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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16789
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1713008
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act
Name of each exchange
Title of each Class on which registered
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity
securities held by non-affiliates of the registrant. All of the registrant's
59,830 units of limited partnership interests, its only class of equity
securities, are held by non-affiliates and were purchased at a price of $250 per
unit. There is no public trading market for the units, and transfers of units
are subject to certain restrictions; accordingly, the registrant is unable to
state the market value of the units held by non-affiliates.
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The Exhibit Index is located at Page E-1.
PART I
Item 1. BUSINESS
INTRODUCTION
Enstar Income/Growth Program Five-B, L.P., a Georgia limited
partnership (the "Partnership"), is engaged in the ownership, operation and
development, and, when appropriate, sale or other disposition, of cable
television systems in small to medium-sized communities. The Partnership was
formed on September 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 was
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), until
September 1998. On September 30, 1998, FHGLP acquired ownership of the
Corporate General Partner from Falcon Cablevision. Simultaneously with the
closing of that transaction, FHGLP contributed all of its existing cable
television system operations to Falcon Communications, L.P. ("FCLP"), a
California limited partnership and successor to FHGLP. FHGLP serves as the
managing partner of FCLP, and the general partner of FHGLP is Falcon Holding
Group, Inc., a California corporation ("FHGI"). The Corporate General
Partner has contracted with FCLP and its affiliates to provide management
services for the Partnership. See Item 13., "Certain Relationships and
Related Transactions." The General Partner, FCLP and affiliated companies
are responsible for the day to day management of the Partnership and its
operations. See "Employees" below.
Based on its belief that the market for cable systems has generally
improved, the Corporate General Partner is evaluating strategies for
liquidating the Partnership. These strategies include the potential sale of
substantially all of the Partnership's assets to third parties and/or
affiliates of the Corporate General Partner, and the subsequent liquidation
of the Partnership. The Corporate General Partner expects to complete its
evaluation within the next several months and intends to advise unitholders
promptly if it believes that commencing a liquidating transaction would be in
the best interests of unitholders.
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."
-2-
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, 1998, the
Joint Venture served approximately 16,200 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.
FCLP 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 FHGI is Marc B. Nathanson. Mr.
Nathanson has managed FCLP or its predecessors since 1975. Mr. Nathanson is
a veteran of more than 30 years in the cable industry and, prior to forming
FCLP'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 FCLP 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.
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 terminate on March 31, 1999. There can be no assurance as to what, if
any, further action may be taken by the FCC, Congress or any other regulatory
authority or court, or 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."
-3-
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/Internet access 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. The Joint Venture is
party to a loan agreement with an affiliate which provides for a revolving
loan facility of $9,181,000 (the "Facility"). The Joint Venture's management
expects to increase borrowings under the Facility to meet system upgrade and
other liquidity requirements. 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 $470,000. The upgrade began in 1998 and $82,800 had been
incurred as of December 31, 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 $500,000 beginning in 2000. The Joint Venture spent
approximately $1,361,400 in 1998 to replace and upgrade cable plant in
Kentucky that sustained storm damage in February 1998. The Joint Venture is
budgeted to spend approximately $1,257,000 in 1999 for plant extensions, new
equipment and system upgrades, including its upgrades in Tennessee. See Note
6 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."
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.
-4-
MARKETING
The Joint Venture's marketing strategy is to provide added value to
increasing levels of subscription services through "packaging." In addition
to the basic service package, customers in substantially all of the systems
may purchase an expanded group of regulated services, additional unregulated
packages of satellite-delivered services, and premium services. 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. FCLP 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 FCLP'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. FCLP 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. A
quarterly newsletter keeps customers up to date on new service offerings,
special events and company information. In addition, the Joint Venture is
participating in the industry's Customer Service Initiative which emphasizes
an on-time guarantee program for service and installation appointments.
FCLP'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.
-5-
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, 1998.
Average
Monthly
Premium Revenue
Homes Basic Basic Service Premium Per Basic
System Passed(1) Subscribers Penetration(2) Units(3) Penetration(4) Subscriber(5)
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Monticello, KY and
Jellico, TN 21,326 15,216 71.3% 2,706 17.8% $35.87
Pomme De Terre, MO 3,583 966 27.0% 122 12.6% $31.11
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Total 24,909 16,182 65.0% 2,828 17.5% $35.57
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(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, 1998.
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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 informational
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, 1998, the Joint Venture's monthly rates for basic
cable service for residential customers, including certain discounted rates,
ranged from $18.74 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 FCLP. 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, 1998. 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-
"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 will 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 will 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, the Joint Venture believes that 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 will expand the
number and types of services these systems offer and enhance the development
of current and future revenue sources. This technology is under frequent
management review.
PROGRAMMING
The Joint Venture purchases basic and premium programming for its
systems from FCLP. In turn, FCLP 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 91,000 basic subscribers at December 31,
1998), which is generally based on a fixed fee per customer or a percentage
of the gross receipts for the particular service. Certain other channels
have also offered FCLP 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 such payments from programmers be offset against the programming fee
increases which can be passed through to subscribers under the FCC's rate
regulations. FCLP's programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. FCLP 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 FCLP's programming contracts. Management believes,
however, that FCLP'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, 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
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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, 1998, 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, 1998.
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
-------------------- ---------- ----------- -----------
Prior to 2000 11 11,443 70.7%
2000 - 2004 5 2,030 12.5%
2005 and after 3 1,958 12.1%
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Total 19 15,431 95.3%
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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 751 customers, comprising
approximately 4.7% 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.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another
person, the operator generally is entitled to the "fair market value" for the
system covered by such franchise, but no value may be attributed to the
franchise itself. In addition, the 1984 Cable Act, as amended by the 1992
Cable Act, establishes comprehensive renewal procedures which require that an
incumbent franchisee's renewal
-9-
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 and has initiated efforts to have the practice
legalized. Legislation has been introduced in Congress which would permit DBS
operators to elect to provide local broadcast signals to their customers
under the Copyright Act. If DBS providers are ultimately permitted to
deliver local broadcast signals, cable television systems would lose a
significant competitive advantage. 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. DIRECTV has recently agreed to purchase PrimeStar.
Multichannel multipoint distribution systems ("wireless cable")
deliver programming services over microwave channels licensed by the FCC and
received by subscribers with special antennas. Wireless cable systems are
less capital intensive, are not required to obtain local franchises or to pay
franchise fees, and are subject to fewer regulatory requirements than cable
television systems. To date, the ability of wireless cable services to
compete with cable television systems has been limited by channel capacity
(35-channel maximum) and the need for unobstructed line-of-sight over-the-air
transmission. Although relatively few wireless cable systems in the United
States are currently in operation or under construction, virtually all
markets have been licensed or tentatively licensed. The use of digital
compression technology, and the FCC's
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recent amendment to its rules, which permits reverse path or two-way
transmission over wireless facilities, may enable wireless cable systems to
deliver more channels and additional services.
Private cable television systems compete to service 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, which
can be used by DBS systems, television stations and other video programming
distributors (including cable television systems), is an alternative
technology for the delivery of interactive video services. It does not
appear at the present time that this service will have a material impact on
the operations of cable television systems.
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 recently completed 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.
Cable systems generally operate pursuant to franchises granted on a
non-exclusive basis. In addition, the 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to build and operate their own cable systems.
Municipally-owned cable systems enjoy certain competitive advantages such as
lower-cost financing and exemption from the payment of franchise fees.
The 1996 Telecom Act eliminates the restriction against ownership
(subject to certain exceptions) 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" (a
facilities-based distribution system, like a cable system, but which is
"open," i.e., also available for use by programmers other than the owner of
the facility) 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. As a result of the foregoing
changes, well financed businesses from outside the cable television industry
(such as public utilities that own the poles to which cable is attached) may
become competitors for franchises or providers of competing services. The
1996 Telecom Act, however, also includes numerous provisions designed to make
it easier for cable operators and others to compete directly with local
exchange telephone carriers in the provision of traditional telephone service
and other telecommunications services.
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Other new technologies, including Internet-based services, may
become competitive with services that cable television systems can offer.
The 1996 Telecom Act directed the FCC to establish, and the FCC has adopted,
regulations and policies for the issuance of licenses for digital television
("DTV") to incumbent television broadcast licensees. DTV is expected to
deliver high definition television pictures, multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital
services, such as data transfer or subscription video. The FCC also has
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and businesses. The FCC also permits
commercial and noncommercial FM stations to use their subcarrier frequencies
to provide nonbroadcast services including data transmission. The cable
television industry competes with radio, television, print media and the
Internet for advertising revenues. As the cable television industry
continues to offer more of its own programming channels, e.g., Discovery and
USA Network, income from advertising revenues can be expected to increase.
Recently a number of Internet service providers, commonly known as
ISPs, have requested local authorities and the FCC to provide rights of
access to cable television systems' broadband infrastructure in order that
they be permitted to deliver their services directly to cable television
systems' customers. In a recent report, the FCC declined to institute a
proceeding to examine this issue, and concluded that alternative means of
access are or soon will be made to a broad range of ISPs. The FCC declined
to take action on ISP access to broadband cable facilities, and the FCC
indicated that it would continue to monitor this issue. Several local
jurisdictions also are reviewing this issue.
Telephone companies are accelerating the deployment of Asymmetric
Digital Subscriber Line technology, known as ADSL. These companies report
that ADSL technology will allow Internet access to subscribers at peak data
transmission speeds equal or greater than that of modems over conventional
telephone lines. Several of the Regional Bell Operating Companies have
requested the FCC to fully deregulate packet-switched networks (a type of
data communication in which small blocks of data are independently
transmitted and reassembled at their destination) to allow them to provide
high-speed broadband services, including interactive online services, without
regard to present service boundaries and other regulatory restrictions. The
Joint Venture cannot predict the likelihood of success of the online services
offered by these competitors, (ISP attempts to gain access to the cable
industry's broadband facilities), or the impact on the Joint Venture's
business.
Premium programming provided by cable systems is subject to the
same competitive factors which exist for other programming discussed above.
The continued profitability of premium services may depend largely upon the
continued availability of attractive programming at competitive prices.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry. See
"Legislation and Regulation."
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected,
and may in the future materially affect, the Partnership and the cable
television industry. The following is a summary of federal laws and
regulations affecting the growth and operation of the cable television
industry and a description of certain state and local laws. The Partnership
believes that the regulation of its industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance
as to what, if any, future actions such legislative and regulatory
authorities may take or the effect thereof on the Partnership 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, however, expanded the definition of
effective competition to include situations where a local telephone company
or an 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.
The FCC's regulations contain standards for the regulation of basic
and nonbasic cable service rates (other than per-channel or per-program
services). Local franchising authorities and/or the FCC are empowered to
order a reduction of existing rates which exceed the maximum permitted level
for either basic and/or nonbasic cable services and associated equipment, and
refunds can be required. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic
service rates. Alternatively, cable operators have the opportunity to make
cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment (E.G., converter boxes and remote control devices) and installation
services be unbundled from the provision of
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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 installation charges and equipment rental. The Joint Venture has had to
bring its rates and charges into compliance with the applicable benchmark or
equipment and installation cost levels in substantially all of its systems.
This has had a negative impact on the Joint Venture's revenues and cash flow.
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, an exemption from compliance
with this requirement 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. At the present time, the Joint Venture's systems
are unable to comply with this requirement.
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 must 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.
The FCC is currently conducting a rulemaking proceeding regarding
the carriage responsibilities of cable television systems during the
transition of broadcast television from analog to digital transmission.
Specifically, the FCC is exploring whether to amend the signal carriage rules
to accommodate the carriage of digital broadcast television signals. The
Joint Venture is unable to predict the ultimate outcome of this proceeding or
the impact of new carriage requirements on the operations of its cable
systems.
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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 certain 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 multichannel video providers to vertically integrated,
satellite-distributed cable programming services. Consequently, with certain
limitations, the federal law generally precludes any satellite distributed
programming service affiliated with a cable company from favoring an
affiliated company over competitors; requires such programmers to sell their
programming to other multichannel video providers; and limits the ability of
such satellite program services to offer exclusive programming arrangements
to their affiliates.
FRANCHISE FEES
Franchising authorities may impose franchise fees, but such
payments cannot exceed 5% of a cable system's annual gross revenues. Under
the 1996 Telecom Act, franchising authorities may not exact franchise fees
from revenues derived from telecommunications services.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of
renewal. While these formal procedures are not mandatory unless timely
invoked by either the cable operator or the franchising authority, they can
provide substantial protection to incumbent franchisees. Even after the
formal renewal procedures are invoked, franchising authorities and cable
operators remain free to negotiate a renewal outside the formal process.
Nevertheless, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account
the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under which
a cable operator seeks to enforce his renewal rights, which could make it
easier in some cases for a franchising authority to deny renewal. While a
cable operator must still submit its request to commence renewal proceedings
within thirty to thirty-six months prior to franchise expiration to invoke
the formal renewal process, the request must be in writing and the
franchising authority must commence renewal proceedings not later than six
months after receipt of such notice. The four-month period for the
franchising authority to grant or deny the renewal now runs from the
submission of the renewal proposal, not the completion of the public
proceeding. Franchising authorities may consider the "level" of programming
service provided by a cable operator in deciding whether to renew. For
alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if,
-15-
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.
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". A recent judicial decision
overturned various parts of the FCC's open video rules, including the FCC's
restriction preventing local governmental authorities from requiring open
video system operators to obtain a franchise. The Joint Venture expects the
FCC to modify its open video rules to comply with the federal court's
decision, but is unable to predict the impact any rule modifications may
have on the Joint Venture's business and operations. See
"Business-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. Such a review is presently pending. Finally, in order to
encourage competition in the provision of video programming, the FCC adopted
a rule prohibiting the common ownership, affiliation, control or interest in
cable television systems and wireless cable facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act
codified this restriction and extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992 are grandfathered. The
1996 Telecom Act exempts cable systems facing effective competition from the
wireless cable and SMATV restriction. In addition, a cable operator can
purchase a SMATV system serving the same area and technically integrate it
into the cable system. The 1992 Cable Act permits states or local franchising
authorities to adopt certain additional restrictions on the ownership of
cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these
purposes include voting interests of 5% or more (unless there is another
single holder of more than 50% of the voting stock), officerships,
directorships, general partnership interests and limited partnership
interests (unless the limited partners have no material involvement in the
limited partnership's business). These rules are under review by the
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FCC. 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 (the "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
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
marketplace competition to best determine which features, functions,
protocols, and product and service options meet the needs of consumers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure
the competitive availability to consumers of customers premises equipment,
such as converters, used to access the services offered by cable television
systems and other multichannel video programming distributions ("MVPD").
Pursuant to those rules, consumers are given the right to attach compatible
equipment to the facilities of their MVPD so long as the equipment does not
harm the network, does not interfere with the services purchased by other
customers, and is not used to receive unauthorized services. As of July 1,
2000, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using
component security modules obtained from the MVPD with set-top units
purchased or leased from retail outlets. As of January 1, 2005, MVPDs will be
prohibited from distributing new set -top equipment integrating both security
and non-security functions to their customers.
-17-
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, in
which 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. The 1996 amendments to the
Communications Act modified the FCC's pole attachment regulatory scheme by
requiring the FCC to adopt new regulations. These regulations become
effective in 2001 and govern the charges for pole attachments used by
companies, including cable operators, that provide telecommunications
services by immediately permitting certain providers of telecommunications
services to rely upon the protections of the current law until the new rate
formula becomes effective in 2001, and by requiring that utilities provide
cable systems and telecommunications carriers with nondiscriminatory access
to any pole, conduit or right-of-way controlled by the utility. In adopting
its new attachment regulations, the FCC concluded, in part, that a cable
operator providing Internet service on its cable system is not providing a
telecommunications service for purposes of the new rules.
The new rate formula adopted by the FCC and which is applicable for
any party, including cable systems, which offer telecommunications services
will result in significantly higher attachment rates for cable systems which
choose to offer such services. Any resulting increase in attachment rates as
a result of the FCC's new rate formula will be phased in over a five-year
period in equal annual increments, beginning in February 2001. Several
parties have requested the FCC to reconsider its new regulations and several
parties have challenged the new rules in court. A federal district court
recently upheld the constitutionality of the new statutory provision, and the
utilities involved in that litigation have appealed the lower court's
decision. The FCC also has initiated a proceeding to determine whether it
should adjust certain elements of the current rate formula. If adopted,
these adjustments could increase rates for pole attachments and conduit
space. The Joint Venture is unable to predict the outcome of this current
litigation or the ultimate impact of any revised FCC rate formula or of any
new pole attachment rate regulations on its business and operations.
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; equal employment opportunity; 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"),
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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. Payment for
music performed in programming offered on a per program basis remains
unsettled. The Joint Venture recently participated in a settlement with BMI
for payment of fees in connection with the Request pay-per-view network.
Industry litigation of this issue with ASCAP is likely.
Copyrighted music transmitted 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 the number and types of cable services provided. The 1996 Telecom
Act prohibits a franchising authority from either requiring or limiting a
cable operator's provision of telecommunications services.
The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system operator, and
the courts have from time to time reviewed the constitutionality of several
general franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992
Cable Act prohibits exclusive franchises, and allows franchising authorities
to exercise greater control over the operation of franchised cable television
systems, especially in the area of customer service and rate regulation.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.
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.
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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, antennas, electronic equipment and satellite earth
stations), cable plant (distribution equipment, amplifiers, customer drops
and hardware), converters, test equipment and tools and maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
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.
-20-
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 1,423 as of December 31, 1998. 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.
Pursuant to documents filed with the Securities and Exchange
Commission on February 12, 1999, Madison Liquidity Investors 104, LLC
("Madison") initiated a tender offer to purchase up to approximately 9.9% of
the outstanding units for $80 per unit. On February 25, 1999, the
Partnership filed a Recommendation Statement on Schedule 14D-9 and
distributed a letter to unitholders recommending that unitholders reject
Madison's offer.
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
-21-
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 and continued through March 1990.
The distributions were funded primarily from distributions received by the
Partnership from the Joint Venture. No distributions were made during 1996,
1997 or 1998.
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 by the Partnership
unless an event of default exists thereunder or the Joint Venture's ratio of
debt to cash flow 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."
-22-
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,
1998. 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 1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
Costs and expenses $ (51,700) $ (28,200) $ (29,700) $ (29,900) $ (23,300)
Interest expense (2,200) (600) (600) (2,900) (2,500)
Equity in net income (loss) of joint
venture (642,500) (555,100) (311,000) (41,100) 272,000
------------ -------------- -------------- -------------- --------------
Net income (loss) $ (696,400) $ (583,900) $ (341,300) $ (73,900) $ 246,200
------------ -------------- -------------- -------------- --------------
------------ -------------- -------------- -------------- --------------
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income (loss) $ (11.52) $ (9.66) $ (5.65) $ (1.22) $ 4.07
------------ -------------- -------------- -------------- --------------
------------ -------------- -------------- -------------- --------------
OTHER OPERATING DATA
Net cash used in operating activities $ (34,400) $ (57,600) $ (27,700) $ (31,100) $ (31,700)
Net cash provided by investing
activities 79,100 9,000 31,500 30,000 28,500
As of December 31,
--------------------------------------------------------------------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998
------------ -------------- -------------- -------------- --------------
Total assets $ 5,249,900 $ 4,641,500 $ 4,301,400 $ 4,226,300 $ 4,466,600
General partners' deficit (72,000) (77,800) (81,200) (81,900) (79,400)
Limited partners' capital 5,282,600 4,704,500 4,366,600 4,293,400 4,537,100
-23-
II. ENSTAR CABLE OF CUMBERLAND VALLEY
Year Ended December 31,
-----------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- -------------
Revenues $ 6,173,900 $ 6,241,700 $ 6,728,900 $ 7,217,900 $ 7,075,400
Costs and expenses (3,657,600) (3,526,300) (3,881,000) (4,127,100) (4,018,600)
Depreciation and amortization (3,158,600) (3,104,900) (2,841,600) (2,672,700) (2,085,200)
-------------- -------------- -------------- -------------- -------------
Operating income (loss) (642,300) (389,500) 6,300 418,100 971,600
Interest expense (664,800) (779,300) (699,400) (578,600) (257,300)
Interest income 22,100 58,600 71,100 78,300 45,300
Casualty loss - - - - (215,600)
-------------- -------------- -------------- -------------- -------------
Net income (loss) $ (1,285,000) $(1,110,200) $ (622,000) $ (82,200) $ 544,000
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
Distributions paid to venturers $ 158,200 $ 18,000 $ 63,000 $ 60,000 $ 57,000
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
OTHER OPERATING DATA
Net cash provided by operating
activities $ 1,882,400 $ 2,045,900 $ 2,750,200 $ 2,939,300 $ 2,890,500
Net cash used in investing activities (773,300) (1,996,800) (673,000) (622,200) (1,794,300)
Net cash used in financing activities (205,600) (18,000) (763,000) (3,661,000) (1,661,800)
EBITDA(1) 2,516,300 2,715,400 2,847,900 3,090,800 3,056,800
EBITDA to revenues 40.8% 43.5% 42.3% 42.8% 43.2%
Total debt to EBITDA 2.7x 2.5x 2.1x 0.8x 0.3x
Capital expenditures $ 763,400 $ 1,975,800 $ 662,100 $ 610,800 $ 1,768,700
As of December 31,
-----------------------------------------------------------------------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- -------------
Total assets $ 18,232,200 $17,049,700 $ 15,832,600 $12,392,100 $ 11,229,800
Total debt 6,767,200 6,767,200 6,067,200 2,600,000 1,000,000
Venturers' capital 10,401,200 9,273,000 8,588,000 8,445,800 8,932,800
- --------------
(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 is not a measurement determined under GAAP and does not represent cash
generated from operating activities in accordance with GAAP. EBITDA should not
be considered by the reader as an alternative to net income as an indicator of
the Joint Venture's financial performance or as an alternative to cash flows as
a measure of liquidity. In addition, the Joint Venture's definition of EBITDA
may not be identical to similarly titled measures used by other companies.
-24-
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
terminate on March 31, 1999. There can be no assurance as to what, if any,
further action may be taken by the FCC, Congress or any other regulatory
authority or court, or 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-A, 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
$31,500, $30,000 and $28,500 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 1996, 1997 and 1998, respectively. The
Partnership did not pay distributions to its partners during 1996, 1997 or
1998.
THE JOINT VENTURE
1998 COMPARED TO 1997
The Joint Venture's revenues decreased from $7,217,900 to
$7,075,400, or by 2.0%, for the year ended December 31, 1998 as compared to
1997. Of the $142,500 decrease, $227,300 was due to decreases in the number
of subscriptions for basic, premium, tier and equipment rental services and
$15,200 was due to decreases in other revenue producing items including
installation revenue. These decreases were partially offset by an increase of
$100,000 due to increases in regulated service rates that were implemented by
the Joint Venture in 1997. As of December 31, 1998, the Joint Venture had
approximately 16,200 basic subscribers and 2,800 premium service units.
-25-
Service costs decreased from $2,553,400 to $2,494,000, or by 2.3%,
for the year ended December 31, 1998 as compared to 1997. Service costs
represent costs directly attributable to providing cable services to
customers. The decrease was principally due to increases in the
capitalization of labor and overhead costs resulting from replacement of
portions of the Joint Venture's Monticello, Kentucky system, which sustained
storm damage in February 1998.
General and administrative expenses decreased from $920,800 to
$884,700, or by 3.9%, for the year ended December 31, 1998 as compared to
1997, primarily due to decreases in marketing and bad debt expenses.
Management fees and reimbursed expenses decreased from $652,900 to
$639,900, or by 2.0%, for the year ended December 31, 1998 as compared to
1997. Management fees decreased in direct relation to decreased revenues as
described above. Reimbursable expenses decreased primarily as a result of
lower allocated personnel costs.
Depreciation and amortization expense decreased from $2,672,700 to
$2,085,200, or by 22.0%, for the year ended December 31, 1998 as compared to
1997, due to the effect of certain tangible assets becoming fully depreciated
and certain intangible assets becoming fully amortized.
Operating income increased from $418,100 to $971,600 for the year
ended December 31, 1998 as compared to 1997, primarily due to decreases in
depreciation and amortization expense.
Interest expense decreased from $578,600 to $257,300, or by 55.5%,
for the year ended December 31, 1998 as compared to 1997, primarily due to
lower average borrowings in 1998.
Interest income decreased from $78,300 to $45,300, or by 42.1%, for
the year ended December 31, 1998 as compared to 1997, due to lower average
cash balances available for investment.
The Joint Venture recognized a $215,600 casualty loss during the
first quarter of 1998 related to storm damage sustained in its Monticello
system.
Due to the factors described above, the Joint Venture generated net
income of $544,000 for the year ended December 31, 1998 as compared with a
net loss of $82,200 for the year ended December 31, 1997.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 42.8% during 1997 to 43.2% in 1998.
The increase was primarily caused by increases in capitalization of labor and
overhead costs related to replacement of damaged assets. EBITDA decreased
from $3,090,800 to $3,056,800, or by 1.1%, as a result.
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 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.
-26-
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.
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.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 42.3% during 1996 to 42.8% in 1997.
The increase was primarily caused by increased revenues. EBITDA increased
from $2,847,900 to $3,090,800, or by 8.5%, as a result.
DISTRIBUTIONS MADE BY THE CUMBERLAND VALLEY JOINT VENTURE
The Joint Venture distributed $63,000, $60,000 and $57,000 equally
between its two partners during 1996, 1997 and 1998, 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.
-27-
Based on its belief that the market for cable systems has generally
improved, the Corporate General Partner is evaluating strategies for
liquidating the Partnership. These strategies include the potential sale of
substantially all of the Partnership's assets to third parties and/or
affiliates of the Corporate General Partner, and the subsequent liquidation
of the Partnership. The Corporate General Partner expects to complete its
evaluation within the next several months and intends to advise unitholders
promptly if it believes that commencing a liquidating transaction would be in
the best interests of unitholders.
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 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 $470,000. The upgrade began in 1998 and $82,800 had been
incurred as of December 31, 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 $500,000 beginning in 2000. The Joint
Venture spent approximately $1,361,400 in 1998 to replace and upgrade cable
plant in Kentucky that sustained storm damage in February 1998. As discussed
below, such losses were not covered by insurance. The Joint Venture also
spent $324,500 in the year ended December 31, 1998 for other equipment and
plant upgrades. The Joint Venture is budgeted to spend approximately
$1,257,000 in 1999 for plant extensions, new equipment and system upgrades,
including its upgrades in Tennessee.
The Partnership 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 1999 and beyond. As a result, the Joint Venture
intends to use its cash for such purposes.
The Joint Venture is party to a loan agreement with Enstar Finance
Company, LLC ("EFC"), a subsidiary of the Corporate General Partner. The
loan agreement provides for a revolving loan facility of $9,181,000 (the
"Facility"). The Joint Venture prepaid $1,600,000 of its outstanding
borrowings during 1998 such that total outstanding borrowings under the
Facility were $1,000,000 at December 31, 1998. The Joint Venture's
management expects to increase borrowings under the Facility in the future
for system upgrades and other liquidity requirements.
The Joint Venture's Facility matures on August 31, 2001, at which
time all amounts then outstanding are due in full. Borrowings bear interest
at the lender's base rate (7.75% at December 31, 1998) plus 0.625%, or at an
offshore rate plus 1.875%. Under certain circumstances, the Joint Venture is
required to make mandatory prepayments, which permanently reduce the maximum
commitment under the Facility. 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 Partnership believes the Joint Venture was in
compliance with the covenants at December 31, 1998.
The Facility does not restrict the payment of distributions to
partners by the Partnership unless an event of default exists thereunder or
the Joint Venture's ratio of debt to cash flow is greater than 4 to 1. The
Partnership 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.
-28-
In October 1998, FCLP reinstated third party insurance coverage for
all of the cable television properties owned or managed by FCLP to cover
damage to cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. This coverage is subject
to a significant annual deductible which applies to all of the cable
television properties owned or managed by FCLP.
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
sustained damage as a result of an ice storm. As of December 31, 1998, the
Joint Venture had spent $1,361,400 to replace and upgrade the damaged system.
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.
During the fourth quarter of 1998, FCLP, on behalf of the Corporate
General Partner, continued its identification and evaluation of the Joint
Venture's Year 2000 business risks and its exposure to computer systems, to
operating equipment which is date sensitive and to the interface systems of
its vendors and service providers. The evaluation has focused on
identification and assessment of systems and equipment that may fail to
distinguish between the year 1900 and the year 2000 and, as a result, may
cease to operate or may operate improperly when dates after December 31, 1999
are introduced.
Based on a study conducted in 1997, FCLP concluded that certain of
the Joint Venture's information systems were not Year 2000 compliant and
elected to replace such software and hardware with applications and equipment
certified by the vendors as Year 2000 compliant. FCLP installed a number of
the new systems in January 1999. The remaining systems are expected to be
installed by mid-1999. The total anticipated cost, including replacement
software and hardware, will be borne by FCLP. FCLP is utilizing internal and
external resources to install the new systems. FCLP does not believe that
any other significant information technology ("IT") projects affecting the
Partnership or Joint Venture have been delayed due to efforts to identify and
address Year 2000 issues.
Additionally, FCLP has continued to inventory the Joint Venture's
operating and revenue generating equipment to identify items that need to be
upgraded or replaced and has surveyed cable equipment manufacturers to
determine which of their models require upgrade or replacement to become Year
2000 compliant. Identification and evaluation, while ongoing, are
substantially completed and a plan is being developed to remediate
non-compliant equipment prior to January 1, 2000. FCLP expects to complete
its planning process by the end of May 1999. Upgrade or replacement, testing
and implementation will be performed thereafter. The cost of such
replacement or remediation, currently estimated at $4,200, is not expected to
have a material effect on the Joint Venture's financial position or results
of operations. The Joint Venture had not incurred any costs related to the
Year 2000 project as of December 31, 1998. FCLP plans to inventory, assess,
replace and test equipment with embedded computer chips in a separate segment
of its project, presently scheduled for the second half of 1999.
FCLP has continued to survey the Joint Venture's significant third
party vendors and service suppliers to determine the extent to which the
Joint Venture's interface systems are vulnerable should those third parties
fail to solve their own Year 2000 problems on a timely basis. Among the most
significant service providers upon which the Joint Venture relies are
programming suppliers, power and telephone companies, various banking
institutions and the Joint Venture's customer billing service. A majority of
these service suppliers either have not responded to FCLP's inquiries
regarding their Year 2000 compliance programs or have responded that they are
unsure if they will become compliant on a timely basis. Consequently, there
can be no assurance that the systems of other companies on which the Joint
Venture must rely will be Year 2000 compliant on a timely basis.
-29-
FCLP expects to develop a contingency plan in 1999 to address
possible situations in which various systems of the Joint Venture, or of
third parties with which the Joint Venture does business, are not compliant
prior to January 1, 2000. Considerable effort will be directed toward
distinguishing between those contingencies with a greater probability of
occurring from those whose occurrence is considered remote. Moreover, such a
plan will necessarily focus on systems whose failure poses a material risk to
the Joint Venture's results of operations and financial condition.
The Joint Venture's most significant Year 2000 risk is an
interruption of service to subscribers, resulting in a potentially material
loss of revenues. Other risks include impairment of the Joint Venture's
ability to bill and/or collect payment from its customers, which could
negatively impact its liquidity and cash flows. Such risks exist primarily
due to technological operations dependent upon third parties and to a much
lesser extent to those under the control of the Joint Venture. Failure to
achieve Year 2000 readiness in either area could have a material adverse
impact on the Joint Venture and consequently on the Partnership. The Joint
Venture is unable to estimate the possible effect on its results of
operations, liquidity and financial condition should its significant service
suppliers fail to complete their readiness programs prior to the Year 2000.
Depending on the supplier, equipment malfunction or type of service provided,
as well as the location and duration of the problem, the effect could be
material. For example, if a cable programming supplier encounters an
interruption of its signal due to a Year 2000 satellite malfunction, the
Joint Venture will be unable to provide the signal to its cable subscribers,
which could result in a loss of revenues, although the Joint Venture would
attempt to provide its customers with alternative program services for the
period during which it could not provide the original signal. Due to the
number of individually owned and operated channels the Joint Venture carries
for its subscribers, and the packaging of those channels, the Joint Venture
is unable to estimate any reasonable dollar impact of such interruption.
1998 VS. 1997
The Partnership used $600 more cash in operating activities during
the year ended December 31, 1998 than in 1997. The Partnership used $4,700
more cash for the payment of liabilities owed to affiliates and third-party
creditors due to differences in the timing of payments. Changes in
receivables from affiliates provided $2,900 less cash in 1998 than in 1997
due to differences in the timing of collections. Partnership expenses used
$7,000 less cash during 1998 than in 1997. Cash from investing activities
decreased by $1,500 due to decreased distributions from the Joint Venture.
1997 VS. 1996
The Partnership used $3,400 more cash in operating activities
during the year ended December 31, 1997 than in 1996. Partnership expenses
used $2,500 more cash during 1997 than in 1996. Decreases in receivables
from affiliates provided $1,500 more cash in 1997 than in 1996 due to
differences in the timing of collections. Cash from investing activities
decreased by $1,500 due to decreased distributions from the Joint Venture.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Partnership
on January 1, 1999, requires costs of start-up activities to be expensed as
incurred. The Partnership believes that adoption of this standard will not
have an impact on the Partnership's financial position or results of
operations.
-30-
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 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Joint Venture is exposed to financial market risks,
including changes in interest rates from its long-term debt arrangements.
Under its current policies, the Joint Venture does not use interest rate
derivative instruments to manage exposure to interest rate changes. An
increase in interest rates of 1% in 1998 would have increased the Joint
Venture's interest expense for the year ended December 31, 1998 by
approximately $18,300 with a corresponding decrease to its net income.
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.
-31-
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, 1998 the Corporate
General Partner managed cable television systems with approximately 91,000
basic subscribers.
On September 30, 1998, FHGLP acquired ownership of the Corporate
General Partner from Falcon Cablevision. FHGI is the sole general partner of
FHGLP. FHGLP controls the general partners of 15 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
Abel C. Crespo Vice President, Corporate Controller
MARC B. NATHANSON, 53, 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, then
the largest 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") and will Chair its 1999 National Convention.
At the 1986 NCTA convention, Mr. Nathanson was honored by being named the
recipient of the Vanguard Award for outstanding contributions to the growth
and development of the cable television industry. Mr. Nathanson is a 30-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 an Advisory Board
member of TVA, (Brazil) and also Chairman of the Board and Chief Executive
Officer of Falcon International
-32-
Communications, LLC. Mr. Nathanson was appointed by President Clinton on
November 1, 1998 as Chair of the Board of Governors for the International
Bureau of Broadcasting which oversees Voice of America, Radio/TV Marti, 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 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.
FRANK J. INTISO, 52, was appointed President and Chief Operating Officer of
FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso held the
positions of Executive Vice President and Chief Operating Officer, with
responsibility for the day-to-day operations of all cable television systems
under the management of Falcon. 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 has a Masters Degree in
Business Administration from UCLA and is a Certified Public Accountant. He
currently serves as Immediate Past Chair of the California Cable Television
Association and is on the boards of the Cable Advertising Bureau, Cable in
the Classroom, and the 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, 60, has been a Director of FHGI and its predecessors
since 1975. He served as Senior Vice President and General Counsel of FHGI
from 1987 to 1990 and has been Executive Vice President and General Counsel
since February 1990. Mr. Itskowitch 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 LLP). 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
Falcon International Communications, LLC.
MICHAEL K. MENEREY, 47, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI and Enstar Communications Corporation since
February 1998 and was Chief Financial Officer and Secretary of FHGI and its
predecessors between 1984 and 1998 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, and he was formerly
associated with BDO Seidman.
JOE A. JOHNSON, 54, has been Executive Vice President of Operations of FHGI
since September 1995, and was a Divisional Vice President of FHGI between
1989 and 1992. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. 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. Mr. Johnson is also a member of the Cable Pioneers.
THOMAS J. HATCHELL, 49, has been Executive Vice President of Operations of
FHGI and Enstar Communications Corporation since February 1998. From October
1995 to February 1998, he was Senior Vice President of Operations of Falcon
International Communications, L.P. and its predecessor company and was a
Senior Vice President of FHGI from January 1992 to September 1995. Mr.
Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From
1981 to 1989, he served as Vice President and Regional Manager for the San
Luis Obispo, California region owned by an affiliate of FHGI. He was Vice
President of Construction of an affiliate of FHGI from June 1980 to June 1981.
-33-
ABEL C. CRESPO, 39, has been Vice President, Corporate Controller of FHGI and
Enstar Communications Corporation since March 1999. He previously had served
as Controller since January 1997. Mr. Crespo joined Falcon in December 1984,
and has held various accounting positions during that time. Mr. Crespo holds
a Bachelor of Science degree in Business Administration from California State
University, Los Angeles.
OTHER OFFICERS OF FALCON
The following sets forth certain biographical information with
respect to certain additional members of FHGI management.
LYNNE A. BUENING, 45, 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, 45, has been Vice President of Advertising Sales and
Production of FHGI since January 1992. From 1988 to 1991, he served as
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. From 1985 to 1988, he was an Advertising Sales Account
Executive at Choice TV, an affiliate of FHGI.
HOWARD J. GAN, 52, has been Vice President of Regulatory Affairs of FHGI and
its predecessors since 1988. Prior to joining FHGI, he was General Counsel at
Malarkey-Taylor Associates, a Washington, D.C.-based telecommunications
consulting firm, from 1986 to 1988, and was Vice President and General
Counsel at CTIC Associates 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 1973 to 1978.
R.W. ("SKIP") HARRIS, 51, has been Vice President of Marketing of FHGI since
June 1991. 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.
MARTIN B. SCHWARTZ, 39, has been Vice President of Corporate Development of
FHGI since March 1999. Mr. Schwartz joined Falcon in November 1989 and has
held various finance, planning and corporate development positions during
that time, most recently that of Director of Corporate Development. Mr.
Schwartz has a Masters Degree in Business Administration from UCLA.
JOAN SCULLY, 63, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. From 1987 to May 1988, she was self-employed as
a management consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles-based cable company from 1985
through 1987. Prior to that time, she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree
in Human Resources Management from Pepperdine University.
RAYMOND J. TYNDALL, 51, has been Vice President of Engineering of FHGI since
October 1989. From 1975 to September 1989, he held various technical
positions with Choice TV and its predecessors. From 1967 to 1975, he held
various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer
in lightwave, microwave, satellite and broadband and is a member of the Cable
Pioneers.
In addition, FHGI has six Divisional Vice Presidents who are based
in the field. They are G. William Booher, Daniel H. DeLaney, Ron L. Hall,
Ronald S. Hren, Michael E. Kemph and Michael D. Singpiel.
-34-
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 FCLP to provide certain management services for the Joint Venture
and pays FCLP a portion of the management fees it receives in consideration
of such services and reimburses FCLP for expenses incurred by FCLP 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, 1998, the Manager charged
the Joint Venture management fees of approximately $283,000 and reimbursed
expenses of $286,100. In addition, the Joint Venture paid the Corporate
General Partner approximately $70,800 in respect of its 1% special interest.
The Joint Venture also reimbursed affiliates approximately $664,600 for
system operating management services. Certain programming services are
purchased through FCLP. The Joint Venture paid FCLP approximately $1,376,700
for these programming services for fiscal year 1998.
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."
-35-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 1999, the only persons known by the
Partnership to own beneficially or that may be deemed to own beneficially more
than 5% of the units were:
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------- ------------------------------------- --------------------------- -----------
Units of Limited Partnership Everest Cable Investors LLC 3,373(1) 5.6%
Interest 199 South Los Robles Ave.,
Suite 440
Pasadena, CA 91101
Units of Limited Partnership Madison/AG Partnership Value 3,033(2) 5.1%
Interest Partners II
ISA Partnership Liquidity Investors
Grammercy Park Investments, LP
P.O. Box 7533
Incline Village, NV 89452
(1) As reported to the Partnership by its transfer agent, Gemisys
Corporation.
(2) As reported in a Schedule 13G dated February 18, 1999 and filed with
the Securities and Exchange Commission by Madison/AG Partnership Value
Partners II ("AG II"), ISA Partnership Liquidity Investors ("ISA") and
Grammercy Park Investments, LP ("Grammercy Park") as members of a
group. The Schedule 13G states that AG II has sole voting and
dispositive power with respect to 2,933 units, that ISA has sole
voting and dispositive power with respect to 60 units and that
Grammercy Park has sole voting and dispositive power with respect to
40 units.
The Corporate General Partner is a wholly-owned subsidiary of
FHGLP. FHGI owns a 10.6% interest in, and is the general partner of, FHGLP.
As of March 3, 1999, 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. Greg A. Nathanson is Marc B. Nathanson's
brother.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
On September 30, 1998, FHGLP acquired ownership of Enstar
Communications Corporation from Falcon Cablevision and FCLP assumed the
management services operations of FHGLP. FCLP now manages the operations of
the partnerships of which Enstar Communications Corporation is the Corporate
General Partner, including the Partnership. FCLP began receiving management
fees and reimbursed expenses which had previously been paid by the
Partnership, as well as other affiliated entities, to FHGLP. The day-to-day
management of FCLP is substantially the same as that of FHGLP, which serves
as the managing partner of FCLP.
-36-
Certain members of management of the Corporate General Partner have
also been involved in the management of other cable ventures. FCLP may enter
into other cable ventures, including ventures similar to the Partnership.
The Partnership and the Joint Venture rely upon the Corporate
General Partner and certain of its affiliates to provide general management
services, system operating services, supervisory and administrative services
and programming. See Item 11., "Executive Compensation." The Joint Venture
is also party to a loan agreement with a subsidiary of the Corporate General
Partner. See Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
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 entities.
These affiliations subject FCLP, 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.
FCLP, 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 include
FCLP), 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
-37-
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.
-38-
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
The Registrant filed a Form 8-K dated December 10, 1998, in
which it reported under Item 5 that an unsolicited offer to
purchase partnership units had been made without the consent
of the Corporate General Partner.
-39-
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
29, 1999.
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
------------------------------
Marc B. Nathanson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of March 1999.
Signatures Title(*)
------------------------------- --------------------------------------
/s/ Marc B. Nathanson Chairman of the Board and Chief
--------------------- Executive Officer
Marc B. Nathanson (Principal Executive Officer)
/s/ Michael K. Menerey Executive Vice President, Chief
---------------------- Financial Officer, Secretary and
Michael K. Menerey Director (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.
-40-
INDEX TO FINANCIAL STATEMENTS
Page
------------------------------------------------
Enstar Income/Growth Enstar Cable of
Program Five-B, L.P. Cumberland Valley
--------------------- -----------------
Reports of Independent Auditors F-2 F-10
Balance Sheets - December 31, 1997
and 1998 F-3 F-11
Financial Statements for each of
the three years in the period
ended December 31, 1998:
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
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Five-B, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income/Growth
Program Five-B, L.P. (A Georgia Limited Partnership) as of December 31, 1997
and 1998, and the related statements of operations, partnership capital
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. 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-B, L.P. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 12, 1999
F-2
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
BALANCE SHEETS
-----------------------------------------
-----------------------------------------
December 31,
-------------------------------------
1997 1998
----------------- ----------------
ASSETS:
Cash $ 3,400 $ 200
Equity in net assets of joint venture 4,222,900 4,466,400
----------------- ----------------
$ 4,226,300 $ 4,466,600
----------------- ----------------
----------------- ----------------
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 14,800 $ 6,700
Due to affiliate - 2,200
----------------- ----------------
TOTAL LIABILITIES 14,800 8,900
----------------- ----------------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (81,900) (79,400)
Limited partners 4,293,400 4,537,100
----------------- ----------------
TOTAL PARTNERSHIP CAPITAL 4,211,500 4,457,700
----------------- ----------------
$ 4,226,300 $ 4,466,600
----------------- ----------------
----------------- ----------------
See accompanying notes to financial statements.
F-3
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF OPERATIONS
-----------------------------------------
-----------------------------------------
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
OPERATING EXPENSES:
General and administrative expenses $ (29,700) $ (29,900) $ (23,300)
------------- ------------- -------------
INTEREST EXPENSE (600) (2,900) (2,500)
------------- ------------- -------------
Loss before equity in net income (loss) of
joint venture (30,300) (32,800) (25,800)
EQUITY IN NET INCOME (LOSS) OF JOINT VENTURE (311,000) (41,100) 272,000
------------- ------------- -------------
NET INCOME (LOSS) $ (341,300) $ (73,900) $ 246,200
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) allocated to General Partners $ (3,400) $ (700) $ 2,500
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) allocated to Limited Partners $ (337,900) $ (73,200) $ 243,700
------------- ------------- -------------
------------- ------------- -------------
NET INCOME (LOSS) PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (5.65) $ (1.22) $ 4.07
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 59,830 59,830 59,830
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to financial statements.
F-4
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
-------------------------------------------
-------------------------------------------
General Limited
Partners Partners Total
--------------- --------------- ---------------
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1996 $ (77,800) $ 4,704,500 $ 4,626,700
Net loss for year (3,400) (337,900) (341,300)
--------------- --------------- ---------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1996 (81,200) 4,366,600 4,285,400
Net loss for year (700) (73,200) (73,900)
--------------- --------------- ---------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 (81,900) 4,293,400 4,211,500
Net income for year 2,500 243,700 246,200
--------------- --------------- ---------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1998 $ (79,400) $ 4,537,100 $ 4,457,700
--------------- --------------- ---------------
--------------- --------------- ---------------
See accompanying notes to financial statements.
F-5
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
STATEMENTS OF CASH FLOWS
-----------------------------------------
-----------------------------------------
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss ) $ (341,300) $ (73,900) $ 246,200
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in net income (loss) of joint venture 311,000 41,100 (272,000)
Increase (decrease) from changes in:
Due from affiliates 1,400 2,900 -
Accounts payable and due to affiliates 1,200 (1,200) (5,900)
------------- ------------- -------------
Net cash used in operating activities (27,700) (31,100) (31,700)
------------- ------------- -------------
Cash flows from investing activities:
Distributions from joint venture 31,500 30,000 28,500
------------- ------------- -------------
Net increase (decrease) in cash 3,800 (1,100) (3,200)
Cash at beginning of year 700 4,500 3,400
------------- ------------- -------------
Cash at end of year $ 4,500 $ 3,400 $ 200
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to financial statements.
F-6
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------
-----------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income/Growth Program Five-B, 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, 1998, the book basis of the Partnership's investment in the
Joint Venture exceeds its tax basis by $2,124,200.
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 Partnership's net income for 1998
in the financial statements is $246,200 as compared to its tax loss of
$257,100 for the same period. The difference is principally due to timing
differences in depreciation and amortization expense reported by the Joint
Venture.
COSTS OF START-UP ACTIVITIES
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Partnership
on January 1, 1999, requires costs of start-up activities to be expensed as
incurred. The Partnership believes that adoption of this standard will not
have an impact on the Partnership's financial position or results of
operations.
F-7
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses have been allocated 99% to the limited partners
and 1% to the general partners. Earnings and losses per unit of limited
partnership interest 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.
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. On September 30, 1998, Falcon Holding Group, L.P., a
Delaware limited partnership ("FHGLP"), acquired ownership of the Corporate
General Partner from Falcon Cablevision. Simultaneously with the closing of
that transaction, FHGLP contributed all of its existing cable television
system operations to Falcon Communications, L.P. ("FCLP"), a California
limited partnership and successor to FHGLP. FHGLP serves as the managing
partner of FCLP. The Corporate General Partner has contracted with FCLP to
provide corporate management services for the Partnership.
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
F-8
ENSTAR INCOME/GROWTH PROGRAM FIVE-B, L.P.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------
-----------------------------------------
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
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.
NOTE 3 - EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and an affiliate partnership, Enstar Income/Growth
Program Five-A, 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 $622,000, $82,200 in 1996 and 1997,
respectively, and income of $544,000 in 1998, of which losses of $311,000 and
$41,100 and income of $272,000 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 1996, 1997 or 1998 other than
through its investment in the Joint Venture. No management fees were paid by
the Partnership during 1996, 1997 and 1998.
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 reimbursed expenses were incurred on behalf of
the Partnership during 1996, 1997 or 1998.
NOTE 5 - COMMITMENTS
The Partnership, together with Enstar Income/Growth Program Five-A,
L.P., has guaranteed the debt of the Joint Venture.
F-9
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, 1997 and 1998, and
the related statements of operations, venturers' capital, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 12, 1999
F-10
ENSTAR CABLE OF CUMBERLAND VALLEY
BALANCE SHEETS
---------------------------------
---------------------------------
December 31,
---------------------------------
1997 1998
-------------- -----------------
ASSETS:
Cash and cash equivalents $ 1,081,200 $ 515,600
Accounts receivable, less allowance of $21,900 and
$14,700 for possible losses 188,100 171,700
Prepaid expenses and other assets 235,200 191,200
Property, plant and equipment, less accumulated
depreciation and amortization 8,874,900 8,997,100
Franchise cost, net of accumulated amortization
of $10,343,800 and $6,785,000 1,884,900 1,256,000
Deferred loan costs and other deferred charges, net 127,800 98,200
--------------- ---------------
$ 12,392,100 $ 11,229,800
--------------- ---------------
--------------- ---------------
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 904,000 $ 659,000
Due to affiliates 442,300 638,000
Note payable - affiliate 2,600,000 1,000,000
--------------- ---------------
TOTAL LIABILITIES 3,946,300 2,297,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income/Growth Program Five-A, L.P. 4,222,900 4,466,400
Enstar Income/Growth Program Five-B, L.P. 4,222,900 4,466,400
--------------- ---------------
TOTAL VENTURERS' CAPITAL 8,445,800 8,932,800
--------------- ---------------
$ 12,392,100 $ 11,229,800
--------------- ---------------
--------------- ---------------
See accompanying notes to financial statements.
F-11
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF OPERATIONS
---------------------------------
---------------------------------
Year Ended December 31,
---------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
REVENUES $ 6,728,900 $ 7,217,900 $ 7,075,400
--------------- -------------- --------------
OPERATING EXPENSES:
Service costs 2,394,700 2,553,400 2,494,000
General and administrative expenses 877,700 920,800 884,700
General Partner management fees
and reimbursed expenses 608,600 652,900 639,900
Depreciation and amortization 2,841,600 2,672,700 2,085,200
--------------- -------------- --------------
6,722,600 6,799,800 6,103,800
--------------- -------------- --------------
Operating income 6,300 418,100 971,600
--------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (699,400) (578,600) (257,300)
Interest income 71,100 78,300 45,300
Casualty loss - - (215,600)
--------------- -------------- --------------
(628,300) (500,300) (427,600)
--------------- -------------- --------------
NET INCOME (LOSS) $ (622,000) $ (82,200) $ 544,000
--------------- -------------- --------------
--------------- -------------- --------------
See accompanying notes to financial statements.
F-12
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, 1996 $ 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
Distributions to venturers (28,500) (28,500) (57,000)
Net income for year 272,000 272,000 544,000
------------------ ------------------- -------------------
BALANCE, December 31, 1998 $ 4,466,400 $ 4,466,400 $ 8,932,800
------------------ ------------------- -------------------
------------------ ------------------- -------------------
See accompanying notes to financial statements.
F-13
ENSTAR CABLE OF CUMBERLAND VALLEY
STATEMENTS OF CASH FLOWS
---------------------------------
---------------------------------
Year Ended December 31,
----------------------------------------------------
1996 1997 1998
-------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (622,000) $ (82,200) $ 544,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,841,600 2,672,700 2,085,200
Amortization of deferred loan costs 52,200 156,200 34,600
Casualty loss - - 215,600
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets 310,500 23,700 60,400
Accounts payable and due to affiliates 167,900 168,900 (49,300)
-------------- --------------- ---------------
Net cash provided by operating activities 2,750,200 2,939,300 2,890,500
-------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures (662,100) (610,800) (1,768,700)
Increase in intangible assets (10,900) (11,400) (25,600)
-------------- --------------- ---------------
Net cash used in investing activities (673,000) (622,200) (1,794,300)
-------------- --------------- ---------------
Cash flows from financing activities:
Distributions to venturers (63,000) (60,000) (57,000)
Repayment of debt (700,000) (6,067,200) -
Borrowings from affiliate - 2,600,000 -
Repayment of borrowings from affiliate - - (1,600,000)
Deferred loan costs - (133,800) (4,800)
-------------- --------------- ---------------
Net cash used in financing activities (763,000) (3,661,000) (1,661,800)
-------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,314,200 (1,343,900) (565,600)
Cash and cash equivalents at beginning of year 1,110,900 2,425,100 1,081,200
-------------- --------------- ---------------
Cash and cash equivalents at end of year $ 2,425,100 $ 1,081,200 $ 515,600
-------------- --------------- ---------------
-------------- --------------- ---------------
See accompanying notes to financial statements.
F-14
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
In 1998, the Joint Venture revised the estimated useful life of its
existing plant assets in a Tennessee franchise area from 15 years to
approximately 12.5 years. The Partnership implemented the reduction as a
result of a system upgrade that is required to be completed by October 2000
as provided for in the franchise agreement. The impact of this change in the
life of the assets was to increase depreciation expense by approximately
$36,500 in 1998.
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.
F-15
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FRANCHISE COST (CONTINUED)
The Joint Venture is in the process of negotiating the renewal of expired
franchise agreements for nine of the Joint Venture's 19 franchises.
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.
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 customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue
is recognized in the period the installation services are provided to the
extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the cable television system.
INCOME TAXES
As a partnership, 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, 1998, the
book basis of the Joint Venture's net assets exceeds its tax basis by
$4,248,400.
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 Joint Venture's net income for
1998 in the financial statements is $544,000 as compared to its tax loss of
$462,500 for the same period. The difference is principally due to timing
differences in depreciation and amortization expense.
F-16
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
COSTS OF START-UP ACTIVITIES
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Joint Venture
on January 1, 1999, requires costs of start-up activities to be expensed as
incurred. The Joint Venture believes that adoption of this standard will not
have an impact on the Joint Venture's financial position or results of
operations.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2 - 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. On September 30, 1998, Falcon Holding Group, L.P., a
Delaware limited partnership ("FHGLP"), acquired ownership of the Corporate
General Partner from Falcon Cablevision. Simultaneously with the closing of
that transaction, FHGLP contributed all of its existing cable television
system operations to Falcon Communications, L.P. ("FCLP"), a California
limited partnership and successor to FHGLP. FHGLP serves as the managing
partner of FCLP. The Corporate General Partner has contracted with FCLP and
its affiliates to provide management services for the Joint Venture.
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.
F-17
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
-------------------------------------
1997 1998
---------------- -----------------
Cable television systems $ 19,259,300 $ 20,338,200
Vehicles, furniture and equipment and leasehold
improvements 694,100 713,300
---------------- -----------------
19,953,400 21,051,500
Less accumulated depreciation
and amortization (11,078,500) (12,054,400)
---------------- -----------------
$ 8,874,900 $ 8,997,100
---------------- -----------------
---------------- -----------------
NOTE 4 - 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.
NOTE PAYABLE - AFFILIATE
The carrying amount approximates fair value due to the variable rate
nature of the note payable.
NOTE 5 - 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. Outstanding borrowings at
December 31, 1998 were $1,000,000.
The Joint Venture's Facility matures on August 31, 2001, at which time
all amounts then outstanding are due in full. Borrowings bear interest at the
lender's base rate (7.75% at December 31, 1998) plus 0.625%, or at an offshore
rate 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
F-18
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 5 - NOTE PAYABLE - AFFILIATE (CONTINUED)
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 during 1997 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 by the Partnership unless an event of default exists thereunder or the
Joint Venture's ratio of debt to cash flow is greater than 4 to 1. The
Corporate General Partner believes the Joint Venture was in compliance with the
covenants at December 31, 1998.
NOTE 6 - 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, 1998 are as follows:
Year Amount
---- ------------
1999 $ 13,600
2000 13,100
2001 13,000
2002 5,300
--------
$ 45,000
--------
--------
Rentals, other than pole rentals, charged to operations approximated
$49,400, $52,100 and $50,100 in 1996, 1997 and 1998, respectively, while pole
rental expense approximated $105,900, $105,100 and $115,400 in 1996, 1997 and
1998, respectively.
Other commitments include approximately $387,200 at December 31, 1998
to complete the upgrade of 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 $500,000 beginning in 2000.
F-19
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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.
In October 1998, FCLP reinstated third party insurance coverage for
all of the cable television properties owned or managed by FCLP to cover
damage to cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. This coverage is subject
to a significant annual deductible which applies to all of the cable
television properties owned or managed by FCLP.
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's Monticello, Kentucky cable system sustained
damage due to an ice storm on February 3, 1998. The cost of replacing and
upgrading the damaged assets amounted to approximately $1,361,400 and
resulted in a casualty loss of $215,600. The cost of repairs was funded from
available cash reserves and operating cash flow. 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.
F-20
ENSTAR CABLE OF CUMBERLAND VALLEY
NOTES TO FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 7 - 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 $269,100, $288,700 and $283,000 in 1996, 1997 and 1998,
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 $67,300, $72,200 and $70,800 in 1996, 1997 and 1998,
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. The
Corporate General Partner has contracted with FCLP and its affiliates to
provide management services for the Joint Venture. 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 $272,200, $292,000 and $286,100 during 1996, 1997 and 1998,
respectively.
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
$580,100, $565,000 and $664,600 in 1996, 1997 and 1998, 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.
Substantially all programming services have been purchased through
FCLP. FCLP, in the normal course of business, purchases cable programming
services from certain program suppliers owned in whole or in part by
affiliates of an entity that became a general partner of FCLP on September
30, 1998. Such purchases of programming services are made on behalf of the
Joint Venture and the other partnerships managed by the Corporate General
Partner as well as for FCLP's own cable television operations. FCLP 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 $1,257,300, $1,332,100 and
$1,376,700 in 1996, 1997 and 1998, respectively. Programming fees are
included in service costs in the statements of operations.
In the normal course of business, the Joint Venture pays interest
and principal to EFC.
NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $703,400, $547,900 and $265,900
in 1996, 1997 and 1998, respectively.
F-21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
3 Second Amended and Restated Agreement of Limited Partnership
of Enstar Income/Growth Program Five-B, 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-B, 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
EXHIBIT INDEX
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.(7)
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.(8)
10.24 Loan Agreement between Enstar Cable of Cumberland Valley and
Enstar Finance Company, LLC dated September 30, 1997.(9)
10.25 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)
10.26 Franchise Agreement granting a non-exclusive community antenna
television system franchise for Campbell County, Tennessee.(10)
10.27 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.(10)
21.1 Subsidiaries: Enstar Cable of Cumberland Valley.
E-2
EXHIBIT INDEX
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 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. 0-16789 for the quarter ended September
30, 1997.
(10) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-16789 for the fiscal year ended December
31, 1997.
E-3