 to acquire, construct
or improve, develop, and operate cable television systems in various locations
in the United States. The partnership agreement provides for Enstar
Communications Corporation (the "Corporate General Partner") and Robert T.
Graff, Jr. to be the general partners and for the admission of limited partners
through the sale of interests in the Partnership.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
The Partnership was formed with an initial capital contribution of
$1,100 comprising $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
1987, and the initial closing took place in March 1987. The Partnership
continued to raise capital until $15,000,000 (the maximum) was sold in July
1987.
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The amended partnership agreement also provides that all partnership profits,
gains, operational losses, and credits (all as defined) be allocated 1% to the
general partners and 99% to the limited partners until the limited partners have
been allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 10% of their initial
investments less any distributions from previous system sales or refinancing of
systems. Thereafter, the respective allocations will be made 20% to the general
partners and 80% to the limited partners. Any losses from system sales or
exchanges shall be allocated first to all partners having positive capital
account balances (based on their respective capital accounts) until all such
accounts are reduced to zero and thereafter to the Corporate General Partner.
All allocations to individual limited partners will be based on their respective
limited partnership ownership interests.
Upon the disposition of substantially all of the Partnership's assets,
gains shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
The Partnership's operating expenses and distributions to partners are
funded primarily from distributions received from the Joint Venture.
The amended partnership agreement limits the amount of debt the
Partnership may incur.
F-8
45
ENSTAR INCOME/GROWTH PROGRAM FIVE-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 3 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and an affiliate partnership, Enstar Income/Growth
Program Five-B, L.P., (collectively, the "Venturers") each own 50% of the Joint
Venture. The Joint Venture was initially funded through capital contributions
made by each Venturer during 1988 totaling $11,821,000 in cash and $750,000 in
capitalized system acquisition and related costs. Each Venturer shares equally
in the profits and losses of the Joint Venture. The Joint Venture incurred
losses of $1,110,200, $622,000 and $82,200 in 1995, 1996 and 1997, respectively,
of which $555,100, $311,000 and $41,100 were allocated to the Partnership.
NOTE 4 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 5% of gross receipts as defined,
from the operations of the Partnership. The Partnership did not own or operate
any cable television operations in 1995, 1996 or 1997 other than through its
investment in the Joint Venture. No management fees were paid by the Partnership
during 1995, 1996 and 1997.
The Agreement also provides that the Partnership will 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. No reimbursable expenses were incurred on behalf of the
Partnership during 1995, 1996 or 1997.
NOTE 5 - COMMITMENTS
The Partnership, together with Enstar Income/Growth Program Five-B,
L.P. has guaranteed the debt of the Joint Venture.
F-9
46
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Cumberland Valley (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Cumberland
Valley (A Georgia General Partnership) as of December 31, 1996 and 1997, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Joint Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Cumberland
Valley at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1998
F-10
47
ENSTAR CABLE OF CUMBERLAND VALLEY
BALANCE SHEETS
=================================
December 31,
-----------------------------------
1996 1997
-------------- --------------
ASSETS:
Cash and cash equivalents $ 2,425,100 $ 1,081,200
Accounts receivable, less allowance of $23,600 and
$21,900 for possible losses 149,500 188,100
Insurance claim receivable 15,600 -
Prepaid expenses and other assets 281,900 235,200
Property, plant and equipment, less accumulated
depreciation and amortization 9,743,900 8,874,900
Franchise cost, net of accumulated amortization 3,063,200 1,884,900
of $12,173,600 and $10,343,800
Deferred loan costs and other deferred charges, net 153,400 127,800
-------------- --------------
$ 15,832,600 $ 12,392,100
============== ==============
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 839,600 $ 904,000
Due to affiliates 337,800 442,300
Note payable 6,067,200 -
Note payable - affiliate - 2,600,000
-------------- --------------
TOTAL LIABILITIES 7,244,600 3,946,300
-------------- --------------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income/Growth Program Five-A, L.P. 4,294,000 4,222,900
Enstar Income/Growth Program Five-B, L.P. 4,294,000 4,222,900
-------------- --------------
TOTAL VENTURERS' CAPITAL 8,588,000 8,445,800
-------------- --------------
$ 15,832,600 $ 12,392,100
============== ==============
See accompanying notes to financial statements.
F-11
48
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF OPERATIONS
=================================
Year Ended December 31,
--------------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
REVENUES $ 6,241,700 $ 6,728,900 $ 7,217,900
-------------- -------------- --------------
OPERATING EXPENSES:
Service costs 2,177,600 2,394,700 2,553,400
General and administrative expenses 786,100 877,700 920,800
General Partner management fees
and reimbursed expenses 562,600 608,600 652,900
Depreciation and amortization 3,104,900 2,841,600 2,672,700
-------------- -------------- --------------
6,631,200 6,722,600 6,799,800
-------------- -------------- --------------
Operating income (loss) (389,500) 6,300 418,100
-------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (779,300) (699,400) (578,600)
Interest income 58,600 71,100 78,300
-------------- -------------- --------------
(720,700) (628,300) (500,300)
-------------- -------------- --------------
NET LOSS $ (1,110,200) $ (622,000) $ (82,200)
============== ============== ==============
See accompanying notes to financial statements.
F-12
49
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF VENTURERS' CAPITAL
=================================
Enstar Income/ Enstar Income/
Growth Program Growth Program
Five-A, L.P. Five-B, L.P. Total
-------------- -------------- --------------
BALANCE, January 1, 1995 $ 5,200,600 $ 5,200,600 $ 10,401,200
Distributions to venturers (9,000) (9,000) (18,000)
Net loss for year (555,100) (555,100) (1,110,200)
-------------- -------------- --------------
BALANCE, December 31, 1995 4,636,500 4,636,500 9,273,000
Distributions to venturers (31,500) (31,500) (63,000)
Net loss for year (311,000) (311,000) (622,000)
-------------- -------------- --------------
BALANCE, December 31, 1996 4,294,000 4,294,000 8,588,000
Distributions to venturers (30,000) (30,000) (60,000)
Net loss for year (41,100) (41,100) (82,200)
-------------- -------------- --------------
BALANCE, December 31, 1997 $ 4,222,900 $ 4,222,900 $ 8,445,800
============== ============== ==============
See accompanying notes to financial statements.
F-13
50
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF CASH FLOWS
=================================
Year Ended December 31,
--------------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (1,110,200) $ (622,000) $ (82,200)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 3,104,900 2,841,600 2,672,700
Amortization of deferred loan costs 52,200 52,200 156,200
Increase (decrease) from changes in:
Receivables, prepaid expenses and other assets 53,300 310,500 23,700
Accounts payable and due to affiliates (54,300) 167,900 168,900
-------------- -------------- --------------
Net cash provided by operating activities 2,045,900 2,750,200 2,939,300
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (1,975,800) (662,100) (610,800)
Increase in intangible assets (21,000) (10,900) (11,400)
-------------- -------------- --------------
Net cash used in investing activities (1,996,800) (673,000) (622,200)
-------------- -------------- --------------
Cash flows from financing activities:
Distributions to venturers (18,000) (63,000) (60,000)
Repayment of debt - (700,000) (6,067,200)
Borrowings from affiliate - - 2,600,000
Deferred loan costs - - (133,800)
-------------- -------------- --------------
Net cash used in financing activities (18,000) (763,000) (3,661,000)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 31,100 1,314,200 (1,343,900)
Cash and cash equivalents at beginning of year 1,079,800 1,110,900 2,425,100
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 1,110,900 $ 2,425,100 $ 1,081,200
============== ============== ==============
See accompanying notes to financial statements.
F-14
51
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Cumberland Valley, a Georgia general partnership (the
"Joint Venture"), owns and operates cable systems in rural areas of Kentucky,
Tennessee and Missouri.
The financial statements do not give effect to any assets that Enstar
Income/Growth Program Five-A, L.P. and Enstar Income/Growth Program Five-B, L.P.
(the "Venturers") may have outside of their interest in the Joint Venture, nor
to any obligations, including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Joint Venture
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents.
Cash equivalents at December 31, 1996 include $2,311,000 of short-term
investments in commercial paper.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvement 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 Joint Venture periodically evaluates the amortization periods of
these intangible assets to determine whether events or circumstances warrant
revised estimates of useful lives. Costs relating to unsuccessful franchise
applications are charged to expense when it is determined that the efforts to
obtain the franchise will not be successful.
DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES
Costs related to obtaining new loan agreements are capitalized and
amortized to interest expense over the life of the related loan. Other deferred
charges are amortized using the straight-line method over two years.
F-15
52
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF ASSETS
The Joint Venture assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Joint Venture also evaluates the amortization periods of assets,
including franchise costs and other intangible assets, to determine whether
events or circumstances warrant revised estimates of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the Joint Venture pays no income taxes. All of the
income, gains, losses, deductions and credits of the Joint Venture are passed
through to the Joint Venturers. Nominal taxes are assessed by certain state
jurisdictions. The basis in the Joint Venture's assets and liabilities differs
for financial and tax reporting purposes. At December 31, 1997, the book basis
of the Joint Venture's net assets exceeds its tax basis by $3,275,200.
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 the net loss for 1997 in the financial statements
is $405,700 less than the tax loss of the Joint Venture for the same period,
caused principally by timing differences in depreciation and amortization
expense.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-16
53
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 2 - JOINT VENTURE MATTERS
The Joint Venture was formed under the terms of a general partnership
agreement (the "partnership agreement") effective January 11, 1988 between
Enstar Income/Growth Program Five-A, L.P. and Enstar Income/Growth Program
Five-B, L.P., which are two limited partnerships sponsored by Enstar
Communications Corporation (the "Corporate General Partner"). The Joint Venture
was formed to pool the resources of the two limited partnerships to acquire,
own, operate and dispose of certain cable television systems.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Corporate
General Partner.
Under the terms of the partnership agreement, the Venturers share
equally in profits, losses, allocations and assets. Capital contributions, as
required, are also made equally.
NOTE 3 - INSURANCE CLAIM RECEIVABLE
Insurance claim receivable at December 31, 1996 consisted of an
uncollected insurance claim arising from storm related system damage sustained
in 1994. The claim was collected during 1996 and 1997.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
-----------------------------------
1996 1997
-------------- --------------
Cable television systems $ 18,928,500 $ 19,259,300
Vehicles, furniture and
equipment and leasehold
improvements 574,700 694,100
-------------- --------------
19,503,200 19,953,400
Less accumulated depreciation
and amortization (9,759,300) (11,078,500)
-------------- --------------
$ 9,743,900 $ 8,874,900
============== ==============
F-17
54
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity
of these instruments.
Notes Payable
The carrying amount approximates fair value due to the variable rate
nature of the notes payable.
NOTE 6 - NOTE PAYABLE - AFFILIATE
On September 30, 1997, the Joint Venture refinanced its existing debt
with a credit facility from a subsidiary of the Corporate General Partner,
Enstar Finance Company, LLC ("EFC"). EFC obtained a secured bank facility of $35
million from two agent banks in order to obtain funds that would in turn be
advanced to the Joint Venture and certain of the other partnerships managed by
the Corporate General Partner. The Joint Venture entered into a loan agreement
with EFC for a revolving loan facility (the "Facility") of $9,181,000 of which
$2,600,000 was advanced to the Joint Venture at closing. Such funds together
with available cash were used to repay the Joint Venture's previous note payable
balance of $4,067,200 and related accrued interest.
The Joint Venture's Facility will mature on August 31, 2001, at which
time all funds previously advanced will be due in full. Borrowings bear interest
at the lender's base rate (8.5% at December 31, 1997), as defined, plus 0.625%,
or at an offshore rate, as defined, plus 1.875%. The Joint Venture is permitted
to prepay amounts outstanding under the Facility at any time without penalty,
and is able to reborrow throughout the term of the Facility up to the maximum
commitment then available so long as no event of default exists. If the Joint
Venture has "excess cash flow" (as defined in its loan agreement) and has
leverage, as defined, in excess of 4.25 to 1, or receives proceeds from sales of
its assets in excess of a specified amount, the Joint Venture is required to
make mandatory prepayments under the Facility. Such prepayments permanently
reduce the maximum commitment under the Facility. The Joint Venture is also
required to pay a commitment fee of 0.5% per annum on the unused portion of its
Facility, and an annual administrative fee. Advances by EFC under its
partnership loan facilities are independently collateralized by individual
partnership borrowers so that no partnership is liable for advances made to
other partnerships. Borrowings under the Joint Venture's Facility are
collateralized by substantially all assets of the Joint Venture and are
guaranteed by the Venturers. At closing, the Joint Venture paid to EFC a $93,400
facility fee. This represented the Joint Venture's pro rata portion of a similar
fee paid by EFC to its lenders. In connection with the refinancing, the Joint
Venture wrote off $113,200 in deferred loan costs relating to the former bank
credit agreement.
The Facility contains certain financial tests and other covenants
including, among others, restrictions on incurrence of indebtedness,
investments, sales of assets, acquisitions and other covenants, defaults and
conditions. The Facility does not restrict the payment of distributions to
partners unless an event of default exists thereunder or the Maximum Leverage
Ratio, as defined, is greater than 4 to 1. The Corporate General Partner
believes the Joint Venture was in compliance with the covenants at December 31,
1997.
F-18
55
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Joint Venture leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2002.
Future minimum rental payments under non-cancelable leases that have
remaining terms in excess of one year as of December 31, 1997 are as follows:
Year Amount
--------------
1998 $ 13,600
1999 13,600
2000 13,100
2001 13,000
2002 5,300
--------------
$ 58,600
==============
Rentals, other than pole rentals, charged to operations approximated
$48,400, $49,400 and $52,100 in 1995, 1996 and 1997, respectively, while pole
rental expense approximated $95,800, $105,900 and $105,100 in 1995, 1996 and
1997, respectively.
Other commitments include approximately $350,000 at December 31, 1997
to upgrade the Joint Venture's Campbell County, Tennessee system. The Joint
Venture also expects to upgrade its systems in surrounding communities at an
additional cost of approximately $570,000 beginning in 1999.
The Joint Venture is subject to regulation by various federal, state
and local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other things,
federal and local regulation of rates charged for basic cable service, cable
programming service tiers ("CPSTs") and equipment and installation services.
Regulations issued in 1993 and significantly amended in 1994 by the Federal
Communications Commission (the "FCC") have resulted in changes in the rates
charged for the Joint Venture's cable services. The Joint Venture believes that
compliance with the 1992 Cable Act has had a significant negative impact on its
operations and cash flow. It also believes that any potential future liabilities
for refund claims or other related actions would not be material. The
Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on
February 8, 1996. As it pertains to cable television, the 1996 Telecom Act,
among other things, (i) ends the regulation of certain CPSTs in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the Joint
Venture expects Congress and the FCC to explore additional methods of regulating
cable service rate increases, including deferral or repeal of the March 31, 1999
sunset of CPST rate regulations and legislation recently was introduced in
Congress to repeal the sunset provision.
F-19
56
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Beginning in August 1997, the Corporate General Partner elected to
self-insure the Joint Venture's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
While the Corporate General Partner has made the election to
self-insure for these risks based upon a comparison of historical damage
sustained over the past five years with the cost and amount of insurance
currently available, there can be no assurance that future self-insured losses
will not exceed prior costs of maintaining insurance for these risks.
Approximately 94% of the Joint Venture's subscribers are served by its system in
Monticello, Kentucky and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Joint Venture's liquidity and cash flows. The Joint
Venture continues to purchase insurance coverage in amounts its management views
as appropriate for all other property, liability, automobile, workers'
compensation and other types of insurable risks.
NOTE 8 - SUBSEQUENT EVENT
The Joint Venture's Monticello, Kentucky cable system sustained damage
due to an ice storm on February 3, 1998. Preliminary evaluations have assessed
the cost of replacing and upgrading the damaged assets at approximately
$900,000. The final damage assessment may differ from initial estimates. As
discussed in Note 7, the Joint Venture is now self-insuring such casualty
losses. Management expects to fund the cost of repairs from available cash
reserves.
NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Joint Venture has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 4% of gross receipts, as
defined, from the operations of the Joint Venture. Management fee expense
approximated $249,700, $269,100 and $288,700 in 1995, 1996 and 1997,
respectively. In addition, the Joint Venture is required to distribute 1% of its
gross revenues to the Corporate General Partner in respect of its interest as
the Corporate General Partner of the Partnership. This fee approximated $62,400,
$67,300 and $72,200 in 1995, 1996 and 1997, respectively.
The Joint Venture also reimburses the Manager for direct expenses
incurred on behalf of the Joint Venture and for the Venture's allocable share of
operational costs associated with services provided by the Manager. All cable
television properties managed by the Corporate General Partner and its
subsidiaries are charged a proportionate share of these expenses. Corporate
office allocations and district office expenses are charged to the properties
served based primarily on the respective percentage of basic customers or homes
passed (dwelling units within a system) within the designated service areas. The
total amounts charged to the Joint Venture for these services approximated
$250,500, $272,200 and $292,000 during 1995, 1996 and 1997, respectively.
F-20
57
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
=================================
NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONTINUED)
The Joint Venture also receives certain system operating management
services from affiliates of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
the Joint Venture. The Joint Venture reimburses the affiliates for the Joint
Venture's allocable share of the affiliates' operational costs. The total amount
charged to the Joint Venture for these costs approximated $532,800, $580,100 and
$565,000 in 1995, 1996 and 1997, respectively. No management fee is payable to
the affiliates by the Joint Venture and there is no duplication of reimbursed
expenses and costs paid to the Manager.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Joint Venture for these
costs based on an estimate of what the Corporate General Partner could negotiate
for such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Joint Venture recorded programming fee expense
of $1,136,500, $1,257,300 and $1,332,100 in 1995, 1996 and 1997, respectively.
Programming fees are included in service costs in the statements of operations.
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $777,400, $703,400 and $547,900 in
1995, 1996 and 1997, respectively.
F-21
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3 Second Amended and Restated Agreement of Limited Partnership of Enstar Income/Growth Program Five-A, L.P., dated
as of August 1, 1988(2)
10.1 Amended and Restated Partnership Agreement of Enstar Cable of Cumberland Valley, dated as of April 28, 1988(2)
10.2 Management Agreement between Enstar Income/Growth Program Five-A, L.P., and Enstar Cable Corporation(1)
10.3 Management Agreement between Enstar Cable of Cumberland Valley and Enstar Cable Corporation, as amended(2)
10.4 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Cumberland, Kentucky(1)
10.5 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Greensboro, Kentucky(1)
10.6 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Jellico, Tennessee(1)
10.7 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Liberty, Kentucky(1)
10.8 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Monticello, Kentucky(1)
10.9 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for the City of Russell Springs, Kentucky(1)
10.10 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for McCreary County, Kentucky(1)
10.11 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for Whitley County, Kentucky(1)
10.12 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
franchise for Campbell County, Tennessee(1)
10.13 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
for Russell County, Kentucky(2)
10.14 Franchise ordinance and related documents thereto granting a non-exclusive community antenna television system
for Wayne County, Kentucky(2)
10.15 Service Agreement between Enstar Communications Corporation, Enstar Cable Corporation and Falcon Holding Group,
Inc. dated as of October 1, 1988(3)
10.16 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated April 29, 1988 between Enstar Cable of
Cumberland Valley and Rhode Island Hospital Trust National Bank, dated March 26, 1990.(4)
10.17 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated April 29, 1988 between Enstar Cable of
Cumberland Valley and Rhode Island Hospital Trust National Bank, dated December 27, 1990.(4)
E-1
59
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.18 Amendment No. 4 to Revolving Credit and Term Loan Agreement
dated April 29, 1988 between Enstar Cable of Cumberland
Valley and Rhode Island Hospital Trust National Bank, dated
March 25, 1992.(5)
10.19 Amendment No. 5 to Revolving Credit and Term Loan Agreement
dated April 29, 1988 between Enstar Cable of Cumberland
Valley and Rhode Island Hospital Trust National Bank, dated
February 16, 1993.(6)
10.20 Amendment No. 6 to Revolving Credit and Term Loan Agreement
dated April 29, 1988 between Enstar Cable of Cumberland
Valley and Rhode Island Hospital Trust National Bank, dated
March 23, 1993.(6)
10.21 Asset Purchase Agreement and related documents by and
between Enstar Cable of Cumberland Valley and W.K.
Communications, Inc., dated as of April 23, 1993.(6)
10.22 Loan Agreement between Enstar Cable of Cumberland Valley and
Kansallis-Osake-Pankki dated December 9, 1993.(8)
10.23 Amendment to Loan Agreement dated December 9, 1993 between
Enstar Cable of Cumberland Valley and Merita Bank Ltd.,
Successor in Interest to Kansallis-Osake-Pankki, dated
December 15, 1995.(9)
10.24 First amendment to the second amended and restated agreement
of Limited Partnership of Enstar Income/Growth Program
Five-A, L.P., dated August 26, 1997.(9)
10.25 Loan Agreement between Enstar Cable of Cumberland Valley and
Enstar Finance Company, LLC dated September 30, 1997.(9)
10.26 Amendment No. 1 to the Loan Agreement dated September 30,
1997 between Enstar Cable of Cumberland Valley and
Enstar Finance Company, LLC dated September 30, 1997.
10.27 Franchise Agreement granting a non-exclusive community
antenna television system franchise for Campbell County,
Tennessee.
10.28 Resolution No. 97120901 of the fiscal court of McCreary
County, Kentucky extending the Cable Television Franchise of
Enstar Cable of Cumberland. Adopted December 9, 1997.
21.1 Subsidiaries: Enstar Cable of Cumberland Valley.
E-2
60
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1987.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1988.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1989.
(4) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1990.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1991.
(6) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-16779 for the quarter ended March 31,
1993.
(7) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1993.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16779 for the fiscal year ended December
31, 1995.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-16779 for the quarter ended September 30,
1997.
E-3