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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 000-15686
ENSTAR INCOME PROGRAM IV-3, L.P.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1648320
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
12405 POWERS COURT DRIVE
ST. LOUIS, MISSOURI 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Units of Limited Partnership Interest None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held by
non-affiliates of the registrant: All of the registrant's 39,900 units of
limited partnership interests, its only class of equity securities, are held by
non-affiliates. There is no public trading market for the units, and transfers
of units are subject to certain restrictions; accordingly, the registrant is
unable to state the market value of the units held by non-affiliates.
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The Exhibit Index is located at Page E-1.
ENSTAR INCOME PROGRAM IV-3, L.P.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
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Item 1 Business...................................................... 3
Item 2 Properties.................................................... 15
Item 3 Legal Proceedings............................................. 15
Item 4 Submission of Matters to a Vote of Security Holders........... 15
PART II
Item 5 Market for the Registrant's Equity Securities and Related
Security Holder Matters....................................... 16
Item 6 Selected Financial Data....................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk 27
Item 8 Financial Statements and Supplementary Data................... 27
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 27
PART III
Item 10 Directors and Executive Officers of the Registrant............ 28
Item 11 Executive Compensation........................................ 29
Item 12 Security Ownership of Certain Beneficial Owners and 30
Management....................................................
Item 13 Certain Relationships and Related Transactions................ 30
PART IV
Item 14 Controls and Procedures....................................... 33
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 33
8-K...........................................................
SIGNATURES.............................................................. 34
CERTIFICATIONS.......................................................... 35
This Annual Report on Form 10-K is for the year ended December 31, 2002. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The Securities and Exchange Commission (SEC) allows us to "incorporate
by reference" information that we file with the SEC, which means that we can
disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of
this Annual Report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
Annual Report. In this Annual Report, "we," "us," and "our" refers to Enstar
Income Program IV-3, L.P.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program IV-3, L.P., a Georgia limited partnership (the
"Partnership"), is engaged in the ownership and operation of cable television
systems serving approximately 1,600 basic customers at December 31, 2002 in and
around the cities of Fulton, Kentucky and South Fulton, Tennessee.
In 1988, the Partnership entered into a general partnership agreement with two
affiliated partnerships, Enstar Income Program IV-1, L.P. (Enstar IV-1) and
Enstar Income Program IV-2, L.P. (Enstar IV-2), (which are also cable television
limited partnerships sponsored by the general partners) to form Enstar Cable of
Macoupin County (the "Joint Venture"). 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 their financial resources.
The Joint Venture began its cable television business operations in January 1988
with the acquisition of a cable television system providing service in and
around the municipalities of Carlinville, Virden, Girard, Thayer and Auburn,
Illinois.
The General Partners of the Partnership are Enstar Communications Corporation, a
Georgia corporation (the "Corporate General Partner") and Robert T. Graff, Jr.
(the "Individual General Partner"). Since its incorporation in 1982, the
Corporate General Partner has been engaged in the cable/telecommunications
business, both as a General Partner of 14 Limited Partnerships formed to own and
operate cable television systems and through a wholly-owned operating
subsidiary. As of December 31, 2002, the Corporate General Partner managed cable
television systems serving approximately 32,400 basic customers. On November 12,
1999, the Corporate General Partner became an indirect controlled subsidiary of
Charter Communications, Inc. (also called Charter), the nation's third largest
cable operator, serving approximately 6.6 million customers. The Corporate
General Partner is responsible for day-to-day management of the Partnership and
its operations. Charter and its affiliates provide management and other services
to the Partnership, for which they receive a management fee and reimbursement of
expenses. The principal executive offices of the Partnership and the Corporate
General Partner are located at 12405 Powerscourt Drive, St. Louis, MO 63131-0555
and their telephone number is (314) 965-0555.
LIQUIDATION BASIS ACCOUNTING AND SALE OF CABLE SYSTEMS
Our Corporate General Partner continues to operate our cable television systems
during our divestiture transactions for the benefit of our unitholders.
On April 10, 2002, pursuant to an asset purchase agreement dated August 29,
2001, the Partnership completed the sale of all of the Partnership's Illinois
cable television systems in and around Fairfield and Shelbyville, Illinois for a
total sale price of approximately $7,333,300 and, together with its affiliates,
Enstar IV-1 and Enstar IV-2, the sale of the Joint Venture for a total sale
price of approximately $9,076,800, the Partnership's one-third share of which is
approximately $3,025,600, to Charter Communications Entertainment I, LLC
("CCE-1"), an affiliate of the Corporate General Partner and an indirect
subsidiary of Charter (the "Charter Sale"). The Charter Sale is part of a larger
transaction in which the Partnership and five other affiliated partnerships
(which, together with the Partnership are collectively referred to as the
"Charter Selling Partnerships") sold all of their assets used in the operation
of their respective Illinois cable television systems to CCE-1 and two of its
affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash
sale price of $63,000,000. Each Charter Selling Partnership received the same
value per customer. In addition, the Limited Partners of each of the Charter
Selling Partnerships approved an amendment to their respective partnership
agreement to allow the sale of assets to an affiliate of such partnership's
General Partner. The Purchasers are each indirect subsidiaries of the Corporate
General Partner's ultimate parent company, Charter, and therefore, are
affiliates of the Partnership and each of the other Charter Selling
Partnerships.
The Charter Sale resulted from a sale process actively pursued since 1999, when
the Corporate General Partner sought purchasers for all of the cable television
systems of the Selling Partnerships, as well as eight other affiliated limited
partnership cable operators of which the Corporate General Partner is also the
general partner. This effort was undertaken primarily because, based on the
Corporate General Partner's experience in the cable television industry, it was
concluded that generally applicable market conditions and competitive factors
were making (and would increasingly make) it extremely difficult for smaller
operators of rural cable systems (such as the Partnership and the other
affiliated partnerships) to effectively compete and be financially successful.
This determination was
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based on the anticipated cost of electronics and additional equipment to enable
the Partnership's and the Joint Venture's systems to operate on a two-way basis
with improved technical capacity, insufficiency of the Partnership's and Joint
Venture's cash reserves and cash flows from operations to finance such
expenditures, limited customer growth potential due to the Partnership's and
Joint Venture's systems' rural location, and a general inability of a small
cable system operator such as the Partnership to benefit from economies of scale
and the ability to combine and integrate systems that large cable operators
have. Although limited plant upgrades have been made, the Corporate General
Partner projected that if the Partnership and Joint Venture made the
comprehensive additional upgrades deemed necessary to enable enhanced and
competitive services, particularly activation of two-way capability, the
Partnership and Joint Venture would not recoup the costs or regain its ability
to operate profitably within the remaining term of its franchises, and as a
result, making these upgrades would not be economically prudent.
As a result of the above transaction, the Joint Venture changed its basis of
accounting to the liquidation basis on April 10, 2002. Accordingly, the assets
in the accompanying statement of net assets in liquidation as of December 31,
2002 have been stated at estimated realizable values and the liabilities have
been reflected at estimated settlement amounts. There were no significant
adjustments recorded upon changing to liquidation basis accounting. Net assets
in liquidation as of December 31, 2002 represent the estimated distribution to
the joint venturers In January 2003, all remaining assets of the Joint Venture
were distributed including a final distribution of $126,000 made to the joint
venturers, of which the Partnership's portion is $42,000.
After setting aside $1,400,000 to fund the Fulton, Kentucky headend's working
capital needs and paying or providing for the payment of the expenses of the
Charter Sale, the Corporate General Partner made distributions from the Joint
Venture to the Partnership of their allocable share of the remaining net sale
proceeds, in accordance with its partnership agreement. The Partnership made an
initial distribution on or about May 15, 2002, with a second distribution made
on or about September 24, 2002 from the Charter Sale. Distributions from the
Joint Venture were $9,537,300 during the year ended December 31, 2002, of which
the Partnership's portion is $3,179,100.
On November 8, 2002, the Partnership entered into an asset purchase agreement
providing for the sale of its remaining cable system to Telecommunications
Management, LLC (Telecommunications Management) for a total sale price of
approximately $1,344,000 (approximately $825 per customer acquired). This sale
is a part of a larger transaction in which the Partnership and eight other
affiliated partnerships (which, together with the Partnership are collectively
referred to as the "Telecommunications Management Selling Partnerships") would
sell all of their remaining assets used in the operation of their respective
cable systems to Telecommunications Management for a total cash sale price of
approximately $15,341,600 (before adjustments) (the Telecommunications
Management Sale). The Telecommunications Management Sale is subject to the
approval of a majority of the holders of the Partnership's units and approval of
the holders of the other Telecommunications Management Selling Partnerships. In
addition, the transaction is subject to certain closing conditions, including
regulatory and franchise approvals. In March 2003, a majority of the Limited
Partners approved the Telecommunications Management Sale and a plan of
liquidation.
On February 6, 2003, the Partnership entered into a side letter amending the
asset purchase agreement providing for the sale of its remaining cable systems
to Telecommunications Management. The February 6, 2003 side letter amends the
asset purchase agreement and Deposit Escrow Agreement to extend the date of the
second installment of the deposit and the Outside Closing Date each by 60 days.
On April 7, 2003, the second installment of the escrow deposit was due and was
not received. We are currently evaluating our alternatives with respect to this
new development.
The Partnership finalized its proposed plan of liquidation in December 2002 in
connection with the Partnership's filing of a proxy to obtain the approval of
the Limited Partners for the sale of the Partnership's final cable system and
the subsequent liquidation and dissolution of the Partnership. In March 2003,
the required number of votes necessary to implement the plan of liquidation were
obtained. As a result, the Partnership changed its basis of accounting to the
liquidation basis as of December 31, 2002. Upon changing to liquidation basis
accounting, the Partnership recorded $23,700 of accrued costs of liquidation in
accounts payable and accrued liabilities representing an estimate of the costs
to be incurred after the sale of the final cable system but prior to dissolution
of the Partnership. Because we are unable to develop reliable estimates of
future operating results or the ultimate realizable value of property, plant and
equipment due to the current uncertainties surrounding the final dissolution of
the Partnership, no adjustments have been recorded to reflect assets at
estimated realizable values or to reflect estimates of future operating results.
These adjustments will be recorded once a sale is imminent and the net sales
proceeds are reasonably estimable. Accordingly, the assets in the accompanying
statement of net assets in the
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liquidation of the Partnership as of December 31, 2002 have been stated at
historical book values. Distributions ultimately made to the partners upon
liquidation will differ from the net assets in liquidation recorded in the
accompanying statement of net assets in liquidation as a result of future
operations, the sale proceeds ultimately received by the Partnership and
adjustments if any to estimated costs of liquidation. Distributions from the
Partnership were $11,087,700 during the year ended December 31, 2002.
The Corporate General Partner's intention is to settle the outstanding
obligations of the Partnership and terminate the Partnership as expeditiously as
possible. Final dissolution of the Partnership and related cash distributions to
the partners will occur upon obtaining final resolution of all liquidation
issues.
DESCRIPTION OF THE PARTNERSHIP'S SYSTEM
The table below sets forth certain operating statistics for the Partnership's
cable system as of December 31, 2002:
AVERAGE
MONTHLY
PREMIUM REVENUE PER
HOMES BASIC BASIC SERVICE PREMIUM BASIC
SYSTEM NAME PASSED(1) CUSTOMERS PENETRATION(2) UNITS(3) PENETRATION(4) CUSTOMER(5)
----------- --------- --------- -------------- -------- -------------- -----------
Fulton, KY 4,400 1,600 36.4% 300 18.8% $ 62.98
(1) Homes passed refers to estimates by the Partnership and Joint
Venture of the approximate number of dwelling units in a particular
community that can be connected to our cable system without any
further extension of principal transmission lines. Estimates are
based upon a variety of sources, including billing records, house
counts, city directories and other local sources.
(2) Basic penetration represents basic customers as a percentage of
homes passed by cable transmission lines.
(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 penetration represents premium service units as a percentage
of homes subscribing to cable service. A customer may purchase more
than one premium service, each of which is counted as a separate
premium service unit. This ratio may be greater than 100% if the
average customer subscribes for more than one premium service.
(5) Average monthly revenue per basic customer has been computed based
on revenue for the year ended December 31, 2002, divided by twelve
months, divided by the actual number of basic customers at the end
of the year.
SERVICES, MARKETING AND PRICES
Our cable television system offers customers various levels of cable services
consisting of:
- broadcast television signals of local network, independent and
educational stations;
- a limited number of television signals originating from distant
cities, such as WGN;
- various satellite delivered, non-broadcast channels, such as CNN,
MTV, The USA Network, ESPN, TNT, and The Disney Channel;
- programming originated locally by the cable television system, such
as public, educational and government access programs; and
For an extra monthly charge, our cable television system also offers premium
television services to its customers. These services, such as HBO and Showtime,
are satellite channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption. See "Regulation and Legislation."
In October 2001, we began offering customers limited digital services through a
hybrid system that delivers traditional cable television services through the
terrestrial cable plant and digital service and its related enhancements through
a satellite dish mounted at the customer's home. This hybrid digital package
includes a
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hybrid digital set top terminal, an interactive electronic programming guide, 45
channels of CD quality digital music, a menu of pay per view channels and at
least 30 additional digital channels but does not provide two-way capability.
Certain packages also offer customers one or more premium channels with
"multiplexes." Multiplexes give customers access to several different versions
of the same premium channel and which are varied as to time of broadcast (such
as east and west coast time slots) or programming content and theme (such as
westerns and romance).
A customer generally pays an initial installation charge and fixed monthly fees
for basic, expanded basic, other tiers of satellite services and premium
programming services. Such monthly service fees constitute the primary source of
revenue for the Partnership's cable television system. In addition to customer
revenues, the Partnership's cable television system receives revenues from the
sale of available advertising spots on advertiser-supported programming and also
offers to our customers home shopping services, which pay the Partnership a
share of revenues from sales of products to the Partnership's customers, in
addition to paying us a separate fee in return for carrying their shopping
service.
The Partnership's marketing strategy is to provide added value to increasing
levels of subscription services through packaging. In addition to the basic
service package, customers may purchase additional unregulated packages of
satellite-delivered services and premium services. The Partnership's service
options vary from system to system, depending upon a cable system's channel
capacity and viewer interests. The Partnership employs radio and local newspaper
advertising to market our services. The Partnership also offers discounts to
customers who purchase premium services on a limited trial basis in order to
encourage a higher level of service subscription. Partnership also has a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the initial decision to subscribe and encourage
customers to purchase higher service levels.
Rates for services also vary from market to market and according to the type of
services selected. Under the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"), most cable television systems
are subject to rate regulation of the basic service tier, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of the Partnership's cable television systems
not deemed to be subject to effective competition under the Federal
Communications Commission's ("FCC") definition. Currently, our cable television
system is not subject to effective competition. See "Regulation and
Legislation."
At December 31, 2002, the Partnership's monthly rates for basic cable service
for residential customers, including certain discounted prices, was $20.58 and
our premium price was $11.95, excluding special promotions offered periodically
in conjunction with the Partnership's marketing programs. A one-time
installation fee, which the Partnership may wholly or partially waive during a
promotional period, is usually charged to new customers. The Partnership charges
commercial customers, such as hotels, motels and hospitals, a negotiated,
non-recurring fee for installation of service and monthly fees based upon a
standard discounting procedure. The Partnership offers most multi-unit dwellings
a negotiated bulk rate in exchange for single-point billing and basic service to
all units. These rates are also subject to regulation.
PROGRAMMING
We purchase basic and premium programming for our systems from Charter based on
Charter's actual cost. Charter's programming costs are generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Charter's programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. Accordingly, no assurances can be
given that Charter's, and correspondingly our, programming costs will not
continue to increase substantially in the near future, or that other materially
adverse terms will not be added to Charter's programming contracts. We believe,
however, that Charter's relations with its programming suppliers generally are
good.
Our cable programming costs have increased in recent years due to additional
programming being provided to basic customers and are expected to continue to
increase due to increased costs to produce or purchase cable programming (with
particularly significant increases occurring with respect to sports
programming), inflationary increases and other factors. In addition, we are
facing higher costs to carry local broadcast channels who elect retransmission
carriage agreements.
CABLE SYSTEM AND TECHNOLOGY
A cable television system receives television, radio and data signals at the
system's headend site by means of over-
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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.
Although the system currently offers the limited digital services through the
hybrid satellite and traditional cable solution, the Fulton, Kentucky headend
operates at 300-330 megahertz and is limited to 36-40 channels. It has no
available channel capacity to accommodate the addition of new channels or to
provide pay-per-view offerings to customers. As a result, 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, additional pay-per-view, new unregulated tiers of
satellite-delivered services and home shopping, so that our cable television
system remains competitive within the industry.
Significant capital would be required for a comprehensive plant and headend
upgrade particularly in light of the high cost of electronics to enable two-way
service, to offer high speed cable modem Internet service and other interactive
services, as well as to increase channel capacity and allow a greater variety of
video services. The Partnership's capital expenditures for recent upgrades have
been made with available funds, and have enhanced the economic value of the
Partnership and our systems and permitted us to maintain compliance with
franchise agreements.
The estimated cost of upgrading our system to two-way capability in order to be
able to offer high-speed Internet service from the Fulton, Kentucky headend, as
well as to increase channel capacity and allow additional video services, would
be approximately $1.5 million (for an upgrade to 550 megahertz (MHz) capacity)
to $1.8 million (for an upgrade to 870 MHz capacity). Given pending sale
transactions, the high cost of this comprehensive upgrade plan and the limited
funds available, such a plan is not judged to be economically prudent, and
accordingly, the Corporate General Partner does not presently anticipate that it
will proceed with a comprehensive upgrade plan. The Corporate General Partner
has continued to make upgrades necessary to maintain compliance with franchise
agreements.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
We continually strive to improve customer service and strengthen community
relations and believe that success in these areas is critical to our business.
We rely upon Charter pursuant to the management services agreement to assist us
with customer service and community relations. We are also committed to
fostering strong community relations in the towns and cities we serve. We
support local charities and community causes in various ways. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate.
FRANCHISES
As of December 31, 2002, the Partnership operated three franchises, permits and
similar authorizations issued by local and state governmental authorities. Each
franchise is awarded by a governmental authority and is may not be transferable
unless the granting governmental authority consents. Most franchises are subject
to termination proceedings in the event of a material breach. In addition,
franchises can require us to pay the granting authority a franchise fee of up to
5% of gross revenues as defined by the franchise agreements, which is the
maximum amount that may be charged under the applicable law.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. The Cable Communications Policy Act
of 1984 (the "1984 Cable Act") provides for, among other things, an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld. If renewal is denied, the franchising authority may acquire ownership
of the system or effect a transfer of the system to another person. The operator
generally is entitled to the fair market value for the system covered by such
franchise, but no value may be attributed to the franchise itself. In addition,
the 1984 Cable Act, as amended by the 1992 Cable Act, establishes comprehensive
renewal procedures which require that an incumbent franchisee's renewal
application be assessed on its own merit and not as part of a comparative
process with competing applications. See "Regulation and Legislation." In
connection with the franchise renewal process, many governmental authorities
require the cable operator to make certain commitments, such as technological
upgrades to the system. Although historically we have been able to renew our
franchises without incurring significant costs, we cannot assure you that any
particular franchise will be renewed or that it can be renewed on commercially
favorable terms. Our failure to obtain renewals of our franchises, especially
those areas where we have the most customers, would have a material adverse
effect on our business, results of operations and financial condition.
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Under the 1996 Telecommunications Act ("1996 Telecom Act"), state and local
authorities are prohibited from limiting, restricting or conditioning the
provision of telecommunications services. They may, however, impose
"competitively neutral" requirements and manage the public rights-of-way.
Granting authorities may not require a cable operator to provide
telecommunications services or facilities, other than institutional networks, as
a condition of an initial franchise grant, a franchise renewal, or a franchise
transfer. The 1996 Telecom Act also limits franchise fees to an operator's
cable-related revenues and clarifies that they do not apply to revenues that a
cable operator derives from providing new telecommunications services.
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. The
franchise agreements typically contain many conditions, such as time limitations
on commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. The provisions of local franchise agreements are subject to
federal regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996
Telecom Act. See "Regulation and Legislation."
We believe our relations with the franchising authorities under which our system
is operated are generally good.
The following table groups the franchises of the Partnership's cable television
systems by date of expiration and presents the number of franchises for each
group of franchises and the approximate number and percentage of homes
subscribing to cable service for each group as of December 31, 2002:
NUMBER OF PERCENTAGE OF
NUMBER OF BASIC BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES CUSTOMERS CUSTOMERS
- ---------------------------- ---------- --------- ---------
Prior to 2003 2 1,500 93.8%
2003 - 2008 1 100 6.2%
--- ----- -----
Total 3 1,600 100.0%
=== ===== =====
As of December 31, 2002, franchise agreements have expired in two of the
Partnership's franchise areas where it serves 1,500 basic customers. The
Partnership continues to serve these customers while it is in negotiations to
transfer and renew the franchise agreements and continues to pay franchise fees
to the franchise authorities. The Partnership operates its cable television
system which serve multiple communities and, in some circumstances, portions of
the system extends into jurisdictions, such as unincorporated communities, for
which we believe no franchise is necessary. In certain instances, where a single
franchise comprises a large percentage of the customers in an operating region,
the loss of such franchise could decrease the economies of scale achieved by the
Partnership's clustering strategy. The Partnership has never had a franchise
revoked for any of its systems and believes that it has satisfactory
relationships with substantially all of its franchising authorities.
COMPETITION
We face competition in the areas of price, services, and service reliability. We
compete with other providers of television signals and other sources of home
entertainment. We operate in a very competitive business environment which can
adversely affect our business and operations.
Through business developments such as the merger of Comcast Corp. and AT&T
Broadband, the largest and third largest cable providers in the country and the
merger of America Online, Inc. (AOL) and Time Warner Inc., customers have come
to expect a variety of services from a single provider. While these mergers are
not expected to have a direct or immediate impact on our business, they
encourage providers of cable and telecommunications services to expand their
service offerings, as cable operators recognize the competitive benefits of a
large customer base and expanded financial resources.
8
Our key competitors include:
DBS. Direct broadcast satellite, known as DBS, is a significant competitor to
cable systems. The DBS industry has grown rapidly over the last several years,
far exceeding the growth rate of the cable television industry, and now serves
more than 19 million subscribers nationwide. DBS service allows the subscriber
to receive video and high-speed Internet access services directly via satellite
using a relatively small dish antenna, provided the customer enables two-way
communication through a separate telephone connection.
Video compression technology and high powered satellites allow DBS providers to
offer more than 200 digital channels from a single 32 transponder satellite,
thereby surpassing the typical analog cable system. In 2002, major DBS
competitors offered a greater variety of channel packages, and were especially
competitive at the lower end pricing. In addition, while we continue to believe
that the initial investment by a DBS customer exceeds that of a cable customer,
the initial equipment cost for DBS has decreased substantially, as the DBS
providers have aggressively marketed offers to new customers of incentives for
discounted or free equipment, installation and multiple units. DBS providers
have a national service and are able to establish a national image and branding
with standardized offerings, which together with their ability to avoid
franchise fees of up to 5% of revenues, leads to greater efficiencies and lower
costs in the lower tiers of service. However, we believe that some consumers
continue to prefer our stronger local presence in our markets.
DBS companies historically were prohibited from retransmitting popular local
broadcast programming. However, a change to the copyright laws in 1999
eliminated this legal impediment. As a result, DBS companies now may retransmit
such programming, once they have secured retransmission consent from the popular
broadcast stations they wish to carry, and honor mandatory carriage obligations
of less popular broadcast stations in the same television markets. In response
to the legislation, DirecTV, Inc. and EchoStar Communications Corporation have
begun carrying the major network stations in the nation's top television
markets. DBS, however, is limited in the local programming it can provide
because of the current capacity limitations of satellite technology, and the DBS
companies currently offer local broadcast programming only in the larger U.S.
markets.
Broadcast Television. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. Traditionally, cable television has provided a higher
picture quality and more channel offerings than broadcast television. However,
the recent licensing of digital spectrum by the Federal Communications
Commission will provide traditional broadcasters with the ability to deliver
high definition television pictures and multiple digital-quality program
streams, as well as advanced digital services such as subscription video and
data transmission.
Traditional Overbuilds. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that such
a franchise might contain terms and conditions more favorable than those
afforded us. In addition, entities willing to establish an open video system,
under which they offer unaffiliated programmers non-discriminatory access to a
portion of the system's cable system, may be able to avoid local franchising
requirements. Well-financed businesses from outside the cable industry, such as
public utilities that already possess fiber optic and other transmission lines
in the areas they serve, may over time become competitors. There are a number of
cities that have constructed their own cable systems, in a manner similar to
city-provided utility services. There also has been interest in traditional
overbuilds by private companies. Constructing a competing cable system is a
capital intensive process which involves a high degree of risk. We believe that
in order to be successful, a competitor's overbuild would need to be able to
serve the homes and businesses in the overbuilt area on a more cost-effective
basis than us. Any such overbuild operation would require either significant
access to capital or access to facilities already in place that are capable of
delivering cable television programming.
Telephone Companies and Utilities. The competitive environment has been
significantly affected by technological developments and regulatory changes
enacted under the 1996 Telecom Act, which was designed to enhance competition in
the cable television and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone companies into the
cable business. The 1996 Telecom Act modified this cross-ownership restriction,
making it possible for local exchange carriers, who have considerable resources,
to provide a wide variety of video services competitive with services offered by
cable systems.
9
Although telephone companies can lawfully enter the cable television business,
activity in this area is currently quite limited. We cannot predict the
likelihood of success of the broadband services offered by our competitors or
the impact on us of such competitive ventures. The entry of telephone companies
as direct competitors in the video marketplace may become more widespread and
could adversely affect the profitability and valuation of established cable
systems.
Additionally, we are subject to competition from utilities which possess fiber
optic transmission lines capable of transmitting signals with minimal signal
distortion.
Private Cable. Additional competition is posed by satellite master antenna
television systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDUs", such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes. Private
cable systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services that are offered by cable
systems. SMATV systems currently benefit from operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of our
current and potential competitors. The Federal Communications Commission ruled
in 1998 that private cable operators can lease video distribution capacity from
local telephone companies and distribute cable programming services over public
rights-of-way without obtaining a cable franchise. In 1999, both the Fifth and
Seventh Circuit Courts of Appeals upheld this Federal Communications Commission
policy.
Wireless Distribution. Cable television systems also compete with wireless
program distribution services such as multi-channel multipoint distribution
systems or "wireless cable," known as MMDS. MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. Both analog and
digital MMDS services require unobstructed "line of sight" transmission paths.
REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and legislation
affecting the cable industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations. The 1996 Telecom Act altered the regulatory structure governing the
nation's communications providers. It removed barriers to competition in both
the cable television market and the local telephone market. Among other things,
it reduced the scope of cable rate regulation and encouraged additional
competition in the video programming industry by allowing local telephone
companies to provide video programming in their own telephone service areas.
The 1996 Telecom Act required the Federal Communications Commission to undertake
a number of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations.
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate regulation
regime on the cable television industry, which limited the ability of cable
companies to increase subscriber fees. Under that regime, all cable systems were
subjected to rate regulation, unless they faced "effective competition" in their
local franchise area. Federal law defines "effective competition" on a
community-specific basis as requiring satisfaction of certain conditions. These
conditions are not typically satisfied in the current marketplace; hence, most
cable systems potentially are subject to rate regulation. However, with the
rapid growth of DBS, it is likely that additional cable systems will soon
qualify for "effective competition" and thereby avoid further rate regulation.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units, commonly referred to as local
franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable service--the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
10
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
For regulated cable systems, the basic service tier rate increases are governed
by a complicated price cap scheme devised by the Federal Communications
Commission that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for system upgrades. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost-of-service regulation is a traditional form of rate
regulation, under which a utility is allowed to recover its costs of providing
the regulated service, plus a reasonable profit.
Cable programming service tiers, which are the expanded basic programming
packages that offer services other than basic programming and which typically
contain satellite-delivered programming, were historically rate regulated by the
Federal Communications Commission. Under the 1996 Telecom Act, however, the
Federal Communications Commission's authority to regulate cable programming
service tier rates expired on March 31, 1999. The Federal Communications
Commission still adjudicates cable programming service tier complaints filed
prior to that date, but strictly limits its review, and possible refund orders,
to the time period prior to March 31, 1999. The elimination of cable programming
service tier regulation affords us substantially greater pricing flexibility,
subject to competitive factors and customer acceptance.
Premium cable services offered on a per-channel or per-program basis remain
unregulated under both the 1992 Cable Act and the 1996 Telecom Act. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis. The 1996 Telecom Act also relaxes
existing "uniform rate" requirements by specifying that uniform rate
requirements do not apply where the operator faces "effective competition," and
by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the Federal Communications
Commission.
Cable Entry into Telecommunications and Pole Attachment Rates. The 1996 Telecom
Act creates a more favorable environment for us to provide telecommunications
services beyond traditional video delivery. It provides that no state or local
laws or regulations may prohibit or have the effect of prohibiting any entity
from providing any interstate or intrastate telecommunications service. States
are authorized, however, to impose "competitively neutral" requirements
regarding universal service, public safety and welfare, service quality, and
consumer protection. State and local governments also retain their authority to
manage the public rights-of-way and may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The favorable pole attachment
rates afforded cable operators under federal law can be gradually increased by
utility companies owning the poles if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, and that approach ultimately was
upheld by the United States Supreme Court.
Cable entry into telecommunications will be affected by the rulings and
regulations implementing the 1996 Telecom Act, including the rules governing
interconnection. A cable operator offering telecommunications services generally
needs efficient interconnection with other telephone companies to provide a
viable service. A number of details designed to facilitate interconnection are
subject to ongoing regulatory and judicial review, but the basic obligation of
incumbent telephone companies to interconnect with competitors, such as cable
companies offering telephone service, is well established. Even so, the economic
viability of different interconnection arrangements can be greatly affected by
regulatory changes. Consequently, we cannot predict whether reasonable
interconnection terms will be available in any particular market we may choose
to enter.
Telephone Company Entry into Cable Television. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers
can now compete with cable operators both inside and outside their telephone
service areas with certain regulatory safeguards. Because of their resources,
local exchange carriers could be formidable competitors to traditional cable
operators. Various local exchange carriers already are providing video
programming services within their telephone service areas through a variety of
distribution methods.
11
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. Even then, the Federal Communications Commission revised
its open video system policy to leave franchising discretion to state and local
authorities. It is unclear what effect this ruling will have on the entities
pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of cable systems serving an overlapping
territory. Cable operator buyouts of overlapping local exchange carrier systems,
and joint ventures between cable operators and local exchange carriers in the
same market, also are prohibited. The 1996 Telecom Act provides a few limited
exceptions to this buyout prohibition, including a carefully circumscribed
"rural exemption." The 1996 Telecom Act also provides the Federal Communications
Commission with the limited authority to grant waivers of the buyout
prohibition.
Electric Utility Entry into Telecommunications/Cable Television. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act of 1935. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the Federal Communications
Commission for operating authority. Like telephone companies, electric utilities
have substantial resources at their disposal, and could be formidable
competitors to traditional cable systems. Several such utilities have been
granted broad authority by the Federal Communications Commission to engage in
activities which could include the provision of video programming.
Additional Ownership Restrictions. The 1996 Telecom Act eliminated a statutory
restriction on broadcast network/cable cross-ownership, but left in place
existing Federal Communications Commission regulations prohibiting local
cross-ownership between co-located television stations and cable systems. The
District of Columbia Circuit Court of Appeals subsequently struck down this
remaining broadcast/cable cross-ownership prohibition, and the Federal
Communications Commission has now eliminated the prohibition.
Pursuant to the 1992 Cable Act, the Federal Communications Commission adopted
rules precluding a cable system from devoting more than 40% of its activated
channel capacity to the carriage of affiliated national video program services.
Also pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules that preclude any cable operator from serving more than 30% of all
U.S. domestic multichannel video subscribers, including cable and direct
broadcast satellite subscribers. The D.C. Circuit Court of Appeals struck down
these vertical and horizontal ownership limits as unconstitutional, concluding
that the Federal Communications Commission had not adequately justified the
specific rules (i.e., the 40% and 30% figures) adopted. The Federal
Communications Commission is now considering replacement regulations.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage rule that allows local commercial
television broadcast stations to require a cable system to carry the station.
More popular stations, such as those affiliated with a national network,
typically elect retransmission consent which is the broadcast signal carriage
rule that allows local commercial television broadcast stations to negotiate for
payments for granting permission to the cable operator to carry the stations.
Must carry requests can dilute the appeal of a cable system's programming
offerings because a cable system with limited channel capacity may be required
to forego carriage of popular channels in favor of less popular broadcast
stations electing must carry. Retransmission consent demands may require
substantial payments or other concessions. Either option has a potentially
adverse effect on our business. The burden associated with must carry may
increase substantially if broadcasters proceed with planned conversion to
digital transmission and the Federal Communications Commission determines that
cable systems simultaneously must carry all analog and digital broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunication offerings. The Federal
Communications Commission tentatively decided against imposition of dual digital
and analog must carry in a January 2001 ruling. At the same time, however, it
initiated further fact-gathering which ultimately could lead to a
reconsideration of the tentative conclusion. The Federal Communications
Commission is also considering whether it should maintain its initial ruling
that, whenever a digital broadcast signal does become eligible for must carry, a
cable operator's obligation is limited to carriage of a
12
single digital video signal. If the Commission reverses itself, and cable
operators are required to carry ancillary digital feeds, the burden associated
with digital must carry could be significantly increased.
Access Channels. Local franchising authorities can include franchise provisions
requiring cable operators to set aside certain channels for public, educational
and governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. The Federal Communications Commission rejected a request
that unaffiliated Internet service providers be found eligible for commercial
leased access.
Access to Programming. To spur the development of independent cable programmers
and competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on the dealings between cable operators and cable programmers. Of
special significance from a competitive business position, the 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over new competitors and requires such programmers to sell their
satellite-delivered programming to other multichannel video distributors. This
provision limits the ability of vertically integrated cable programmers to offer
exclusive programming arrangements to cable companies. The Federal
Communications Commission recently extended this exclusivity prohibition to
October 2007. DBS providers have no similar restrictions on exclusive
programming contracts. Pursuant to the Satellite Home Viewer Improvement Act,
the Federal Communications Commission has adopted regulations governing
retransmission consent negotiations between broadcasters and all multichannel
video programming distributors, including cable and DBS.
Inside Wiring; Subscriber Access. In an order dating back to 1997 and largely
upheld in a 2003 reconsideration order, the Federal Communications Commission
established rules that require an incumbent cable operator upon expiration of a
multiple dwelling unit service contract to sell, abandon, or remove "home run"
wiring that was installed by the cable operator in a multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers who are willing to pay the building owner a higher fee, where such a
fee is permissible. In another proceeding, the Federal Communications Commission
has preempted restrictions on the deployment of private antennae on property
within the exclusive use of a condominium owner or tenant, such as balconies and
patios. This Federal Communications Commission ruling may limit the extent to
which we along with multiple dwelling unit owners may enforce certain aspects of
multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for us to provide service in multiple dwelling unit
complexes.
Other Communications Act Provisions and Regulations of the Federal
Communications Commission. In addition to the Communications Act provisions and
Federal Communications Commission regulations noted above, there are other
statutory provisions and regulations of the Federal Communications Commission
covering such areas as:
- subscriber privacy,
- programming practices, including, among other things,
(1) blackouts of programming offered by a distant broadcast signal
carried on a cable system which duplicates the programming for which
a local broadcast station has secured exclusive distribution rights,
(2) local sports blackouts,
(3) indecent programming,
(4) lottery programming,
(5) political programming,
(6) sponsorship identification,
(7) children's programming advertisements, and
(8) closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
13
- technical standards,
- equal employment opportunity,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The Federal Communications Commission (the FCC) ruled that cable customers must
be allowed to purchase set-top terminals from third parties and established a
multi-year phase-in during which security functions (which would remain in the
operator's exclusive control) would be unbundled from basic converter functions,
which could then be provided by third party vendors. The first phase
implementation date was July 1, 2000. As of January 1, 2005, cable operators
will be prohibited from placing in service new set-top terminals that integrate
security functions and basic converter navigation functions.
The FCC is currently conducting a rulemaking in which it is considering adopting
rules to help implement a recent agreement between major cable operators and
manufacturers of consumer electronics on "plug and play" digital televisions.
The proposed rules would require cable operators to provide "point of
deployment" security modules and support to customer-owned digital televisions
and similar devices already equipped with built-in set-top box functionality.
The rules would also permit the offering of digital programming with certain
copy controls built into the programming, subject to limitations on the use of
those copy controls. These proposed restrictions, if adopted as proposed, would
apply equally to cable operators and to other MVPDs, such as DBS.
Additional Regulatory Policies May Be Added in the Future. The Federal
Communications Commission has initiated an inquiry to determine whether the
cable industry's future provision of interactive services should be subject to
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the FCC's review of the AOL-Time Warner merger is yet
another expression of regulatory concern regarding control over cable capacity.
Copyright. Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool that varies depending on the size of the system,
the number of distant broadcast television signals carried, and the location of
the cable system, cable operators can obtain blanket permission to retransmit
copyrighted material included in broadcast signals. The possible modification or
elimination of this compulsory copyright license is the subject of continuing
legislative review and could adversely affect our ability to obtain desired
broadcast programming. We cannot predict the outcome of this legislative
activity. Copyright clearances for nonbroadcast programming services are
arranged through private negotiations.
Cable operators distribute locally originated programming and advertising that
use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
State and Local Regulation. Cable systems generally are operated pursuant to
nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, franchising fees, system construction and maintenance obligations,
system channel capacity, design and technical performance, customer service
standards, and indemnification protections. A number of states, including
Connecticut, subject cable systems to the jurisdiction of centralized state
governmental agencies, some of which impose regulation of a character similar to
that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming. Certain
states are considering the imposition of new broadly applied telecommunications
taxes.
14
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements as a condition for providing its consent.
Historically, most franchises have been renewed for and consents granted to
cable operators that have provided satisfactory services and have complied with
the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for certain "competitively
neutral" requirements and as necessary to manage the public rights-of-way. This
law should facilitate entry into competitive telecommunications services,
although certain jurisdictions still may attempt to impose rigorous entry
requirements. In addition, local franchising authorities may not require a cable
operator to provide any telecommunications service or facilities, other than
institutional networks under certain circumstances, as a condition of an initial
franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom
Act also provides that franchising fees are limited to an operator's
cable-related revenues and do not apply to revenues that a cable operator
derives from providing new telecommunications services. In a March 2002
decision, the Federal Communications Commission tentatively held that a cable
operator's provision of Internet access service should not subject the operator
to additional franchising requirements. That decision is currently under appeal
to federal court.
EMPLOYEES
The various personnel required to operate the Partnership's business operations
are employed by the Partnership, the Corporate General Partner, its subsidiary
corporation and Charter. As of December 31, 2002, we had three employees, the
cost of which is charged directly to the Partnership. The additional employment
costs incurred by the Corporate General Partner, its subsidiary corporation and
Charter are allocated and charged to the Partnership for reimbursement pursuant
to the Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") and the management agreement between the Partnership and Enstar
Cable Corporation (the "Management Agreement"). Other personnel required to
operate the Partnership's business operations are employed by affiliates of the
Corporate General Partner. The amounts of these reimbursable costs are set forth
in Item 11. "Executive Compensation."
ITEM 2. PROPERTIES
The Partnership owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices,
and owns or leases its service vehicles. The Partnership believes that its
properties, both owned and leased, are suitable and adequate for its business
operations. The Partnership 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
We are involved from time to time in routine legal matters and other claims
incidental to our business. We believe that the resolution of such matters will
not have a material adverse impact on our consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 2002, a proxy was filed with the SEC seeking to obtain approval of
the Limited Partners for the sale of the Partnership's remaining cable system
and the subsequent liquidation and dissolution of the Partnership. On March 14,
2003, the SEC review process was completed and proxy statements were mailed to
the holders of the limited partnership units. A majority vote was reached in
March 2003 although the consent solicitation period remains open until May 16,
2003.
15
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 858 as
of December 31, 2002. In addition to restrictions on the transferability of
units described in the Partnership Agreement, the transferability of units may
be affected by restrictions on resales imposed by federal or state law.
DISTRIBUTIONS
The amended Partnership Agreement generally provides that all cash
distributions, as defined, be allocated 1% to the General Partners and 99% to
the Limited Partners until the Limited Partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The Partnership Agreement also provides that all partnership profits, gains,
operational losses, and credits, all as defined, be allocated 1% to the General
Partners and 99% to the Limited Partners until the Limited Partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the Limited Partners have received cash flow equal to their
initial investments, the General Partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the Limited Partners have
received an annual simple interest return of at least 12% of their initial
investments less any distributions from previous system sales and cash
distributions from operations after Capital Payback. Thereafter, the respective
allocations will be made 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, gain
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.
We began making periodic cash distributions to Limited Partners from operations
during 1987 and distributed $498,800 ($12.50 per unit) in each of 2001 and 2000.
Distributions to Limited Partners totaled $10,976,800 ($275.11 per unit) for the
year ended December 31, 2002. The distributions in 2001 were primarily funded
from cash flow generated by Partnership operations, which consisted of cash flow
generated by the Partnership's cable systems and cash flow distributions
received by the Partnership from the Joint Venture. The 2002 distribution was
funded primarily by proceeds from the sale of the Partnership's cable systems
and distributions from the Joint Venture from the sale of its cable systems. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
Upon the completion of the sale of all of the remaining cable systems to
Telecommunications Management as discussed herein, the Partnership will be
liquidated and all remaining assets distributed to the Limited Partners and the
Corporate General Partner.
ITEM 6. SELECTED FINANCIAL DATA
The table below presents selected financial data of the Partnership and the
Joint Venture for the five years ended December 31, 2002. This data should be
read in conjunction with the Partnership's and Joint Venture's financial
statements included in Item 8. "Financial Statements and Supplementary Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.
16
I. THE PARTNERSHIP
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2002 (1) 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
OPERATIONS STATEMENT DATA
Revenues $ 1,209,200 $ 2,374,100 $ 2,485,800 $ 2,598,500 $ 2,649,700
Operating expenses (901,600) (1,577,300) (1,598,000) (1,660,700) (1,591,700)
Depreciation and amortization (160,300) (325,700) (371,300) (519,600) (532,000)
------------ ------------ ------------ ------------ ------------
Operating income 147,300 471,100 516,500 418,200 526,000
Interest income 52,100 49,200 86,200 34,300 28,000
Interest expense -- -- (13,400) (12,500) (13,000)
Gain on sale of assets 5,875,800 -- -- -- 200
Equity in net income of Joint Venture 2,361,200 194,500 223,000 237,200 207,100
Other expense -- (32,300) (30,700) -- --
------------ ------------ ------------ ------------ ------------
Net income $ 8,436,400 $ 682,500 $ 781,600 $ 677,200 $ 748,300
============ ============ ============ ============ ============
Distributions paid to partners $ 11,087,700 $ 503,800 $ 503,800 $ 503,800 $ 503,800
============ ============ ============ ============ ============
PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Net income $ 208.35 $ 16.93 $ 19.39 $ 16.80 $ 18.57
============ ============ ============ ============ ============
Distributions $ 275.11 $ 12.50 $ 12.50 $ 12.50 $ 12.50
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash from operating activities $ 601,700 $ 1,630,000 $ 921,300 $ 833,300 $ 754,000
Net cash from investing activities 10,385,200 319,600 (211,000) (95,500) (226,300)
Net cash from financing activities (11,087,700) (503,800) (503,800) (503,800) (503,800)
Capital expenditures $ 124,200 $ 279,300 $ 273,500 $ 128,200 $ 234,500
AS OF DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999 1998
----------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets $ 5,414,900 $ 4,467,100 $ 4,150,700 $ 4,048,200
General Partners' deficit (40,400) (42,200) (45,000) (46,800)
Limited Partners' capital $ 4,307,000 $ 4,130,100 $ 3,855,100 $ 3,683,500
AS OF
DECEMBER 31,
2002
-----------
NET ASSETS IN LIQUIDATION DATA
Total assets $3,112,600
Net assets in liquidation $1,591,600
- ----------
(1) Comparability of the above information from year to year is affected by
the disposition of the Partnership's cable systems in March and April
2002. This information excludes the effect of liquidation costs recorded
on December 31, 2002. See Note 2 to our financial statements included with
this Annual Report.
17
II. ENSTAR CABLE OF MACOUPIN COUNTY
PERIOD FROM
JANUARY 1,
2002 TO YEAR ENDED DECEMBER 31,
APRIL 10, --------------------------------------------------------------------
2002 (1) 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
OPERATIONS STATEMENT DATA
Revenues $ 526,000 $ 1,877,900 $ 1,979,600 $ 1,993,600 $ 2,003,000
Operating expenses (350,000) (1,135,100) (1,201,500) (1,113,700) (1,060,500)
Depreciation and amortization (86,600) (226,300) (222,900) (217,800) (344,500)
----------- ----------- ----------- ----------- -----------
Operating income 89,400 516,500 555,200 662,100 598,000
Interest income 2,200 82,400 116,600 49,500 23,300
Gain on sale of cable systems 6,918,500 -- -- -- --
Other expense -- (15,400) (2,800) -- --
----------- ----------- ----------- ----------- -----------
Net income $ 7,010,100 $ 583,500 $ 669,000 $ 711,600 $ 621,300
=========== =========== =========== =========== ===========
Distributions to venturers $ -- $ 1,800,000 $ 189,000 $ 105,000 $ 37,500
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash from operating activities $ 44,400 $ 1,364,500 $ 833,100 $ 737,700 $ 1,010,200
Net cash from investing activities 9,080,300 (899,800) (79,400) (232,700) (205,100)
Net cash from financing activities -- (1,800,000) (189,000) (105,000) (37,500)
Capital expenditures 1,800 898,600 77,400 196,400 170,900
AS OF DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998
---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets $3,219,100 $3,938,800 $3,538,900 $3,053,500
Venturers' capital $2,579,700 $3,796,200 $3,316,200 $2,709,600
AS OF
DECEMBER 31,
2002
--------
NET ASSETS IN LIQUIDATION DATA
Total assets $171,700
Net assets in liquidation $126,000
(1) Comparability of the above information from year to year is affected by
the disposition of the Macoupin Joint Venture's cable systems in and
around Macoupin, Illinois in April 2002. See Note 2 to the Macoupin Joint
Venture's financial statements included with this Annual Report.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This annual report includes certain forward-looking statements regarding, among
other things, our future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward-looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership, as discussed more fully elsewhere
in this Report.
We conduct our cable television business operations both (i) through the direct
ownership and operation of certain cable television systems and (ii) through our
participation as a partner with a one-third (1/3) interest in Enstar Cable of
Macoupin County. The Joint Venture is owned equally by us and two affiliated
partnerships (Enstar Income Program IV-1, L.P. and Enstar Income Program IV-2,
L.P.). We participate equally with our co-partners under the Joint Venture's
partnership agreement with respect to capital contributions, obligations and
commitments, and results of operations. Accordingly, in considering our
financial condition and results of operations, consideration must also be made
of those matters as they relate to the Joint Venture. The following discussion
reflects such consideration, and with respect to results of operations, a
separate discussion is provided for each entity.
The Partnership finalized its proposed plan of liquidation in December 2002 in
connection with the Partnership's filing of a proxy to obtain the approval of
the Limited Partners for the sale of the Partnership's final cable system and
the subsequent liquidation and dissolution of the Partnership. In March 2003,
the required number of votes necessary to implement the plan of liquidation were
obtained. As a result, the Partnership changed its basis of accounting to the
liquidation basis as of December 31, 2002. Upon changing to liquidation basis
accounting, the Partnership recorded $23,700 of accrued costs of liquidation in
accounts payable and accrued liabilities representing an estimate of the costs
to be incurred after the sale of the final cable system but prior to dissolution
of the Partnership. Because we are unable to develop reliable estimates of
future operating results or the ultimate realizable value of property, plant and
equipment due to the current uncertainties surrounding the final dissolution of
the Partnership, no adjustments have been recorded to reflect assets at
estimated realizable values or to reflect estimates of future operating results.
These adjustments will be recorded once a sale is imminent and the net sales
proceeds are reasonably estimable. Accordingly, the assets in the accompanying
statement of net assets in the liquidation of the Partnership as of December 31,
2002 have been stated at historical book values. Distributions ultimately made
to the partners upon liquidation will differ from the net assets in liquidation
recorded in the accompanying statement of net assets in liquidation as a result
of future operations, the sale proceeds ultimately received by the Partnership
and adjustments if any to estimated costs of liquidation. Distributions from the
Partnership were $11,087,700 during the year ended December 31, 2002.
CRITICAL ACCOUNTING ESTIMATES
Certain of our accounting policies require our management to make difficult,
subjective or complex judgments. We consider the following policies to be the
most critical in understanding the estimates, assumptions and judgments that are
involved in preparing our financial statements and the uncertainties that could
impact our results of operations, financial condition and cash flows:
- - Capitalization of labor and overhead costs;
- - Useful lives of property, plant and equipment; and
- - Impairment of property, plant and equipment.
Capitalization of labor and overhead costs. The cable industry is highly capital
intensive and a large portion of our resources is spent on capital activities
associated with extending, rebuilding, and upgrading our cable network. As of
December 31, 2002 and 2001, the net carrying amount of the Partnership's
property, plant and equipment (consisting primarily of cable network assets) was
$454,600 (representing 14.6% of total assets) and $1,720,200 (representing 31.8%
of total assets). Total capital expenditures for the years ended December 31,
2002, 2001 and 2000 were approximately $124,200, $279,300 and $273,500,
respectively. As of December 31, 2001, the net carrying amount of the Macoupin
Joint Venture's property, plant and equipment (consisting primarily of cable
network assets) was $2,198,500 (representing 68.3% of total assets). Total
capital expenditures for the years ended December 31, 2001 and 2000 were
approximately $898,600 and $77,400, respectively.
19
Costs associated with network construction, initial customer installations and
installation refurbishments are capitalized. Costs capitalized as part of
initial customer installations include materials, direct labor, and certain
indirect costs. These indirect costs are associated with the activities of
personnel who assist in connecting and activating the new service and consist of
compensation and overhead costs associated with these support functions. The
costs of disconnecting service at a customer's dwelling or reconnecting service
to a previously installed dwelling are charged to operating expense in the
period incurred. Costs for repairs and maintenance are charged to operating
expense as incurred, while equipment replacement and betterments, including
replacement of cable drops from the pole to the dwelling, are capitalized.
Direct labor costs directly associated with capital projects are capitalized. We
capitalize direct labor costs associated with personnel based upon the specific
time devoted to network construction and customer installation activities.
Capitalizable activities performed in connection with customer installations
include:
- - Scheduling a "truck roll" to the customer's dwelling for service
connection;
- - Verification of serviceability to the customer's dwelling (i.e.,
determining whether the customer's dwelling is capable of receiving
service by our cable network and/or receiving advanced or data services);
- - Customer premise activities performed by in-house field technicians and
third-party contractors in connection with customer installations,
installation of network equipment in connection with the installation of
expanded services and equipment replacement and betterment; and
- - Verifying the integrity of the customer's network connection by initiating
test signals downstream from the headend to the customer's digital set-top
terminal.
We capitalize direct labor costs associated with personnel based upon the
specific time devoted to network construction and installation activities. Some
judgment is involved in the determination of which labor tasks are attributable
to capitalizable activities. The Partnership capitalized internal direct labor
costs of $14,000, $35,500 and $22,000, for the years ended December 31, 2002,
2001 and 2000, respectively. The Joint Venture capitalized internal direct labor
costs of $6,200, $16,600 and $15,200, for the years ended December 31, 2002,
2001 and 2000, respectively.
Judgment is required to determine the extent to which indirect costs
("overhead") are incurred as a result of specific capital activities, and
therefore should be capitalized. We capitalize overhead based upon an estimate
of the portion of indirect costs that contribute to capitalizable activities
using an overhead rate applied to the amount of direct labor capitalized. We
have established the overhead rates based on an analysis of the nature of costs
incurred in support of capitalizable activities and a determination of the
portion of costs which is directly attributable to capitalizable activities. The
primary costs that are included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with capitalized direct
labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle costs, (iii) the
cost of dispatch personnel that directly assist with capitalizable installation
activities, and (iv) indirect costs directly attributable to capitalizable
activities.
While we believe our existing capitalization policies are appropriate, a
significant change in the nature or extent of our development activities could
affect the extent to which we capitalized direct labor or overhead in the
future. The Partnership capitalized overhead of $13,900, $31,900 and $19,900,
respectively, for the years ended December 31, 2002, 2001 and 2000. The Joint
Venture capitalized overhead of $6,100, $14,900 and $13,600, respectively, for
the years ended December 31, 2002, 2001 and 2000.
Useful lives of property, plant and equipment. In accordance with GAAP, we
evaluate the appropriateness of estimated useful lives assigned to our property,
plant and equipment, and revise such lives to the extent warranted by changing
facts and circumstances. Any change in the estimate of remaining lives would be
recorded prospectively as required by APB No. 20. While we believe our current
useful life estimates are reasonable, a significant change in assumptions about
the extent or timing of future asset retirements and replacements, or in our
upgrade program, could materially affect future depreciation expense.
The Partnership's depreciation expense related to property, plant and equipment
totaled $158,500, $286,300 and $274,300, representing approximately 14.9%, 15.0%
and 13.9% of operating expenses, for the years ended December 31, 2002, 2001 and
2000, respectively. The Joint Venture's depreciation expense related to
property, plant and equipment totaled $83,500, $214,200 and $210,800,
representing approximately 19.1%, 15.7% and 14.8% of operating expenses, for the
period ended April 10, 2002 and the years ended December 31, 2001 and 2000,
respectively. Depreciation is recorded using the straight-line method over
management's estimate of the estimated useful lives of the related assets as
follows:
20
Cable distribution systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of life of lease or useful life of asset
Impairment of property, plant and equipment. As discussed above, the net
carrying value of our property, plant and equipment is significant. We are
required under SFAS No. 144 to evaluate the recoverability of our property,
plant and equipment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such events or changes in
circumstances could include such factors as changes in technological advances,
fluctuations in the market value of such assets, adverse changes in
relationships with local franchise authorities, adverse changes in market
conditions or poor operating results. Under SFAS No. 144, a long-lived asset is
deemed impaired when the carrying amount of such asset exceeds the projected
undiscounted future cash flows associated with the asset.
RESULTS OF OPERATIONS
THE PARTNERSHIP
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
The Partnership finalized its proposed plan of liquidation in December 2002 in
connection with the filing of a proxy to obtain the approval of the Limited
Partners for the sale of the Partnership's final cable system and the subsequent
liquidation and dissolution of the Partnership. In March 2003, the required
number of votes necessary to implement the plan of liquidation were obtained. As
a result, the Partnership changed its basis of accounting to the liquidation
basis as of December 31, 2002. Upon changing to liquidation basis accounting,
the Partnership recorded $23,700 of accrued costs of liquidation representing an
estimate of the costs to be incurred after the sale of the final cable system
but prior to dissolution of the Partnership. Because we are unable to develop
reliable estimates of future operating results or the ultimate realizable value
of property, plant and equipment due to the current uncertainties surrounding
the final dissolution of the Partnership, no adjustments have been recorded to
reflect assets at estimated realizable values or to reflect estimates of future
operating results. These adjustments will be recorded once a sale is imminent
and the net sales proceeds are reasonably estimable. Accordingly, the assets in
the accompanying statement of net assets in liquidation of the Partnership as of
December 31, 2002 have been stated at historical book values. Distributions
ultimately made to the partners upon liquidation will differ from the net assets
in liquidation recorded in the accompanying statement of net assets in
liquidation as a result of future operations, the sale proceeds ultimately
received by the Partnership and adjustments if any to estimated costs of
liquidation. Distributions from the Partnership were $11,087,700 during the year
ended December 31, 2002.
Revenues decreased $1,164,900 from $2,374,100 to $1,209,200, or 49.1%, for the
year ended December 31, 2002 as compared to 2001. The decrease was due to a
decline in the number of basic and premium service customers coupled with the
sale of the Partnership's Illinois cable systems in April 2002. As of December
31, 2002 and 2001, we had approximately 1,600 and 4,900 basic service customers,
respectively, and 300 and 1,100 premium service customers, respectively.
Service costs decreased $353,500 from $825,900 to $472,400, or 42.8%, for the
year ended December 31, 2002 as compared to 2001. Service costs represent costs
directly attributable to providing cable services to customers. The decrease was
primarily due to the sale of the Partnership's Illinois cable systems in April
2002.
General and administrative expenses decreased $170,400 from $395,100 to
$224,700, or 43.1%, for the year ended December 31, 2002 as compared to 2001,
primarily due to the sale of the Partnership's Illinois cable systems in April
2002.
General partner management fees and reimbursed expenses decreased $151,800 from
$356,300 to $204,500, or 42.6%, for the year ended December 31, 2002 as compared
to 2001. These costs represent administrative costs reimbursed to Charter by the
Partnership based on Charter's actual costs incurred. The decrease was primarily
due to a decrease in management fees due to a decrease in revenues as a result
of the sale of the Partnership's Illinois cable systems in April 2002.
Depreciation and amortization expense decreased $165,400 from $325,700 to
$160,300, or 50.8%, for the year ended December 31, 2002 as compared to 2001,
due to the sale of the Partnership's Illinois cable systems in April
21
2002 and the impact of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Due to the factors described above, operating income decreased $323,800 from
$471,100 to $147,300, or by 68.7%, for the year ended December 31, 2002 as
compared to 2001.
Interest income, net of interest expense, increased $2,900 from $49,200 to
$52,100, or 5.9%, for the year ended December 31, 2002 as compared to 2001. The
increase was primarily due to higher average cash balances available for
investment in 2002 as a result of our capital expenditures and lower interest
rates.
We recognized a $5,875,800 gain in 2002 on the sale of the Partnership's
Illinois cable systems in the first half of the year.
Other expense of $32,300 for the years ended December 31, 2001 represents legal
and proxy costs associated with the proposed sales of our assets.
Due to the factors described above, net income increased $7,753,900 from
$682,500 to $8,436,400 for the year ended December 31, 2002 as compared to 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues decreased $111,700 from $2,485,800 to $2,374,100, or 4.5%, for the year
ended December 31, 2001 as compared to 2000. The decrease was due to a decline
in the number of basic and premium service customers. As of December 31, 2001
and 2000, we had approximately 4,900 and 5,300 basic service customers,
respectively, and 1,100 and 2,000 premium service customers, respectively.
Service costs decreased $7,600 from $833,500 to $825,900, or less than 1%, for
the year ended December 31, 2001 as compared to 2000. Service costs represent
costs directly attributable to providing cable services to customers. The
decrease was primarily due to decreases in personnel costs and certain costs
incurred by us prior to the Charter acquisition that are now incurred by Charter
and reimbursed by us, as described above.
General and administrative expenses decreased $23,000 from $418,100 to $395,100,
or 5.5%, for the year ended December 31, 2001 as compared to 2000, primarily due
to a decrease in professional fees.
General partner management fees and reimbursed expenses increased $9,900 from
$346,400 to $356,300, or 2.9%, for the year ended December 31, 2001 as compared
to 2000. The increase was primarily due to an increase in the level of such
services being provided and billed to us by Charter.
Depreciation and amortization expense decreased $45,600 from $371,300 to
$325,700, or 12.3%, for the year ended December 31, 2001 as compared to 2000,
due to the impact of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Due to the factors described above, operating income decreased $45,400 from
$516,500 to $471,100, or by 8.8%, for the year ended December 31, 2001 as
compared to 2000.
Interest income, net of interest expense, decreased $23,600 from $72,800 to
$49,200, or 32.4%, for the year ended December 31, 2001 as compared to 2000. The
decrease was primarily due to lower average cash balances available for
investment in 2001 as a result of our capital expenditures.
Other expense of $32,300 and $30,700 for the years ended December 31, 2001 and
2000, respectively, represent legal and proxy costs associated with the proposed
sales of our assets.
Due to the factors described above, net income decreased $99,100 from $781,600
to $682,500, or 12.7%, for the year ended December 31, 2001 as compared to 2000.
22
THE JOINT VENTURE
The Joint Venture had no results of operations for the period subsequent to
April 10, 2002 as a result of the sale of its cable systems as discussed in Note
2 to the accompanying financial statements of the Joint Venture. The Joint
Venture had net income of $7,010,100, of which $6,918,500 was the gain on sale
of cable systems. Accordingly, no discussion of operating results for the period
from January 1, 2002 to April 10, 2002 and the year ended December 31, 2001, has
been provided as such analysis is not meaningful.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The Joint Venture's revenues decreased $101,700 from $1,979,600 to $1,877,900,
or 5.1%, for the year ended December 31, 2001 as compared to 2000. The decrease
was due to a decline in basic and premium service customers. As of December 31,
2001 and 2000, the Joint Venture had approximately 3,900 and 4,500 basic
customers, respectively, and 1,100 and 1,300 premium service units,
respectively.
Service costs decreased $49,700 from $669,500 to $619,800, or 7.4%, for the year
ended December 31, 2001 as compared to 2000. Service costs represent costs
directly attributable to providing cable services to customers. The decrease was
primarily due to a decrease in personnel costs coupled with a decrease in
copyrights and franchise fees due to a decrease in revenues.
General and administrative expenses decreased $2,900 from $218,100 to $215,200,
or 1.3%, for the year ended December 31, 2001 as compared to 2000. The increase
was due to an increase in bad debt expense, an increase in costs associated with
customer billings and an increase in property and casualty insurance in 2001.
General partner management fees and reimbursed expenses decreased $13,800 from
$313,900 to $300,100, or 4.4%, for the year ended December 31, 2001 as compared
to 2000. General partner management fees decreased primarily due to a decrease
in administrative activities provided by Charter on the Joint Venture's behalf.
General partner management fees also decreased in direct relation to decreased
revenues as discussed above.
Depreciation and amortization expense increased $3,400 from $222,900 to
$226,300, or 1.5%, for the year ended December 31, 2001 as compared to 2000, due
to capital expenditures in 2000 and 2001.
Due to the factors described above, the Joint Venture's operating income
decreased $38,700 from $555,200 to $516,500, or 7.0%, for the year ended
December 31, 2001 as compared to 2000.
Interest income decreased $34,200 from $116,600 to $82,400, or 29.3%, for the
year ended December 31, 2001 compared to 2000. The decrease was primarily due to
lower average cash balances available for investment during the year.
Other expense increased $12,600 from $2,800 to $15,400 for the year ended
December 31, 2001 as compared to 2000. Other expense represents legal and proxy
costs associated with the proposed sales of the Joint Venture's assets.
Due to the factors described above, the Joint Venture's net income decreased
$85,500 from $669,000 to $583,500, or 12.8%, for the year ended December 31,
2001 as compared to 2000.
LIQUIDITY AND CAPITAL RESOURCES
THE PARTNERSHIP
We believe that cash generated by our continuing operations will be adequate to
fund any capital expenditures required by our franchise agreements and other
liquidity requirements in 2003 and beyond. In light of pending sale
transactions, we do not anticipate making significant additional upgrades to the
Fulton, Kentucky cable plant or headend electronics.
Operating activities provided $1,028,300 less cash during 2002 than in 2001.
Changes in accounts payable, accrued liabilities and due to/from affiliates
provided $625,500 less cash primarily due to differences in the timing of
payments. Changes in accounts receivable, prepaid expenses and other assets
provided $51,200 more cash in 2002 than in the prior year, due to differences in
the timing of receivable collections and the payment of prepaid expenses.
23
Operating activities provided $708,700 more cash during 2001 than in 2000.
Changes in accounts payable, accrued liabilities and due to/from affiliates
provided $730,500 more cash primarily due to differences in the timing of
payments. Changes in accounts receivable, prepaid expenses and other assets
provided $94,400 more cash in 2001 than in the prior year, due to differences in
the timing of receivable collections and the payment of prepaid expenses.
Investing activities provided $10,065,600 more cash in 2002 than in 2001. The
change was primarily due to a $155,100 decrease in capital expenditures and
proceeds from the sale of the Partnership's Illinois cable systems of
$7,330,300, offset by a $2,579,100 increase in distributions from the Joint
Venture.
Investing activities provided $530,600 more cash in 2001 than in 2000. The
change was primarily due to a $5,800 increase in capital expenditures and a $600
increase in cash used for intangible assets, offset by a $537,000 increase in
distributions from the Joint Venture.
We distributed $11,087,700, $503,800 and $503,800 for the years ended December
31, 2002, 2001 and 2000, respectively. However, there can be no assurances
regarding the level, timing, or continuation of future distributions.
The Macoupin Joint Venture distributed $9,537,300, $1,800,000 and $189,000
equally among its three partners in 2002, 2001 and 2000, respectively.
LIQUIDATION BASIS ACCOUNTING AND SALE OF CABLE SYSTEMS
Our Corporate General Partner continues to operate our cable television systems
during our divestiture transactions for the benefit of our unitholders.
On April 10, 2002, pursuant to an asset purchase agreement dated August 29,
2001, the Partnership completed the sale of all of the Partnership's Illinois
cable television systems in and around Fairfield and Shelbyville, Illinois for a
total sale price of approximately $7,333,300 and, together with its affiliates,
Enstar IV-1 and Enstar IV-2, the sale of the Joint Venture for a total sale
price of approximately $9,076,800, the Partnership's one-third share of which is
approximately $3,025,600, to Charter Communications Entertainment I, LLC
("CCE-1"), an affiliate of the Corporate General Partner and an indirect
subsidiary of Charter (the "Charter Sale"). The Charter Sale is part of a larger
transaction in which the Partnership and five other affiliated partnerships
(which, together with the Partnership are collectively referred to as the
"Charter Selling Partnerships") sold all of their assets used in the operation
of their respective Illinois cable television systems to CCE-1 and two of its
affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash
sale price of $63,000,000. Each Charter Selling Partnership received the same
value per customer. In addition, the Limited Partners of each of the Charter
Selling Partnerships approved an amendment to their respective partnership
agreement to allow the sale of assets to an affiliate of such partnership's
General Partner. The Purchasers are each indirect subsidiaries of the Corporate
General Partner's ultimate parent company, Charter, and therefore, are
affiliates of the Partnership and each of the other Charter Selling
Partnerships.
The Charter Sale resulted from a sale process actively pursued since 1999, when
the Corporate General Partner sought purchasers for all of the cable television
systems of the Selling Partnerships, as well as eight other affiliated limited
partnership cable operators of which the Corporate General Partner is also the
general partner. This effort was undertaken primarily because, based on the
Corporate General Partner's experience in the cable television industry, it was
concluded that generally applicable market conditions and competitive factors
were making (and would increasingly make) it extremely difficult for smaller
operators of rural cable systems (such as the Partnership and the other
affiliated partnerships) to effectively compete and be financially successful.
This determination was based on the anticipated cost of electronics and
additional equipment to enable the Partnership's and the Joint Venture's systems
to operate on a two-way basis with improved technical capacity, insufficiency of
the Partnership's and Joint Venture's cash reserves and cash flows from
operations to finance such expenditures, limited customer growth potential due
to the Partnership's and Joint Venture's systems' rural location, and a general
inability of a small cable system operator such as the Partnership to benefit
from economies of scale and the ability to combine and integrate systems that
large cable operators have. Although limited plant upgrades have been made, the
Corporate General Partner projected that if the Partnership and Joint Venture
made the comprehensive additional upgrades deemed necessary to enable enhanced
and competitive services, particularly activation of two-way capability, the
Partnership and Joint Venture would not recoup the costs or regain its ability
to operate profitably within the remaining term of its franchises, and as a
result, making these upgrades would not be economically prudent.
24
As a result of the above transaction, the Joint Venture changed its basis of
accounting to the liquidation basis on April 10, 2002. Accordingly, the assets
in the accompanying statement of net assets in liquidation as of December 31,
2002 have been stated at estimated realizable values and the liabilities have
been reflected at estimated settlement amounts. There were no significant
adjustments recorded upon changing to liquidation basis accounting. Net assets
in liquidation as of December 31, 2002 represent the estimated distribution to
the joint venturers In January 2003, all remaining assets of the Joint Venture
were distributed including a final distribution of $126,000 made to the joint
venturers, of which the Partnership's portion is $42,000.
After setting aside $1,400,000 to fund the Fulton, Kentucky headend's working
capital needs and paying or providing for the payment of the expenses of the
Charter Sale, the Corporate General Partner made distributions from the Joint
Venture to the Partnership of their allocable share of the remaining net sale
proceeds, in accordance with its partnership agreement. The Partnership made an
initial distribution on or about May 15, 2002, with a second distribution made
on or about September 24, 2002 from the Charter Sale. Distributions from the
Joint Venture were $9,537,300 during the year ended December 31, 2002.
On November 8, 2002, the Partnership entered into an asset purchase agreement
providing for the sale of its remaining cable system to Telecommunications
Management, LLC (Telecommunications Management) for a total sale price of
approximately $1,344,000 (approximately $825 per customer acquired). This sale
is a part of a larger transaction in which the Partnership and eight other
affiliated partnerships (which, together with the Partnership are collectively
referred to as the "Telecommunications Management Selling Partnerships") would
sell all of their remaining assets used in the operation of their respective
cable systems to Telecommunications Management for a total cash sale price of
approximately $15,341,600 (the Telecommunications Management Sale). The
Telecommunications Management Sale is subject to the approval of a majority of
the holders of the Partnership's units and approval of the holders of the other
Telecommunications Management Selling Partnerships. In addition, the transaction
is subject to certain closing conditions, including regulatory and franchise
approvals. In March 2003, a majority of the Limited Partners approved the
Telecommunications Management Sale and a plan of liquidation.
On February 6, 2003, the Partnership entered into a side letter amending the
asset purchase agreement providing for the sale of its remaining cable systems
to Telecommunications Management. The February 6, 2003 side letter amends the
asset purchase agreement and Deposit Escrow Agreement to extend the date of the
second installment of the deposit and the Outside Closing Date each by 60 days.
On April 7, 2003, the second installment of the escrow deposit was due and was
not received. We are currently evaluating our alternatives with respect to this
new development.
The Partnership finalized its proposed plan of liquidation in December 2002 in
connection with the filing of a proxy to obtain the approval of the Limited
Partners for the sale of the Partnership's final cable system and the subsequent
liquidation and dissolution of the Partnership. In March 2003, the required
number of votes necessary to implement the plan of liquidation were obtained. As
a result, the Partnership changed its basis of accounting to the liquidation
basis as of December 31, 2002. Upon changing to liquidation basis accounting,
the Partnership recorded $23,700 of accrued costs of liquidation in accounts
payable and accrued liabilities representing an estimate of the costs to be
incurred after the sale of the final cable system but prior to dissolution of
the Partnership. Because we are unable to develop reliable estimates of future
operating results or the ultimate realizable value of property, plant and
equipment due to the current uncertainties surrounding the final dissolution of
the Partnership, no adjustments have been recorded to reflect assets at
estimated realizable values or to reflect estimates of future operating results.
These adjustments will be recorded once a sale is imminent and the net sales
proceeds are reasonably estimable. Accordingly, the assets in the accompanying
statement of net assets in liquidation of the Partnership as of December 31,
2002 have been stated at historical book values. Distributions ultimately made
to the partners upon liquidation will differ from the net assets in liquidation
recorded in the accompanying statement of net assets in liquidation as a result
of future operations, the sale proceeds ultimately received by the Partnership
and adjustments if any to estimated costs of liquidation. Distributions from the
Partnership were $11,087,700 during the year ended December 31, 2002.
The Corporate General Partner's intention is to settle the outstanding
obligations of the Partnership and terminate the Partnership as expeditiously as
possible. Final dissolution of the Partnership and related cash distributions to
the partners will occur upon obtaining final resolution of all liquidation
issues.
25
INVESTING ACTIVITIES
Significant capital would be required for a comprehensive plant and headend
upgrade particularly in light of the high cost of electronics to enable two-way
service, to offer high speed cable modem Internet service and other interactive
services, as well as to increase channel capacity and allow a greater variety of
video services.
The estimated cost of upgrading our system to two-way capability in order to be
able to offer high-speed Internet service from the Fulton, Kentucky headend, as
well as to increase channel capacity and allow additional video services, would
be approximately $1.5 million (for an upgrade to 550 megahertz (MHz) capacity)
to $1.8 million (for an upgrade to 870 MHz capacity). Given pending sale
transactions, the high cost of this comprehensive upgrade plan, the limited
funds available, and the belief that such a plan is not economically prudent,
the Corporate General Partner does not presently anticipate that it will proceed
with a comprehensive upgrade plan. The Corporate General Partner has continued
to maintain compliance with franchise agreements and be economically prudent.
FINANCING ACTIVITIES
We were party to a loan agreement with Enstar Finance Company, LLC, a subsidiary
Enstar Communication Corporation. The loan agreement provided for a revolving
loan facility of $2,000,000 and matured on August 31, 2001. The loan facility
was not extended or replaced. Cash generated by our operations together with
available cash balances will be used to fund any capital expenditures as
required by franchise authorities. However, our present cash reserves will be
insufficient to fund a comprehensive upgrade program. If our system is sold, we
will need to rely on increased cash flow from operations or new sources of
financing in order to meet our future liquidity requirements. There can be no
assurance that such cash flow increases can be attained, or that additional
future financing will be available on terms acceptable to us. If we are not able
to attain such cash flow increases, or obtain new sources of borrowings, we will
not be able to fully complete any cable systems upgrades as required by
franchise authorities. As a result, the value of our systems would be lower than
that of systems rebuilt to a higher technical standard.
We believe it is critical to conserve cash to fund our future liquidity
requirements and any anticipated capital expenditures as required by franchise
authorities. Accordingly, we do not anticipate distributions to partners at this
time, other than those resulting from the pending sales transactions.
CERTAIN TRENDS AND UNCERTAINTIES
Insurance coverage is maintained for all of the cable television properties
owned or managed by Charter to cover damage to cable distribution systems,
customer connections and against business interruptions resulting from such
damage. This coverage is subject to a significant annual deductible which
applies to all of the cable television properties owned or managed by Charter,
including us.
Charter and our Corporate General Partner have had communications and
correspondence with representatives of certain limited partners, and others,
concerning certain Enstar partnerships of which our Corporate General Partner is
also the Corporate General Partner. While we are not aware of any formal
litigation which has been filed relating to the communications and
correspondence, or the subject matter referred to therein, it is impossible to
predict what actions may be taken in the future or what loss contingencies may
result therefrom.
It is difficult to assess the impact the general economic slowdown will have on
future operations. This could result in reduced spending by customers and
advertisers, which could reduce the Partnership's revenues and operating cash
flow, as well as the collectibility of accounts receivable.
As disclosed in Charter Communications, Inc.'s Annual Report on Form 10-K, the
parent of our Corporate General Partner and our Manager is the defendant in
twenty-two class action and shareholder lawsuits and is the subject of a grand
jury investigation being conducted by the United States Attorney's Office for
the Eastern District of Missouri and an SEC investigation. Charter is unable to
predict the outcome of these lawsuits and government investigations. An
unfavorable outcome of these matters could have a material adverse effect on
Charter's results of operations and financial condition which could in turn have
a material adverse effect on us.
INFLATION
Certain of our expenses, such as those for wages and benefits, equipment repair
and replacement, and billing and
26
marketing generally increase with inflation. However, we do not believe that our
financial results have been, or will be, adversely affected by inflation in a
material manner, provided that we are able to increase our service prices
periodically, of which there can be no assurance. See "Regulation and
Legislation."
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Partnership adopted SFAS No.
143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material
impact on the Partnership's financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the
rescission of several previously issued accounting standards, new accounting
guidance for the accounting for certain lease modifications and various
technical corrections that are not substantive in nature to existing
pronouncements. SFAS No. 145 will be adopted by the Partnership beginning
January 1, 2003, except for the provisions relating to the amendment of SFAS
No. 13, which will be adopted for transactions occurring subsequent to May
15, 2002. Adoption of SFAS No. 145 did not have a material impact on the
financial statements of the Partnership.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. SFAS No. 146 will be adopted by the Partnership
for exit or disposal activities that are initiated after December 31, 2002.
Adoption of SFAS No. 146 will not have a material impact on the financial
statements of the Partnership.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, it amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used on reported results. Adoption of SFAS No. 148 did not have a material
impact on the financial statements of the Partnership.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to material market risks associated with financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the financial statements and related financial information required
to be filed hereunder is located on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported in our Current Report on Form 8-K, dated June 14, 2002.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Corporate General Partner of the Partnership may be considered for certain
purposes, the functional equivalent of directors and executive officers. The
Corporate General Partner is ECC.
The directors and executive officers of the Corporate General Partner as of
March 15, 2003, all of whom have their principal employment in a comparable
position with Charter, are named below:
NAME POSITION
---- --------
Carl E. Vogel President and Chief Executive Officer
Margaret A. Bellville Executive Vice President and Chief Operating Officer
Steven A. Schumm Director of the Corporate General Partner, Executive Vice President, Chief
Administrative Officer and interim Chief Financial Officer
Steven E. Silva Executive Vice President - Corporate Development and Chief Technology Officer
Curtis S. Shaw Senior Vice President, General Counsel and Secretary
Paul E. Martin Senior Vice President, Corporate Controller and Principal Financial Officer
Partnership Matters
Except for executive officers who joined Charter after November 1999, all
executive officers were appointed to their position with the Corporate General
Partner following Charter's acquisition of control of the Corporate General
Partner in November 1999, have been employees of Charter since November 1999,
and prior to November 1999, were employees of Charter Investment, Inc., an
affiliate of Charter and the Corporate General Partner.
Carl E. Vogel, 45, President and Chief Executive Officer. Mr. Vogel has more
than 20 years of experience in telecommunications and the subscription
television business. Prior to joining Charter in October 2001, he was a Senior
Vice President of Liberty Media Corp., from November 1999 to October 2001, and
Chief Executive Officer of Liberty Satellite and Technology, from April 2000 to
October 2000. Prior to joining Liberty, Mr. Vogel was an Executive Vice
President and Chief Operating Officer of Field Operations for AT&T Broadband and
Internet Services, with responsibility of managing operations of all of AT&T's
cable broadband properties, from June 1999 to November 1999. From June 1998 to
June 1999, Mr. Vogel served as Chief Executive Officer of Primestar, Inc., a
national provider of subscription television services, and from 1997 to 1998, he
served as Chief Executive Officer of Star Choice Communications. From 1994
through 1997, Mr. Vogel served as the President and Chief Operating Officer of
EchoStar Communications. He began his career at Jones Intercable in 1983. Mr.
Vogel serves as a director of OnCommand Corporation, and holds a B.S. degree in
finance and accounting from St. Norbert College.
Margaret A. Bellville, 49, Executive Vice President and Chief Operating Officer.
Before joining Charter in December 2002, Ms. Bellville was President and CEO of
Incanta Inc., a technology-based streaming content company, from 2001 to 2002.
Incanta Inc. filed for bankruptcy in April 2002. From 1995 to 2001, Ms Bellville
worked for Cox Communications, the nation's fourth-largest cable television
company. She joined Cox in 1995 as Vice President of Operations and advanced to
Executive Vice President of Operations. Ms. Bellville joined Cox from Century
Communications, where she served as Senior Vice President of the company's
southwest division. Before that, Ms. Bellville served seven years with GTE
Wireless in a variety of management and executive-level roles. A graduate of the
State University of New York in Binghamton, Ms. Bellville is also a graduate of
Harvard Business School's Advanced Management Program. She currently serves on
the Dan O'Brien Youth Foundation Board, the Public Affairs committee for the
NCTA, the CTAM Board of Directors, and is a trustee and secretary for the
industry association Women in Cable and Telecommunications. Ms. Bellville is an
inaugural fellow of the Betsy Magness Leadership Institute and has been named
"Woman of the Year" by Women in Cable and Telecommunications in California.
Steven A. Schumm, 50, Director of the Corporate General Partner, Executive Vice
President, Chief Administrative Officer and interim Chief Financial Officer.
Prior to joining Charter Investment in 1998, Mr. Schumm was a partner with Ernst
& Young LLP where he worked for 24 years in a variety of professional service
and management roles. At the time he joined Charter, Mr. Schumm was Managing
Partner of the St. Louis office of Ernst & Young LLP and a member of the firm's
National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis
University.
Steven E. Silva, 43, Executive Vice President - Corporate Development and Chief
Technology Officer. Mr. Silva
28
joined Charter Investment in 1995. Prior to his promotion to Executive Vice
President and Chief Technology Officer in October 2001, he was Senior Vice
President - Corporate Development and Technology since September 1999. Mr. Silva
previously served in various management positions at U.S. Computer Services,
Inc., a billing service provider specializing in the cable industry. He is a
member of the board of directors of TV Gateway, LLC.
Curtis S. Shaw, 54, Senior Vice President, General Counsel and Secretary. From
1988 until he joined Charter Investment in 1997, Mr. Shaw served as corporate
counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a corporate lawyer,
specializing in mergers and acquisitions, joint ventures, public offerings,
financings, and federal securities and antitrust law. Mr. Shaw received a B.A.
degree from Trinity College and a J.D. degree from Columbia University School of
Law.
Paul E. Martin, 42, Senior Vice President, Corporate Controller and Principal
Financial Officer for Partnership Matters. Mr. Martin joined Charter as Vice
President and Corporate Controller since March 2000, and became Principal
Financial Officer for Partnership Matters in July 2001 and Senior Vice President
in April 2002. Prior to joining Charter in March 2000, Mr. Martin was Vice
President and Controller for Operations and Logistics for Fort James
Corporation, a manufacturer of paper products. From 1995 to February 1999, Mr.
Martin was Chief Financial Officer of Rawlings Sporting Goods Company, Inc. Mr.
Martin received a B.S. degree in accounting from the University of Missouri -
St. Louis.
The sole director of the Corporate General Partner is elected to a one-year term
at the annual shareholder meeting to serve until the next annual shareholder
meeting and thereafter until his respective successor is elected and qualified.
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 and Joint Venture have management agreements (the "Management
Agreement") with Enstar Cable Corporation ("Enstar Cable"), a wholly owned
subsidiary of the Corporate General Partner, pursuant to which Enstar Cable
manages the Partnership's and Joint Venture's systems and provides all
operational support for the activities of the Partnership and the Joint Venture.
For these services, Enstar Cable receives a management fee of 5% of the
Partnership's gross revenues and 4% of the Joint Venture's gross revenues,
excluding revenues from the sale of cable television systems or franchises,
which is calculated and paid monthly. The Joint Venture also is required to
distribute 1% of its gross revenues to the Corporate General Partner for its
interest as the Corporate General Partner of the Partnership. In addition, the
Partnership and Joint Venture reimburse Enstar Cable for certain operating
expenses incurred by Enstar Cable in the daily operation of their cable systems.
The Management Agreement also requires the Partnership and Joint Venture to
indemnify Enstar Cable (including its officers, employees, agents and
shareholders) against loss or expense, absent negligence or deliberate breach by
Enstar Cable of the Management Agreements. The Management Agreements are
terminable by the Partnership upon 60 days written notice to Enstar Cable.
Enstar Cable had, prior to November 12, 1999, engaged Falcon Communications,
L.P. ("Falcon") to provide management services for the Partnership and Joint
Venture and paid Falcon a portion of the management fees it received in
consideration of such services and reimbursed Falcon for expenses incurred by
Falcon on its behalf. Subsequent to November 12, 1999, Charter has provided such
services and received such payments. Additionally, the Joint Venture received
system operating management services from affiliates of Enstar Cable in lieu of
directly employing personnel to perform those services. The Joint Venture
reimburses the affiliates for its allocable share of their operating costs. The
Corporate General Partner also performs supervisory and administrative services
for the Partnership, for which it is reimbursed.
For the fiscal year ended December 31, 2002, Enstar Cable charged the
Partnership management fees of approximately $60,500. For the period from
January 1, 2002 to April 10, 2002, Enstar Cable charged the Joint Venture
management fees of approximately $21,000. In addition, the Joint Venture paid
the Corporate General Partner approximately $5,300 relative to its 1% special
interest. The Partnership and Joint Venture also reimbursed Enstar Cable,
Charter and its affiliates approximately $144,000 and $63,900, respectively, for
system operating management services and direct expenses. In addition,
programming services are purchased through Charter. The Partnership and Joint
Venture are charged approximately $277,200 and $119,500 for these programming
services for fiscal year 2002 and for the period from January 1, 2002 to April
10, 2002, respectively.
Charter as manager of the Corporate General Partner has adopted a code of
conduct which covers all employees, including all executive officers, and
includes conflict of interest provisions and standards for honest and ethical
conduct, a copy of which is attached as Exhibit 14.1 to this Annual Report.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2002, the following group of unitholders beneficially owned,
in the aggregate, 5% or more of the total outstanding units. As of the date
hereof, there is no other person known by the Partnership to own beneficially,
or that may be deemed to own beneficially, more than 5% of the units.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------
NAME AND ADDRESS OF BENEFICIAL SOLE VOTING AND SHARED VOTING AND PERCENT OF
OWNER AND ADDRESS DISPOSITIVE POWER DISPOSITIVE POWER CLASS
----------------- ----------------- ----------------- -----
Everest Cable Investors, LLC
199 S Los Robles Avenue Ste 440 0 5.7
Pasadena, CA 91101 2,285 (1)
Stephen Feinberg
450 Park Avenue, 28th Floor 0 5.7
New York, NY 10022 2,285 (2)
W. Robert Kohorst
199 S Los Robles Avenue Ste 440 0 5.7
Pasadena, CA 91101 2,285 (3)
Eric J. Branfman
3640 Appleton Street NW 0 7.1
Washington, DC 20008 2,285 (4)
(1) Amount and percent of beneficial ownership listed are based on information
received from the Partnership's transfer agent, Gemisys Financial
Services. A Schedule 13G filed February 14, 2000 also reflect this
ownership interest.
(2) Based on a Schedule 13G filed February 14, 2000. Mr. Feinberg is the
co-president of Blackacre Capital Management Corp., which is the general
partner of Blackacre Capital Group, L.P., which is the managing member of
Blackacre Everest, LLC, which is the first of the three managing members
of Everest. Mr. Feinberg possesses the sole power to determine the consent
of Blackacre Everest, LLC. Mr. Feinberg also shares the power to determine
the consent of Everest Partner, LLC, the second of the three Everest
managing member, with Mr. Kohorst. Mr. Feinberg does not directly own any
Units.
(3) Based on a Schedule 13G filed February 14, 2000. Mr. Kohorst is the
Manager of Everest Properties II, LLC, the third managing member of
Everest. He possesses the sole power to determine the consent of Everest
Properties II, LLC and, as stated above, also shares the power to
determine the consent of Everest Partner, LLC with Mr. Feinberg. Mr.
Kohorst does not directly own any Units.
(4) Amount and percent of beneficial ownership listed is based on information
received from Enstar IV-3's transfer agent, Gemisys Financial Services. A
Schedule 13G filed by Mr. Branfman on June 26, 2002 shows beneficial
ownership of 2,221 units, or 5.6%
The Corporate General Partner is a wholly-owned subsidiary of Charter
Communications Holding Company, LLC. As of December 31, 2002, the common
membership units of Charter Communications Holding Company, LLC are owned 46.5%
by Charter, 18.4% by Vulcan Cable III Inc., and 35.1% by Charter Investment,
Inc. (assuming conversion of all convertible securities). Charter controls 100%
of the voting power of Charter Communications Holding Company LLC. Paul G. Allen
owns approximately 7.1% of the outstanding capital stock of Charter and controls
approximately 92.9% of the voting power of Charter's common stock, and he is the
sole equity owner of Charter Investment, Inc. and Vulcan Cable III Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES
On November 12, 1999, Charter acquired ownership of Enstar Communications
Corporation ("ECC") from Falcon Holding Group, L.P. and assumed the management
services operations previously provided by affiliates Falcon Communications,
L.P. Charter now manages the operations of the partnerships of which ECC is the
Corporate General Partner, including the Partnership. Commencing November 13,
1999, Charter began receiving management fees and reimbursed expenses which had
previously been paid by the Corporate General Partner to Falcon
30
Communications, L.P.
Pursuant to a Management Agreement dated November 26, 1985 between the
Partnership and Enstar Cable Corporation, a subsidiary of the Corporate General
Partner, Enstar Cable Corporation provides financial, management, supervisory
and marketing services, as necessary to the Partnership's operations. This
Management Agreement provides that the Partnership shall pay management fees
equal to 5% of the Partnership's gross receipts from customers. In addition,
Enstar Cable is to be reimbursed for amounts paid to third parties, the cost of
administrative services in an amount equal to the lower of actual cost or the
amount the Partnership would be required to pay to independent parties for
comparable administrative services, salaries and benefits of employees necessary
for day-to-day operation of the Partnership's systems, and an allocable shares
of costs associated with facilities required to manage the Partnership's
systems. To provide these management services, Enstar Cable Corporation has
engaged Charter Communications Holding Company, an affiliate of the Corporate
General Partner and Charter, to provide management, consulting, programming and
billing services for the Partnership.
Since November 12, 1999, when Charter acquired control of the Corporate General
Partner and its subsidiary, Enstar Cable Corporation, as well as Falcon
Communications, L.P., the management fees payable have been limited to
reimbursement of an allocable share of Charter's management costs, which is less
than the fee permitted by the existing agreement. As of December 31, 2002,
accrued and unpaid management fees to Charter Communications Holding Company
LLC. from the Joint Venture were $144,500. As of December 31, 2002, accrued and
unpaid management fees to Charter Communications Holding Company LLC. from the
Partnership were $209,500. In addition, the Partnership was charged directly for
the salaries and benefits of employees for daily operations, and where shared by
other Charter systems, an allocable share of facilities costs, with programming
and billing being charged to the Partnership at Charter's actual cost. For the
year ended December 31, 2002 and for the period from January 1, 2002 to April
10, 2002, service costs directly attributable to providing cable services to
customers which were incurred by Charter and reimbursed by the Partnership and
Joint Venture were $277,200 and $119,500, respectively.
CONFLICTS OF INTEREST
The Partnership relies upon the Corporate General Partner and certain of its
affiliates to provide general management services, system operating services,
supervisory and administrative services and programming. See Item 11. "Executive
Compensation" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The executive officers of the Corporate
General Partner have their personal employment with Charter, and, as a result,
are involved in the management of other cable ventures. Charter expects to
continue to enter into other cable ventures. These affiliations subject Charter
and the Corporate General Partner and their management to conflicts of interest.
These conflicts of interest relate to the time and services that management will
devote to the Partnership's affairs.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a fiduciary and
consequently must exercise good faith and integrity in handling partnership
affairs. Where the question has arisen, some courts have held that a limited
partner may institute legal action on his own behalf and on behalf of all other
similarly situated limited partners (a class action) to recover damages for a
breach of fiduciary duty by a general partner, or on behalf of the Partnership
(a partnership derivative action) to recover damages from third parties. Section
14-9-1001 of the Georgia Revised Uniform Limited Partnership Act also allows a
partner to maintain a partnership derivative action if general partners with
authority to do so have refused to bring the action or if an effort to cause
those general partners to bring the action is not likely to succeed. Some cases
decided by federal courts have recognized the right of a limited partner to
bring such actions under the Securities and Exchange Commission's Rule 10b-5 for
recovery of damages resulting from a breach of fiduciary duty by a general
partner involving fraud, deception or manipulation in connection with the
limited partner's purchase or sale of partnership units.
The Partnership Agreement provides that the General Partners will be indemnified
by the Partnership for acts performed within the scope of their authority under
the Partnership Agreement if the General Partners (i) acted in good faith and in
a manner that it reasonably believed to be in, or not opposed to, the best
interests of the Partnership and the partners, and (ii) had no reasonable
grounds to believe that their conduct was negligent. In addition, the
Partnership Agreement provides that the General Partners will not be liable to
the Partnership or its Limited Partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, Limited Partners
will have a more limited right of action than they would have absent such
provisions. In addition, the Partnership maintains, at its expense and in such
reasonable amounts as the Corporate General Partner shall
31
determine, a liability insurance policy which insures the Corporate General
Partner, Charter and its affiliates, officers and directors and persons
determined by the Corporate General Partner, against liabilities which they may
incur with respect to claims made against them for wrongful or allegedly
wrongful acts, including certain errors, misstatements, misleading statements,
omissions, neglect or breaches of duty.
32
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the 90 days prior
to the date of this report, our Corporate General Partner carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Administrative Officer and Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our Chief
Administrative Officer and Principal Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that
information that is required to be disclosed by the Partnership in reports
that it files in its periodic SEC reports is recorded, processed,
summarized and reported within the terms specified in the SEC rules and
forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or in other factors that could significantly affect
those controls subsequent to the date that our Corporate General Partner
carried out this evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements on page F-1.
2. Financial Statement Schedules
Reference is made to the Index to Financial Statements on page F-1.
3. Exhibits
Reference is made to the Exhibits Index on Page E-1.
(b) Reports on Form 8-K
On February 14, 2003, the registrant filed a current report on Form 8-K
dated February 6, 2003 to announce it had entered into a side letter
amending an asset purchase agreement.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENSTAR INCOME PROGRAM IV-3, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
Dated: April 17, 2003 By: /s/ Steven A. Schumm
--------------------
Steven A. Schumm
Director, Executive Vice President
Chief Administrative Officer and
Interim Chief Financial 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 and on the dates indicated below.
Dated: April 17, 2003 By: /s/ Steven A. Schumm
--------------------
Steven A. Schumm
Director, Executive Vice President
Chief Administrative Officer and
Interim Chief Financial Officer
(Principal Executive Officer) *
Dated: April 17, 2003 By: /s/ Paul E. Martin
------------------
Paul E. Martin
Senior Vice President
and Corporate Controller
(Principal Financial Officer and
Principal Accounting Officer) *
* Indicates position held with Enstar Communications Corporation, the
Corporate General Partner of the registrant.
34
CERTIFICATIONS
Certification of Chief Administrative Officer
I, Steven A. Schumm, certify that:
1. I have reviewed this annual report on Form 10-K of Enstar Income Program
IV-3, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 17, 2003
/s/ Steven A. Schumm
- ---------------------
Steven A. Schumm
Executive Vice President, Director,
Chief Administrative Officer and
Interim Chief Financial Officer
35
Certification of Principal Financial Officer
I, Paul E. Martin, certify that:
1. I have reviewed this annual report on Form 10-K of Enstar Income Program
IV-3, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 17, 2003
/s/ Paul E. Martin
- --------------------
Paul E. Martin
Senior Vice President and
Corporate Controller (Principal Financial Officer and
Principal Accounting Officer)
36
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ENSTAR INCOME ENSTAR CABLE
PROGRAM OF MACOUPIN
IV-3, L.P. COUNTY
---------- ------
Independent Auditors' Report F-2 F-17
Report of Independent Public Accountants F-3 F-18
Statement of Net Assets in Liquidation as of December 31, 2002 F-4 F-19
Balance Sheet as of December 31, 2001 F-5 F-20
Statement of Changes in Net Assets in Liquidation for the period
from April 11, 2002 to December 31, 2002 - F-21
Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-6 F-22
Statements of Partnership/Venturers' Capital
(Deficit) for the years ended December 31, 2002, 2001 and 2000 F-7 F-23
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-8 F-24
Notes to Financial Statements F-9 F-25
All financial statement schedules have been omitted because they are either not
required, not applicable or the information has otherwise been supplied.
INDEPENDENT AUDITORS' REPORT
To the Partners of
Enstar Income Program IV-3, L.P.:
We have audited the accompanying statement of net assets in liquidation of
Enstar Income Program IV-3, L.P. (a Georgia limited partnership) as of December
31, 2002 (see Note 2). We have also audited the statements of operations,
partnership capital (deficit) and cash flows for the year ended December 31,
2002. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The 2001 and 2000 financial statements were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated March
29, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As described in Note 2 to the financial statements, the partners of Enstar
Income Program IV-3, L.P. have approved a plan of liquidation. Accordingly, the
Partnership has changed its basis of accounting from the going concern basis to
a liquidation basis as of December 31, 2002.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the net assets in liquidation of Enstar Income Program
IV-3, L.P. as of December 31, 2002, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America applied on the bases
described in the preceding paragraph.
/s/ KPMG, LLP
St. Louis, Missouri
April 11, 2003
F-2
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Enstar Income Program IV-3, L.P.:
We have audited the accompanying balance sheets of Enstar Income Program IV-3,
L.P. (a Georgia limited partnership) as of December 31, 2001 and 2000, and the
related statements of operations, partnership capital (deficit) and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program IV-3,
L.P. as of December 31, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 29, 2002
F-3
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENT OF NET ASSETS IN LIQUIDATION
(SEE NOTE 2)
AS OF DECEMBER 31, 2002
ASSETS:
Cash and cash equivalents $ 2,597,700
Accounts receivable 8,700
Prepaid expenses and other assets 6,800
Property, plant and equipment 454,600
Franchise cost 2,800
Equity in net assets of Joint Venture 42,000
-----------
Total assets 3,112,600
-----------
LIABILITIES:
Accounts payable and accrued liabilities 293,100
Due to affiliates 1,227,900
-----------
Total liabilities 1,521,000
-----------
NET ASSETS IN LIQUIDATION:
General Partners (28,400)
Limited Partners 1,620,000
-----------
$ 1,591,600
===========
See accompanying notes to financial statements.
F-4
ENSTAR INCOME PROGRAM IV-3, L.P.
BALANCE SHEET
AS OF DECEMBER 31, 2001
ASSETS
ASSETS:
Cash $ 2,698,500
Accounts receivable 99,100
Prepaid expenses and other assets 14,600
Equity in net assets of joint venture 859,900
Property, plant and equipment, net of accumulated depreciation
of $5,472,100 1,720,200
Franchise cost, net of accumulated amortization of $2,552,200 22,600
-----------
Total assets $ 5,414,900
===========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 51,600
Accrued liabilities 210,100
Due to affiliates 886,600
-----------
Total liabilities 1,148,300
-----------
PARTNERSHIP CAPITAL (DEFICIT):
General Partners (40,400)
Limited Partners 4,307,000
-----------
Total partnership capital 4,266,600
-----------
Total liabilities and partnership capital $ 5,414,900
===========
See accompanying notes to financial statements.
F-5
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
(SEE NOTE 2)
REVENUES $1,209,200 $ 2,374,100 $ 2,485,800
OPERATING EXPENSES:
Service costs 472,400 825,900 833,500
General and administrative expenses 224,700 395,100 418,100
General partner management fees and reimbursed expenses 204,500 356,300 346,400
Depreciation and amortization 160,300 325,700 371,300
---------- ----------- -----------
1,061,900 1,903,000 1,969,300
---------- ----------- -----------
Operating income 147,300 471,100 516,500
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 52,100 49,200 86,200
Interest expense -- -- (13,400)
Gain on sale of cable systems 5,875,800 -- --
Other -- (32,300) (30,700)
---------- ----------- -----------
5,927,900 16,900 42,100
---------- ----------- -----------
Income before equity in net income of joint venture 6,075,200 488,000 558,600
---------- ----------- -----------
EQUITY IN NET INCOME OF JOINT VENTURE 2,361,200 194,500 223,000
---------- ----------- -----------
Net income $8,436,400 $ 682,500 $ 781,600
========== =========== ===========
NET INCOME ALLOCATED TO GENERAL PARTNERS $ 123,100 $ 6,800 $ 7,800
========== =========== ===========
NET INCOME ALLOCATED TO LIMITED PARTNERS $8,313,300 $ 675,700 $ 773,800
========== =========== ===========
NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 208.35 $ 16.93 $ 19.39
========== =========== ===========
WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS
OUTSTANDING DURING THE YEAR 39,900 39,900 39,900
========== =========== ===========
See accompanying notes to financial statements.
F-6
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -----
PARTNERSHIP CAPITAL (DEFICIT), January 1, 2000 $ (45,000) $ 3,855,100 $ 3,810,100
Distributions to partners (5,000) (498,800) (503,800)
Net income 7,800 773,800 781,600
--------- ------------ ------------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 2000 (42,200) 4,130,100 4,087,900
Distributions to partners (5,000) (498,800) (503,800)
Net income 6,800 675,700 682,500
--------- ------------ ------------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 2001 (40,400) 4,307,000 4,266,600
Distributions to partners (110,900) (10,976,800) (11,087,700)
Net income 123,100 8,313,300 8,436,400
--------- ------------ ------------
PARTNERSHIP CAPITAL (DEFICIT), December 31, 2002 (28,200) 1,643,500 1,615,300
Effects of change to liquidation basis (see Note 2) (200) (23,500) (23,700)
--------- ------------ ------------
NET ASSETS IN LIQUIDATION, December 31, 2002 $ (28,400) $ 1,620,000 $ 1,591,600
========= ============ ============
See accompanying notes to financial statements.
F-7
ENSTAR INCOME PROGRAM IV-3, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
(SEE NOTE 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,436,400 $ 682,500 $ 781,600
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 160,300 325,700 371,300
Equity in net income of joint venture (2,361,200) (194,500) (223,000)
Gain on sale of cable systems (5,875,800) -- --
Changes in:
Accounts receivable, prepaid expenses and other assets 98,400 47,200 (47,200)
Accounts payable, accrued liabilities and due to affiliates 143,600 769,100 38,600
------------ ----------- -----------
Net cash from operating activities 601,700 1,630,000 921,300
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (124,200) (279,300) (273,500)
Change in intangible assets -- (1,100) (500)
Proceeds from sale of cable system 7,330,300 -- --
Distributions from joint venture 3,179,100 600,000 63,000
------------ ----------- -----------
Net cash from investing activities 10,385,200 319,600 (211,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (11,087,700) (503,800) (503,800)
------------ ----------- -----------
Net cash from financing activities (11,087,700) (503,800) (503,800)
------------ ----------- -----------
Net increase in cash (100,800) 1,445,800 206,500
CASH, beginning of year 2,698,500 1,252,700 1,046,200
------------ ----------- -----------
CASH, end of year $ 2,597,700 $ 2,698,500 $ 1,252,700
============ =========== ===========
See accompanying notes to financial statements.
F-8
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(1) ORGANIZATION
Enstar Income Program IV-3, L.P., a Georgia limited partnership (the
"Partnership"), was formed on November 4, 1985, by a partnership agreement, as
amended (the "Partnership Agreement"), to acquire, construct, improve, develop
and operate cable television systems in various locations in the United States.
The Partnership Agreement provides for Enstar Communications Corporation (the
"Corporate General Partner") and Robert T. Graff, Jr. to be the General Partners
and for the admission of Limited Partners through the sale of interests in the
Partnership.
On November 12, 1999, Charter Communications Holdings Company, LLC, an entity
controlled by Charter, acquired both the Corporate General Partner, as well as
Falcon Communications, L.P. ("Falcon"), the entity that provided management and
certain other services to the Partnership. Charter is the nation's third largest
cable operator, serving approximately 6.6 million customers and files periodic
reports with the Securities and Exchange Commission. Charter and its affiliates
(principally CC VII Holdings, LLC, the successor-by-merger to Falcon) provide
management and other services to the Partnership. Charter receives a management
fee and reimbursement of expenses from the Corporate General Partner for
managing the Partnership's cable television operations. The Corporate General
Partner, Charter and affiliated companies are responsible for the management of
the Partnership and its operations.
The financial statements do not give effect to any assets that the partners may
have outside of their interest in the Partnership, nor to any obligations of the
partners, including income taxes.
(2) SALES OF ASSETS AND LIQUIDATION BASIS ACCOUNTING
On April 10, 2002, pursuant to an asset purchase agreement dated August 29,
2001, the Partnership completed the sale of all of the Partnership's Illinois
cable television systems in and around Fairfield and Shelbyville, Illinois to
Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate of the
Corporate General Partner and an indirect subsidiary of Charter Communications,
Inc. ("Charter") for a total sale price of approximately $7,333,300 and,
together with its affiliates, Enstar IV-1 and Enstar IV-2, the sale of the Joint
Venture for a total sale price of approximately $9,076,800, the Partnership's
one-third share of which is approximately $3,025,600 (the "Charter Sale"). The
Charter Sale is part of a larger transaction in which the Partnership and five
other affiliated partnerships (which, together with the Partnership are
collectively referred to as the "Charter Selling Partnerships") sold all of
their assets used in the operation of their respective Illinois cable television
systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the
"Purchasers") for a total cash sale price of $63,000,000. Each Charter Selling
Partnership received the same value per customer. In addition, the Limited
Partners of each of the Charter Selling Partnerships approved an amendment to
their respective partnership agreement to allow the sale of assets to an
affiliate of such partnership's General Partner. The Purchasers are each
indirect subsidiaries of the Corporate General Partner's ultimate parent
company, Charter, and therefore, are affiliates of the Partnership and each of
the other Charter Selling Partnerships.
The Charter Sale resulted from a sale process actively pursued since 1999, when
the Corporate General Partner sought purchasers for all of the cable television
systems of the Selling Partnerships, as well as eight other affiliated limited
partnership cable operators of which the Corporate General Partner is also the
general partner. This effort was undertaken primarily because, based on the
Corporate General Partner's experience in the cable television industry, it was
concluded that generally applicable market conditions and competitive factors
were making (and would increasingly make) it extremely difficult for smaller
operators of rural cable systems (such as the Partnership and the other
affiliated partnerships) to effectively compete and be financially successful.
This determination was based on the anticipated cost of electronics and
additional equipment to enable the Partnership's and the Joint Venture's systems
to operate on a two-way basis with improved technical capacity, insufficiency of
the Partnership's and Joint Venture's cash reserves and cash flows from
operations to finance such expenditures, limited customer growth potential due
to the Partnership's and Joint Venture's systems' rural location, and a general
inability of a small cable system operator such as the Partnership to benefit
from economies of scale and the ability to combine and integrate systems that
large cable operators have. Although limited plant upgrades have been made, the
Corporate General Partner projected that if the Partnership and Joint Venture
made the comprehensive additional upgrades deemed necessary to enable enhanced
and competitive services, particularly activation of two-way
F-9
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
capability, the Partnership and Joint Venture would not recoup the costs or
regain its ability to operate profitably within the remaining term of its
franchises, and as a result, making these upgrades would not be economically
prudent.
As a result of the above transaction, the Joint Venture changed its basis of
accounting to the liquidation basis on April 10, 2002. Accordingly, the assets
in the accompanying statement of net assets in liquidation as of December 31,
2002 have been stated at estimated realizable values and the liabilities have
been reflected at estimated settlement amounts. There were no significant
adjustments recorded upon changing to liquidation basis accounting. Net assets
in liquidation as of December 31, 2002 represent the estimated distribution to
the joint venturers In January 2003, all remaining assets of the Joint Venture
were distributed including a final distribution of $126,000 made to the joint
venturers, of which the Partnership's portion is $42,000.
After setting aside $1,400,000 to fund the Fulton, Kentucky headend's working
capital needs and paying or providing for the payment of the expenses of the
Charter Sale, the Corporate General Partner made distributions from the Joint
Venture to the Partnership of their allocable share of the remaining net sale
proceeds, in accordance with its partnership agreement. The Partnership made an
initial distribution on or about May 15, 2002, with a second distribution made
on or about September 24, 2002 from the Charter Sale. Distributions from the
Joint Venture were $9,537,300 during the year ended December 31, 2002, of which
the Partnership's portion is $3,179,100.
On November 8, 2002, the Partnership entered into an asset purchase agreement
providing for the sale of its remaining cable system to Telecommunications
Management, LLC (Telecommunications Management) for a total sale price of
approximately $1,344,000 (approximately $825 per customer acquired). This sale
is a part of a larger transaction in which the Partnership and eight other
affiliated partnerships (which, together with the Partnership are collectively
referred to as the "Telecommunications Management Selling Partnerships") would
sell all of their remaining assets used in the operation of their respective
cable systems to Telecommunications Management for a total cash sale price of
approximately $15,341,600 (before adjustments) (the Telecommunications
Management Sale). The Telecommunications Management Sale is subject to the
approval of a majority of the holders of the Partnership's units and approval of
the holders of the other Telecommunications Management Selling Partnerships. In
addition, the transaction is subject to certain closing conditions, including
regulatory and franchise approvals. In March 2003, a majority of the Limited
Partners approved the Telecommunications Management Sale and a plan of
liquidation.
On February 6, 2003, the Partnership entered into a side letter amending the
asset purchase agreement providing for the sale of its remaining cable systems
to Telecommunications Management. The February 6, 2003 side letter amends the
asset purchase agreement and Deposit Escrow Agreement to extend the date of the
second installment of the deposit and the Outside Closing Date each by 60 days.
On April 7, 2003, the second installment of the escrow deposit was due and was
not received. Management is currently evaluating our alternatives with respect
to this new development.
The Partnership finalized its proposed plan of liquidation in December 2002 in
connection with the filing of a proxy to obtain the approval of the Limited
Partners for the sale of the Partnership's final cable system and the subsequent
liquidation and dissolution of the Partnership. In March 2003, the required
number of votes necessary to implement the plan of liquidation were obtained. As
a result, the Partnership changed its basis of accounting to the liquidation
basis as of December 31, 2002. Upon changing to liquidation basis accounting,
the Partnership recorded $23,700 of accrued costs of liquidation in accounts
payable and accrued liabilities representing an estimate of the costs to be
incurred after the sale of the final cable system but prior to dissolution of
the Partnership. Because we are unable to develop reliable estimates of future
operating results or the ultimate realizable value of property, plant and
equipment due to the current uncertainties surrounding the final dissolution of
the Partnership, no adjustments have been recorded to reflect assets at
estimated realizable values or to reflect estimates of future operating results.
These adjustments will be recorded once a sale is imminent and the net sales
proceeds are reasonably estimable. Accordingly, the assets in the accompanying
statement of net assets in liquidation of the Partnership as of December 31,
2002 have been stated at historical book values. Distributions ultimately made
to the partners upon liquidation will differ from the net assets in liquidation
recorded in the accompanying statement of net assets in liquidation as a
F-10
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
result of future operations, the sale proceeds ultimately received by the
Partnership and adjustments if any to estimated costs of liquidation.
Distributions from the Partnership were $11,087,700 during the year ended
December 31, 2002.
The Corporate General Partner's intention is to settle the outstanding
obligations of the Partnership and terminate the Partnership as expeditiously as
possible. Final dissolution of the Partnership and related cash distributions to
the partners will occur upon obtaining final resolution of all liquidation
issues.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As discussed in Note 2, the financial statements as of December 31, 2002 are
presented on a liquidation basis of accounting. Accordingly, the financial
information in the statement of net assets in liquidation for such period is
presented on a different basis of accounting than the financial statements for
the years ended December 31, 2002, 2001 and 2000, which are prepared on the
historical cost basis of accounting.
Cash Equivalents
The Partnership considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. These investments are carried at
cost which approximates market value.
Investment in Joint Venture
The Partnership's investment and share of the income or loss in the Joint
Venture was accounted for on the equity method of accounting.
Property, Plant and Equipment
Costs associated with initial customer installations and the additions of
network equipment are capitalized. The costs of disconnecting service at a
customer's dwelling or reconnecting service to a previously installed dwelling
are charged to operating expense in the period incurred. Costs for repairs and
maintenance are charged to operating expense as incurred, while equipment
replacement and betterments, including replacement of drops, are capitalized.
Cable distribution systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of life of lease or useful life of asset
Franchise Cost
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Franchise rights acquired through
the purchase of cable television systems represent management's estimate of fair
value and are generally amortized using the straight-line method over a period
of up to 15 years. This period represents management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Partnership. Amortization
expense related to franchises for the years ended December 31, 2002, 2001 and
2000 was $1,800, $38,300 and $97,000, respectively.
As of December 31, 2002, franchise agreements have expired in two of the
Partnership's franchise areas where it serves 1,500 basic customers. The
Partnership continues to serve these customers while it is in negotiations to
extend the franchise agreements and continues to pay franchise fees to the
franchise authorities.
Long-Lived Assets
F-11
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
The Partnership reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest is less than the carrying amount of the asset, the carrying amount of
the asset is reduced to its estimated fair value and an impairment loss is
recognized.
Revenue Recognition
Cable television revenues from basic and premium services are recognized when
the related services are provided. Advertising revenues are recognized when
commercials are broadcast. Installation revenues are recognized to the extent of
direct selling costs incurred. The remainder, if any, is deferred and amortized
to income over the estimated average period that customers are expected to
remain connected to the cable system. As of December 31, 2002, 2001 and 2000, no
installation revenues have been deferred, as direct selling costs have exceeded
installation revenue.
Local governmental authorities impose franchise fees on the Partnership ranging
up to a federally mandated maximum of 5% of gross revenues. Such fees are
collected on a monthly basis from the Partnership's customers and are
periodically remitted to local franchise authorities. Franchise fees collected
and paid are reported as revenues and expenses.
Income Taxes
The Partnership pays no federal income taxes. All of the income, gains, losses,
deductions and credits of the Partnership are passed through to its partners.
The basis in the Partnership's assets and liabilities differs for financial and
tax reporting purposes. As of December 31, 2002, 2001 and 2000, the book basis
of the Partnership's net assets exceeds its tax basis by approximately $173,100,
$1,006,400 and $961,400, respectively. The accompanying financial statements,
which are prepared in accordance with accounting principles generally accepted
in the United States, differ from the financial statements prepared for tax
purposes due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
net income for the year ended December 31, 2002 in the financial statements is
approximately $870,000 less than tax income primarily as a result of differences
between tax gain on sale of cable systems versus book gain on sale of cable
systems caused principally by book and tax basis differences on the assets sold.
The net effect of these accounting differences is that net income for the years
ended December 31, 2001 and 2000 in the financial statements is approximately
$78,900 and $8,500 more than tax income for the same period, respectively,
caused principally by timing differences in depreciation and amortization
expense reported by the Partnership and the Joint Venture.
Net Income per Unit of Limited Partnership Interest
Net income per unit of limited partnership interest is based on the average
number of units outstanding during the periods presented. For this purpose, net
income has been allocated 99% to the Limited Partners and 1% to the General
Partners. The General Partners do not own units of partnership interest in the
Partnership, but rather hold a participation interest in the income, losses and
distributions of the Partnership.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The estimates include useful lives of property, plant and
equipment valuation of long-lived assets and allocated operating costs. Actual
results could differ from those estimates.
F-12
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(4) PARTNERSHIP MATTERS
The Partnership Agreement generally provides that all cash distributions, as
defined, be allocated 1% to the General Partners and 99% to the Limited Partners
until the Limited Partners have received aggregate cash distributions equal to
their original capital contributions ("Capital Payback"). The Partnership
Agreement also provides that all partnership profits, gains, operational losses,
and credits, all as defined, be allocated 1% to the General Partners and 99% to
the Limited Partners until the Limited Partners have been allocated net profits
equal to the amount of cash flow required for Capital Payback. After the Limited
Partners have received cash flow equal to their initial investments, the General
Partners will receive a 1% allocation of cash flow from sale or liquidation of a
system until the Limited Partners have received an annual simple interest return
of at least 12% of their initial investments less any distributions from
previous system sales and cash distributions from operations after Capital
Payback. Thereafter, the respective allocations will be made 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 Agreement limits the amount of debt the Partnership
may incur.
A portion of the Partnership's distributions to partners is funded from
distributions received from the Joint Venture.
(5) EQUITY IN NET ASSETS OF JOINT VENTURE
The Partnership and two affiliated partnerships (Enstar Income Program IV-1,
L.P. and Enstar Income Program IV-2, L.P.) each own one-third of the Joint
Venture. The Joint Venture was initially funded through capital contributions
made by each venturer during 1988 of $2,199,700 in cash and $40,000 in
capitalized system acquisition and related costs. In 1988, the Joint Venture
acquired certain cable television systems in Illinois. Each venturer shared
equally in the profits and losses of the Joint Venture. The Joint Venture
generated net income of $7,010,100, $583,500 and $669,000 for the period from
January 1, 2002 to April 10, 2002 and the years ended December 31, 2001 and
2000, respectively, of which $2,336,700, $194,500 and $223,000 was allocated to
the Partnership, respectively. In addition, the Joint Venturer's net assets in
liquidation increased by $73,500 of which $24,500 was allocated to the
Partnership. The operations of the Joint Venture were significant to the
Partnership and its financial statements included elsewhere in this Annual
Report should be reviewed in conjunction with these financial statements.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at historical cost consists of the following as of
the dates presented:
DECEMBER 31,
------------
2002 2001
---- ----
Cable distribution systems $ 2,514,800 $ 6,836,400
Land and improvements 2,500 10,100
Vehicles, furniture and equipment 134,500 345,800
---------- ----------
2,651,800 7,192,300
Less: accumulated depreciation (2,197,200) (5,472,100)
---------- ----------
F-13
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
$ 454,600 $ 1,720,200
============ ===========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$158,500, $286,300 and $274,300, respectively.
No adjustments have been made to record assets at estimated realizable value as
required in liquidation basis accounting due to uncertainties surrounding the
sales of the final systems and the final dissolution of the Partnership.
(7) COMMITMENTS AND CONTINGENCIES
Litigation
The Partnership and Joint Venture are party to lawsuits and claims that arose in
the ordinary course of conducting its business. In the opinion of management,
after consulting with legal counsel, the outcome of these lawsuits and claims
will not have a material adverse effect on the Partnership and Joint Venture's
financial position or results of operations.
Regulation in the Cable Television Industry
The operation of a cable system is extensively regulated by the Federal
Communications Commission (FCC), some state governments and most local
governments. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations. The 1996 Telecom Act altered the regulatory structure
governing the nation's communications providers. It removed barriers to
competition in both the cable television market and the local telephone market.
Among other things, it reduced the scope of cable rate regulation and encouraged
additional competition in the video programming industry by allowing local
telephone companies to provide video programming in their own telephone service
areas.
The 1996 Telecom Act required the FCC to undertake a host of implementing
rulemakings. Moreover, Congress and the FCC have frequently revisited the
subject of cable regulation. Future legislative and regulatory changes could
adversely affect the Partnership's operations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During the years
ended December 31, 2002, 2001 and 2000, the amounts refunded by the Partnership
have been insignificant. The Partnership may be required to refund additional
amounts in the future.
Insurance
Insurance coverage is maintained for all of the cable television properties
owned or managed by Charter to cover damage to cable distribution systems,
customer connections and against business interruptions resulting from such
damage. This coverage is subject to a significant annual deductible which
applies to all of the cable television properties owned or managed by Charter,
including those of the Partnership and Joint Venture.
All of the Partnership's customers are served by its system in Fulton, 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
Partnership's liquidity and cash flows. The Partnership continues to maintain
insurance coverage in amounts its management views as appropriate for all other
property, liability, automobile, workers' compensation and insurable risks.
F-14
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(8) EMPLOYEE BENEFIT PLAN
The Partnership participates in a cash or deferred profit sharing plan (the
"Profit Sharing Plan") sponsored by a subsidiary of the Corporate General
Partner, which covers substantially all of its employees. The Profit Sharing
Plan provides that each participant may elect to make a contribution in an
amount up to 15% of the participant's annual compensation which otherwise would
have been payable to the participant as salary. Effective January 1, 1999, the
Profit Sharing Plan was amended, whereby the Partnership would make an employer
contribution equal to 100% of the first 3% and 50% of the next 2% of the
participants' contributions. Contributions of $800, $1,100 and $0 were made
during 2002, 2001 and 2000, respectively.
(9) TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the "Management
Agreement") with Enstar Cable Corporation ("Enstar Cable"), a wholly owned
subsidiary of the Corporate General Partner, for a monthly management fee of 5%
of gross receipts, as defined, from the operations of the Partnership.
Management fee expense was $60,500, $118,700 and $124,300 for the years ended
December 31, 2002, 2001 and 2000, respectively. Management fees are non-interest
bearing.
The Management Agreement also provides that the Partnership reimburse Enstar
Cable for direct expenses incurred on behalf of the Partnership and for the
Partnership's allocable share of the Manager's operational costs. Additionally,
Charter and its affiliates provide other management and operational services for
the Partnership. These expenses are charged to the properties served based
primarily on the Partnership's allocable share of operational costs associated
with the services provided. The total amount charged to the Partnership for
these services and direct expenses approximated $144,000, $237,600 and $222,100
for the years ended December 31, 2002, 2001 and 2000, respectively.
Substantially all programming services had been purchased through Charter.
Charter charges the Partnership for these costs based on its costs. The
Partnership recorded programming fee expense of $277,200, $537,500 and $520,300
for the years ended December 31, 2002, 2001 and 2000, respectively. Programming
fees are included in service costs in the accompanying statements of operations.
As disclosed in Charter Communications, Inc.'s Annual Report on Form 10-K, the
parent of the Corporate General Partner and our Manager is the defendant in
twenty-two class action and shareholder lawsuits and is the subject of a grand
jury investigation being conducted by the United States Attorney's Office for
the Eastern District of Missouri and an SEC investigation. Charter is unable to
predict the outcome of these lawsuits and government investigations. An
unfavorable outcome of these matters could have a material adverse effect on
Charter's results of operations and financial condition which could in turn have
a material adverse effect on the Partnership.
(10) RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Partnership adopted SFAS No. 143 on January
1, 2003. The adoption of SFAS No. 143 did not have a material impact on the
Partnership's financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of
several previously issued accounting standards, new accounting guidance for the
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. SFAS No. 145 will
be adopted by the Partnership beginning January 1, 2003, except for the
provisions relating to the amendment of SFAS No. 13, which will be adopted for
transactions occurring subsequent to
F-15
ENSTAR INCOME PROGRAM IV-3, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
May 15, 2002. Adoption of SFAS No. 145 did not have a material impact on the
financial statements of the Partnership.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred rather than when a company
commits to such an activity and also establishes fair value as the objective for
initial measurement of the liability. SFAS No. 146 will be adopted by the
Partnership for exit or disposal activities that are initiated after December
31, 2002. Adoption of SFAS No. 146 will not have a material impact on the
financial statements of the Partnership.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, it amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. Adoption of SFAS No. 148
did not have a material impact on the financial statements of the Partnership.
F-16
INDEPENDENT AUDITORS' REPORT
To the Venturers of
Enstar Cable of Macoupin County:
We have audited the accompanying statement of net assets in liquidation of
Enstar Cable of Macoupin County (a Georgia general partnership) as of December
31, 2002, and the related statement of changes in net assets in liquidation for
the period from April 11, 2002 to December 31, 2002 (see Note 2). We have also
audited the statements of operations, venturers' capital and cash flows for the
period from January 1, 2002 to April 10, 2002. These financial statements are
the responsibility of the Venture's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The 2001 and 2000
financial statements were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements in
their report dated March 29, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As described in Note 2 to the financial statements, as a result of the sale of
the Venture's systems, the Venture has changed its basis of accounting from the
going concern basis to a liquidation basis as of April 10, 2002.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the net assets in liquidation of Enstar Cable of
Macoupin County as of December 31, 2002, the changes in net assets in
liquidation for the period from April 11, 2002 to December 31, 2002, and the
results of its operations and its cash flows for the period from January 1, 2002
to April 10, 2002 in conformity with accounting principles generally accepted in
the United States of America applied on the bases described in the preceding
paragraph.
/s/ KPMG, LLP
St. Louis, Missouri
April 11, 2003
F-17
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Venturers of
Enstar Cable of Macoupin County:
We have audited the accompanying balance sheets of Enstar Cable of Macoupin
County (a Georgia general partnership) as of December 31, 2001 and 2000, and the
related statements of operations, venturers' capital and cash flows for the
years then ended. These financial statements are the responsibility of the
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Cable of Macoupin County
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 29, 2002
F-18
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENT OF NET ASSETS IN LIQUIDATION
(SEE NOTE 2)
AS OF DECEMBER 31, 2002
ASSETS:
Cash and cash equivalents $171,700
--------
Total assets 171,700
--------
LIABILITIES:
Due to affiliates 45,700
--------
Total liabilities 45,700
--------
NET ASSETS IN LIQUIDATION:
Enstar Income Program IV-1, L.P. 42,000
Enstar Income Program IV-2, L.P. 42,000
Enstar Income Program IV-3, L.P. 42,000
--------
$126,000
========
See accompanying notes to financial statements.
F-19
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEET
AS OF DECEMBER 31, 2001
2001
----------
ASSETS
ASSETS:
Cash $ 912,800
Accounts receivable, net 40,800
Prepaid expenses and other assets 4,100
Property, plant and equipment, net of accumulated depreciation of $3,033,100 2,198,500
Franchise cost, net of accumulated amortization of $49,700 62,200
Deferred charges, net 700
----------
Total assets $3,219,100
==========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 36,400
Accrued liabilities 196,100
Due to affiliates 406,900
----------
Total liabilities 639,400
----------
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 859,900
Enstar Income Program IV-2, L.P. 859,900
Enstar Income Program IV-3, L.P. 859,900
----------
Total venturers' capital 2,579,700
----------
Total liabilities and venturers' capital $3,219,100
==========
See accompanying notes to financial statements.
F-20
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD FROM APRIL 11, 2002 TO DECEMBER 31, 2002
Additions:
Reduction in accrued expenses $ 23,000
Interest income 50,500
----------
73,500
Deductions:
Distribution to joint venturers 9,537,300
----------
9,537,300
Net decrease in net assets in liquidation (9,463,800)
NET ASSETS IN LIQUIDATION, beginning of period 9,589,800
----------
NET ASSETS IN LIQUIDATION, end of period $ 126,000
==========
See accompanying notes to financial statements.
F-21
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
PERIOD FROM
JANUARY 1,
2002 TO YEAR ENDED DECEMBER 31,
APRIL 10, ------------------------
2002 2001 2000
---------- ---------- ----------
(SEE NOTE 2)
REVENUES $ 526,000 $1,877,900 $1,979,600
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 172,400 619,800 669,500
General and administrative expenses 87,400 215,200 218,100
General partner management fees and
reimbursed expenses 90,200 300,100 313,900
Depreciation and amortization 86,600 226,300 222,900
---------- ---------- ----------
436,600 1,361,400 1,424,400
---------- ---------- ----------
Operating income 89,400 516,500 555,200
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 2,200 82,400 116,600
Other expense -- (15,400) (2,800)
---------- ---------- ----------
2,200 67,000 113,800
---------- ---------- ----------
GAIN ON SALE OF CABLE SYSTEMS 6,918,500 -- --
---------- ---------- ----------
Net income $7,010,100 $ 583,500 $ 669,000
========== ========== ==========
See accompanying notes to financial statements.
F-22
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
FOR THE PERIOD FROM JANUARY 1, 2002 TO APRIL 10, 2002 AND
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
ENSTAR ENSTAR ENSTAR
INCOME INCOME INCOME
PROGRAM PROGRAM PROGRAM
IV-1, L.P. IV-2, L.P. IV-3, L.P. TOTAL
------------ ------------- ----------- -----------
BALANCE, January 1, 2000 $ 1,105,400 $ 1,105,400 $1,105,400 $ 3,316,200
Distributions to venturers (63,000) (63,000) (63,000) (189,000)
Net income 223,000 223,000 223,000 669,000
------------ ------------- ----------- -----------
BALANCE, December 31, 2000 1,265,400 1,265,400 1,265,400 3,796,200
Distributions to venturers (600,000) (600,000) (600,000) (1,800,000)
Net income 194,500 194,500 194,500 583,500
------------ ------------- ----------- -----------
BALANCE, December 31, 2001 859,900 859,900 859,900 2,579,700
Net income 2,336,700 2,336,700 2,336,700 7,010,100
------------ ------------- ----------- -----------
BALANCE, April 10, 2002 $ 3,196,600 $ 3,196,600 $ 3,196,600 $ 9,589,800
============ ============= =========== ===========
See accompanying notes to financial statements.
F-23
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1, 2002 YEAR ENDED DECEMBER 31,
TO APRIL 10, -------------------------
2002 2001 2000
--------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,010,100 $ 583,500 $ 669,000
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 86,600 226,300 222,900
Gain on sale of cable systems (6,918,500) -- --
Changes in:
Accounts receivable, prepaid expenses and other assets 63,200 57,900 21,300
Accounts payable, accrued liabilities and due to
affiliates (197,000) 496,800 (80,100)
--------------- ----------- -----------
Net cash from operating activities 44,400 1,364,500 833,100
--------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,800) (898,600) (77,400)
Increase in intangible assets -- (1,200) (2,000)
Proceeds from sale of cable system 9,082,100 -- --
--------------- ----------- -----------
Net cash from investing activities 9,080,300 (899,800) (79,400)
--------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to venturers -- (1,800,000) (189,000)
--------------- ----------- -----------
Net cash from financing activities -- (1,800,000) (189,000)
Net increase (decrease) in cash 9,124,700 (1,335,300) 564,700
CASH, beginning of period 912,800 2,248,100 1,683,400
--------------- ----------- -----------
CASH, end of period $ 10,037,500 $ 912,800 $2,248,100
=============== =========== ===========
See accompanying notes to financial statements.
F-24
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(1) ORGANIZATION
Enstar Cable of Macoupin County, a Georgia general partnership (the "Venture"),
owns and operates cable television systems in small to medium-sized communities
in Illinois.
The financial statements do not give effect to any assets that Enstar Income
Program IV-1, L.P., Enstar Income Program IV-2, L.P. and Enstar Income Program
IV-3, L.P. (the "Venturers" or "Partnerships") may have outside of their
interest in the Venture, nor to any obligations of the Venturers, including
income taxes.
(2) SALES OF ASSETS AND LIQUIDATION BASIS ACCOUNTING
On April 10, 2002, pursuant to an asset purchase agreement dated August 29,
2001, the Venturers completed the sale of the Venture's systems to Charter
Communications Entertainment I, LLC ("CCE-1"), an affiliate of the Corporate
General Partner and an indirect subsidiary of Charter Communications, Inc.
("Charter"), for a total sale price of approximately $9,076,800 (the "Charter
Sale"). The Charter Sale is part of a larger transaction in which the Venturers
and three other affiliated partnerships (which, together are collectively
referred to as the "Selling Partnerships") sold all of their assets used in the
operation of their respective Illinois cable television systems to CCE-1 and two
of its affiliates (also referred to, with CCE-1, as the "Purchasers") for a
total cash sale price of $63,000,000. Each Selling Partnership received the same
value per customer. In addition, the Limited Partners of each of the Selling
Partnerships approved an amendment to their respective partnership agreement to
allow the sale of assets to an affiliate of such partnership's General Partner.
The Purchasers are each indirect subsidiaries of the Corporate General Partner's
ultimate parent company, Charter, and, therefore, are affiliates of the
Venturers and each of the other Selling Partnerships.
The Charter Sale resulted from a sale process actively pursued since 1999, when
the Corporate General Partner of the Venturers sought purchasers for all of the
cable television systems of the Selling Partnerships, as well as eight other,
affiliated limited partnership cable operators of which the Corporate General
Partner is also the general partner. This effort was undertaken primarily
because, based on the Corporate General Partner's experience in the cable
television industry, it was concluded that generally applicable market
conditions and competitive factors were making (and would increasingly make) it
extremely difficult for smaller operators of rural cable systems (such as the
Venture and the other affiliated partnerships) to effectively compete and be
financially successful. This determination was based on the anticipated cost of
electronics and additional equipment to enable the Venture's systems to operate
on a two-way basis with improved technical capacity, insufficiency of Venture
cash reserves and cash flows from operations to finance such expenditures,
limited customer growth potential due to the Venture's systems' rural location,
and a general inability of a small cable system operator such as the Venture to
benefit from economies of scale and the ability to combine and integrate systems
that large cable operators have. Although limited plant upgrades have been made,
the Corporate General Partner projected that if the Venture made the
comprehensive additional upgrades deemed necessary to enable enhanced and
competitive services, particularly two-way capability, the Venture would not
recoup the costs or regain its ability to operate profitably within the
remaining term of its franchises, and as a result, making these upgrades would
not be economically prudent.
As a result of the sale of the Venture's systems, the Venture changed its basis
of accounting to the liquidation basis on April 10, 2002. Accordingly, the
assets in the accompanying statement of net assets in liquidation as of December
31, 2002 are stated at estimated realizable values and the liabilities are
reflected at estimated settlement amounts. There were no significant adjustments
recorded upon changing to liquidation basis accounting. Net assets in
liquidation as of December 31, 2002 represent the estimated distribution to the
Venturers. In January 2003, all remaining assets of the Venture were
distributed including a final distribution of $126,000 made to the Venturers.
The Corporate General Partner's intention is to settle the outstanding
obligations of the Venture and terminate the Venture as expeditiously as
possible. Final dissolution of the Venture and related cash distributions to the
Venturers will occur upon obtaining final resolution of all liquidation issues.
F-25
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As discussed in Note 2, the financial statements as of December 31, 2002 are
presented on a liquidation basis of accounting. Accordingly, the financial
information in the statement of net assets in liquidation for such period is
presented on a different basis of accounting than the financial statements for
the years ended December 31, 2002, 2001 and 2000, which are prepared on the
historical cost basis of accounting.
Cash Equivalents
The Venture considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are carried at
cost which approximates market value.
Property, Plant and Equipment
Costs associated with initial customer installations and the additions of
network are capitalized. The costs of disconnecting service at a customer's
dwelling or reconnecting service to a previously installed dwelling are charged
to operating expense in the period incurred. Costs for repairs and maintenance
are charged to operating expense as incurred, while equipment replacement and
betterments, including replacement of drops, are capitalized.
Cable distribution systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of life of lease or useful
life of asset
Franchise Cost
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Franchise rights acquired through
the purchase of cable television systems represent management's estimate of fair
value and are generally amortized using the straight-line method over a period
of up to 15 years. This period represents management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Venture. Amortization
expense related to franchises for the period from January 1, 2002 to April 10,
2002 and years ended December 31, 2001 and 2000 was $3,100, $11,500 and $11,000,
respectively.
Deferred Charges
Deferred charges are amortized using the straight-line method over two years.
Long-Lived Assets
The Venture reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest is less than the carrying amount of the asset, the carrying amount of
the asset is reduced to its estimated fair value and an impairment loss is
recognized.
Revenue Recognition
Cable television revenues from basic and premium services are recognized when
the related services are provided. Advertising revenues are recognized when
commercials are broadcast. Installation revenues are recognized to the extent of
direct selling costs incurred. The remainder, if any, is deferred and amortized
to income over the estimated average period that customers are expected to
remain connected to the cable system. As of December 31, 2002, 2001 and 2000, no
installation revenues have been deferred, as direct selling costs have exceeded
installation revenues.
Local governmental authorities impose franchise fees on the Venture ranging up
to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis from the Venture's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
F-26
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Advertising Costs
The Venture expenses all advertising costs as incurred.
Income Taxes
The Venture pays no federal income taxes. All of the income, gains, losses,
deductions and credits of the Venture are passed through to its Venturers. The
basis in the Venture's assets and liabilities differs for financial and tax
reporting purposes. As of December 31, 2002, 2001 and 2000, the book basis of
the Venture's net assets exceeds its tax basis by approximately $0, $893,700 and
$761,400, respectively. The accompanying financial statements, which are
prepared in accordance with accounting principles generally accepted in the
United States, differ from the financial statements prepared for tax purposes
due to the different treatment of various items as specified in the Internal
Revenue Code. The net effect of these accounting differences is that net income
for the year ended December 31, 2002 in the financial statements is
approximately $880,100 less than tax income primarily as a result of differences
between tax gain on sale of cable systems versus book gain in sale of cable
systems caused principally by book and tax differences on the assets sold. The
net effect of these accounting differences is that net income differs for the
years ended December 31, 2001 and 2000 in the financial statements in that net
income is approximately $132,300 and $84,500 more than tax income for the same
period, respectively, caused principally by timing differences in depreciation
and amortization expense.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The estimates include useful lives of property, plant and
equipment, valuation of long-lived assets and allocated operating costs. Actual
results could differ from those estimates.
(4) JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture agreement effective
December 30, 1987, among the Venturers, three limited partnerships sponsored by
Enstar Communications Corporation (the "Corporate General Partner"). The Venture
was formed to pool the resources of the three limited partnerships to acquire,
own, operate, and dispose of certain cable television systems. In 1988, the
Venture acquired two cable television systems in Illinois.
On September 30, 1988, Falcon Cablevision, a California limited partnership,
purchased all of the outstanding capital stock of the Corporate General Partner.
On September 30, 1998, Falcon Holding Group, L.P. ("FHGLP") acquired ownership
of the Corporate General Partner from Falcon Cablevision. Simultaneously with
the closing of that transaction, FHGLP contributed all of its existing cable
television system operations to Falcon Communications, L.P. ("FCLP"), a
California limited partnership and successor to FHGLP. FHGLP served as the
managing partner of FCLP, and the General Partner of FHGLP was Falcon Holding
Group, Inc., a California corporation ("FHGI"). On November 12, 1999, Charter
Communications Holding Company, LLC, ("Charter"), acquired the ownership of FCLP
and the Corporate General Partner. The Corporate General Partner, Charter and
affiliated companies are responsible for the day-to-day management of the
Venture and its operations.
Under the terms of the joint venture agreement, the Venturers share equally in
profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
F-27
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at historical cost consists of the following as of
December 31, 2001:
Cable distribution systems $ 4,982,300
Land and improvements 26,300
Vehicles, furniture and equipment 223,000
------------
5,231,600
Less: accumulated depreciation (3,033,100)
------------
$ 2,198,500
============
Depreciation expense for the period from January 1, 2002 to April 10, 2002 and
the years ended December 31, 2001 and 2000, was $83,500, $214,200 and $210,800,
respectively.
(6) COMMITMENTS AND CONTINGENCIES
Litigation
The Venture is a party to lawsuits and claims that arose in the ordinary course
of conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits and claims will not have a material
adverse effect on the Venture's financial position or results of operations.
Regulation in the Cable Television Industry
The operation of a cable system is extensively regulated by the Federal
Communications Commission (FCC), some state governments and most local
governments. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations. The 1996 Telecommunications Act (the "1996 Telecom Act")
altered the regulatory structure governing the nation's communications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduced the scope
of cable rate regulation and encouraged additional competition in the video
programming industry by allowing local telephone companies to provide video
programming in their own telephone service areas.
The 1996 Telecom Act required the FCC to undertake a host of implementing
rulemakings. Moreover, Congress and the FCC have frequently revisited the
subject of cable regulation. Future legislative and regulatory changes could
adversely affect the Venture's operations.
Insurance
Insurance coverage is maintained for all of the cable television properties
owned or managed by Charter to cover damage to cable distribution systems,
customer connections and against business interruptions resulting from such
damage. This coverage is subject to a significant annual deductible which
applies to all of the cable television properties owned or managed by Charter,
including those of the Venture.
(7) EMPLOYEE BENEFIT PLAN
The Venture participated in a cash or deferred profit sharing plan (the "Profit
Sharing Plan") sponsored by a subsidiary of the Corporate General Partner, which
covers substantially all of its employees. The Profit Sharing Plan provides that
each participant may elect to make a contribution in an amount up to 15% of the
participant's annual compensation which otherwise would have been payable to the
participant as salary. Effective January 1,
F-28
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1999, the Profit Sharing Plan was amended, whereby the Venture would make an
employer contribution equal to 100% of the first 3% and 50% of the next 2% of
the participants' contributions. A contribution of $200, $300 and $0 was made
during 2002, 2001 and 2000, respectively.
(8) TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement (the "Management Agreement")
with Enstar Cable Corporation (the "Manager"), a wholly owned subsidiary of the
Corporate General Partner, pursuant to which the Venture pays a monthly
management fee of 4% of gross revenues to the Manager. Management fee expense
for the period from January 1, 2002 to April 10, 2002 and the years ended
December 31, 2001 and 2000, approximated $21,000, $75,100 and $79,200,
respectively. In addition, the Venture is also required to distribute to the
Corporate General Partner an amount equal to 1% of its gross revenues
representing its interest as the Corporate General Partner. Management fee
expense for the period from January 1, 2002 to April 10, 2002 and the years
ended December 31, 2001 and 2000, approximated $5,300, $18,800 and $19,800,
respectively. Management fees are non-interest bearing.
In addition to the monthly management fee, the Management Agreement also
provides that the Venture reimburse the Manager for direct expenses incurred on
behalf of the Venture and for the Venture's allocable share of operational costs
associated with services provided by the Manager. Additionally, Charter and its
affiliates provide other management and operational services for the Venture.
These expenses are charged to the properties served based primarily on the
Venture's allocable share of operational costs associated with the services
provided. The total amounts charged to the Venture for these services and direct
expenses approximated $63,900, $206,200 and $214,900 for the period from January
1, 2002 to April 10, 2002 and the years ended December 31, 2001 and 2000,
respectively.
Substantially all programming services are purchased through Charter. Charter
charges the Venture for these costs based on its costs. Programming fee expense
was $119,500, $400,500 and $401,500 for the period from January 1, 2002 to April
10, 2002 and the years ended December 31, 2001 and 2000, respectively.
Programming fees are included in service costs in the accompanying statements of
operations.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Venture adopted SFAS No. 143 on January 1,
2003. The adoption of SFAS No. 143 did not have a material impact on the
Venture's financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of
several previously issued accounting standards, new accounting guidance for the
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. SFAS No. 145 will
be adopted by the Venture beginning January 1, 2003, except for the provisions
relating to the amendment of SFAS No. 13, which will be adopted for transactions
occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 did not have a
material impact on the financial statements of the Venture.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred rather than when a company
commits to such an activity and also establishes fair value as the objective for
initial measurement of the liability. SFAS No. 146 will be adopted by the
F-29
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Venture for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS No. 146 will not have a material impact on the financial
statements of the Venture.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, it amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. Adoption of SFAS No. 148
did not have a material impact on the financial statements of the Venture.
F-30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1a Asset Purchase Agreement, dated November 8, 2002, by and among
Telecommunications Management, LLC and Enstar Income Program
II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income
Program 1984-1, L.P., Enstar Income/Growth Program Six-A,
L.P., Enstar VII, L.P., Enstar VIII, L.P., Enstar X, L.P.,
Enstar XI, L.P., Enstar IV/PBD Systems Venture and Enstar
Cable of Cumberland Valley (Incorporated by reference to
Exhibit 2.1 to the quarterly report on Form 10-Q of Enstar
Income Program II-2, L.P. filed on November 12, 2002 (File No.
000-14505)).
2.1b Letter of Amendment, dated as of February 6, 2003, between
Enstar Income Program II-2, L.P., Enstar Income Program IV-3,
L.P., Enstar Income Program 1984-1, L.P., Enstar Income/Growth
Program Six-A, L.P., Enstar Vii, L.P., Enstar VIII. L.P.,
Enstar X, L.P., Enstar XI, L.P., Enstar IV/PBD Systems Venture
and Enstar Cable of Cumberland Valley and Telecommunications
Management, LLC (Incorporated by reference to Exhibit 2.1 to
the current report on Form 8-K of Enstar Income/Growth Program
Five-A, L.P. filed on February 14, 2003 (File No. 000-16779)).
2.2a Asset Purchase Agreement, dated August 29, 2001, by and
between Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions
Partners, LLC and Enstar Income Program II-1, L.P., Enstar
Income Program II-2, L.P., Enstar Income Program IV-3, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD
Systems Venture, and Enstar Cable of Macoupin County.
(Incorporated by reference to the exhibits to the registrant's
Current Report on Form 8-K, File No. 000-14505 dated August
29, 2001.)
2.2b Letter of Amendment, dated September 10, 2001, by and between
Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions
Partners, LLC and Enstar Income Program II-1, L.P., Enstar
Income Program II-2, L.P., Enstar Income Program IV-3, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD
Systems Venture, and Enstar Cable of Macoupin County.
(Incorporated by reference to the exhibits to the registrant's
Current Report on Form 8-K, File No. 000-14505 dated August
29, 2001.)
2.3a Asset Purchase Agreement dated June 21, 2000, by and among
Multimedia Acquisition Corp., as Buyer, and Enstar Income
Program 1984-1, L.P., Enstar Income Program IV-3, L.P., Enstar
Income/Growth Program Six-A, L.P., Enstar VII, Enstar VIII and
Enstar X, Ltd., as Sellers. (Incorporated by reference to the
exhibits to the Current Report on Form 8-K of Enstar Income
Program 1984-1, L.P., File No. 000-13333, filed on June 30,
2000.)
2.3b Amendment dated September 29, 2000, of the Asset Purchase
Agreement dated June 21, 2000, by and among Multimedia
Acquisition Corp., as Buyer, and Enstar Income Program 1984-1,
L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth
Program Six-A, L.P., Enstar VII, Enstar VIII and Enstar X,
Ltd., as Sellers. (Incorporated by reference to the exhibits
to the Current Report on Form 10-Q of Enstar Income/Growth
Program Six-A, L.P., File No. 000-17687 for the quarter ended
September 30, 2000.)
2.4a Asset Purchase Agreement, dated August 8, 2000, by and among
Multimedia Acquisition Corp., as Buyer, and Enstar Income
Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar
Income Program IV-3, L.P., Enstar Income/Growth Program
Five-A, L.P., Enstar Income/Growth Program Five-B, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IX and Enstar
XI, Ltd., Enstar IV/PBD Systems Venture, Enstar Cable of
Cumberland Valley and Enstar Cable of Macoupin County, as
Sellers. (Incorporated by reference to the exhibits to the
Current Report on Form 10-Q of Enstar Income Program II-1,
L.P., File No. 000-14508 for the quarter ended June 30, 2000.)
2.4b Amendment dated September 29, 2000, of the Asset Purchase
Agreement dated August 8, 2000, by and among Multimedia
Acquisition Corp., as Buyer, and Enstar Income Program II-1,
L.P., Enstar Income Program II-1, L.P., Enstar Income Program
IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar
IX, Ltd., Enstar XI, Ltd., Enstar IV/PBD Systems Venture,
Enstar Cable of Cumberland Valley and Enstar Cable of Macoupin
County, as Sellers. (Incorporated by reference to the exhibits
to the Current Report on Form 10-Q of Enstar Income Program
IV-1,
E-1
File No. 000-15705 for the quarter ended September 30, 2000.)
10.1 Management Agreement between Enstar Income Program IV-3 and
Enstar Cable Corporation. (Incorporated by reference to the
exhibits to the Registrant's Annual Report on Form 10-K, File
No. 000-15686 for the fiscal year ended December 31, 1986.)
10.2 Management Services Agreement between Enstar Cable Corporation
and Falcon Communications, L.P. dated as of September 30, 1998
(Incorporated by reference to the exhibits to the Annual
Report on Form 10-K of Enstar Income Program II-1, L.P., File
No. 000-14508 for the fiscal year ended December 31, 2001.)
10.3 Service agreement between Enstar Communications Corporation,
Enstar Cable Corporation and Falcon Communications, L.P. dated
as of September 30, 1998 (Incorporated by reference to the
exhibits to the Annual Report on Form 10-K of Enstar Income
Program II-1, L.P., File No. 000-14508 for the fiscal year
ended December 31, 2001.)
10.4 Consulting Agreement between Enstar Communications Corporation
and Falcon Communications, L.P. dated as of September 30, 1998
(Incorporated by reference to the exhibits to the Annual
Report on Form 10-K of Enstar Income Program II-1, L.P., File
No. 000-14508 for the fiscal year ended December 31, 2001.)
10.5 Amended and Restated Partnership Agreement of Enstar Cable of
Macoupin County, as of October 1, 1993. (Incorporated by
reference to the exhibits to the Registrant's Quarterly Report
on Form 10-Q, File No. 000-15686 for the quarter ended
September 30, 1997.)
10.6 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise
for the City of Fairfield, IL. (Incorporated by reference to
the exhibits to the Registrant's Annual Report on Form 10-K,
File No. 000-15686 for the fiscal year ended December 31,
1987.)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise
for the City of Auburn, Illinois. (Incorporated by reference
to the exhibits to the Registrant's Quarterly Report on Form
10-Q, File No. 000-15686 for the quarter ended September 30,
1997.)
10.8 Franchise Agreement and related documents thereto granting a
non-exclusive community antenna television system franchise
for the City of Shelbyville, Illinois. (Incorporated by
reference to the exhibits to the Registrant's Quarterly Report
on Form 10-Q, File No. 000-15686 for the quarter ended
September 30, 1997.)
10.9 Franchise Ordinance granting a non-exclusive community antenna
television system franchise for the City of Carlinville,
Illinois.
21 Subsidiaries: Enstar Cable of Macoupin County
14.1 Code of Conduct adopted January 28, 2003. (Incorporated by
reference to the exhibits to the Registrant's Annual Report on
Form 10-K, File No. 000-13333 for the fiscal year ended
December 31, 2002.)
**99.1 Certification pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Administrative Officer).
**99.2 Certification pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Principal Financial Officer).
** filed herewith
E-2