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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-15706
ENSTAR INCOME PROGRAM IV-2, L.P.
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(Exact name of Registrant as specified in its charter)
Georgia 58-1648318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12444 Powerscourt Dr., Suite 100
St. Louis, Missouri 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act
Name of each exchange
Title of each Class on which registered
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Units of Limited Partnership Interest None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant - all of the registrant's 39,848 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.
PART I
Item 1. BUSINESS
Introduction
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Enstar Income Program IV-2, L.P., a Georgia limited
partnership, is engaged in the ownership and operation of cable television
systems in small to medium-sized communities. The partnership was formed on
October 16, 1985. The general partners of the partnership are Enstar
Communications Corporation (the "corporate general partner"), and Robert T.
Graff, Jr. (the "individual general partner"). On November 12, 1999, Charter
Communications Holdings Company, LLC, an entity controlled by Charter
Communications, Inc., acquired both the corporate general partner, as well as
Falcon Communications, L.P., the entity that provided management and certain
other services to the partnership. Charter is the nation's fourth largest cable
operator, serving 6.2 million customers and files periodic reports with the
Securities and Exchange Commission. Charter and its affiliates (principally CC
VII Holdings, LLC, the successor-by-merger to Falcon Communications, L.P.) now
provide management and other services to the partnership. See Item 13., "Certain
Relationships and Related Transactions." See "Employees" below. In this annual
report, the terms "we" and "our" refer to the partnership.
All of our cable television business operations are conducted
through the partnership's participation as a co-general partner in both Enstar
IV/PBD Systems Venture and Enstar Cable of Macoupin County (collectively the
"Joint Ventures"), the other general partners of which are also cable television
limited partnerships sponsored by the general partners of the partnership. The
Joint Ventures were formed in order to enable each of their partners to
participate in the acquisition and ownership of a more diverse pool of systems
by combining certain of their financial resources. Because all of our operations
are conducted through our participation in the Joint Ventures, much of the
discussion in this report relates to the Joint Ventures and their activities.
References to the partnership include the Joint Ventures where appropriate.
In accordance with the partnership agreement, the corporate
general partner has implemented a plan for liquidating the partnership. In
connection with that strategy, the corporate general partner has entered into an
agreement with a cable broker to market the Joint Ventures' cable systems to
third parties. Should the Joint Ventures receive offers from third parties for
such assets, the corporate general partner will prepare a proxy for submission
to the limited partners for the purpose of approving or disapproving such sale.
Should such a sale be approved, the corporate general partner will proceed to
liquidate the partnership and Joint Ventures following the settlement of their
final liabilities. We can give no assurance, however, that we will be able to
generate a sale of the Joint Ventures' cable assets.
A cable television system receives television, radio and data
signals at the system's "headend" site by means of over-the-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
Our cable television systems offer customers various levels,
or "tiers", of cable services consisting of:
* broadcast television signals of local network, independent and educational
stations
* a limited number of television signals from so-called "super stations"
originating from distant cities, such as WGN
* various satellite - delivered, non-broadcast channels, such as
- Cable News Network, or "CNN"
- MTV: Music Television, or "MTV"
- The USA Network
- ESPN
-2-
- Turner Network Television, or "TNT" and
- The Disney Channel
* programming originated locally by the cable television system, such as
public, educational and government access programs, and
* information displays featuring news, weather, stock market and financial
reports, and public service announcements.
For an extra monthly charge, our cable television systems also
offer "premium" television services to their customers. These services, such as
Home Box Office, or "HBO", and Showtime are satellite channels that consist
principally of feature films, live sporting events, concerts and other special
entertainment features, usually presented without commercial interruption. See
"Legislation and Regulation."
A customer generally pays an initial installation charge and
fixed monthly fees for basic, expanded basic, other tiers of satellite services
and premium programming services. Such monthly service fees constitute the
primary source of revenues for our cable television systems. In addition to
customer revenues, our cable television systems receive revenue from the sale of
available advertising spots on advertiser-supported programming and also offer
to our customers home shopping services, which pay the partnership a share of
revenues from sales of products to our customers, in addition to paying us a
separate fee in return for carrying their shopping service. Certain other
channels have also offered the cable systems managed by Charter, including those
of the partnership, fees in return for carrying their service, but due to our
pending sale, our management cannot predict the impact of such potential
payments on our business. See Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Charter receives a management fee and reimbursement of
expenses from the corporate general partner for managing our cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of the general partner is Jerald
L. Kent. The principal executive offices of the partnership and the general
partner are located at 12444 Powerscourt Drive, Suite 100, St. Louis, MO
63131-0555 and their telephone number is (314) 965-0555. See Item 10.,
"Directors and Executive Officers of the Registrant."
BUSINESS STRATEGY
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Historically, the partnership has followed a systematic
approach to acquiring, operating and developing cable television systems based
on the primary goal of increasing operating cash flow while maintaining the
quality of services offered by its cable television systems. Our business
strategy has focused on serving small to medium-sized communities. We believe
that given a similar rate, technical, and channel capacity/utilization profile,
our cable television systems generally involve less risk of increased
competition than systems in large urban cities. In our markets, consumers have
access to only a limited number of over-the-air broadcast television signals. In
addition, these markets typically offer fewer competing entertainment
alternatives than large cities. Nonetheless, we believe that all cable operators
will face increased competition in the future from alternative providers of
multi-channel video programming services. See "Competition."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992, or the "1992 Cable
Act", by the FCC has had a negative impact on our revenues and cash flow. These
rules are subject to further amendment to give effect to the Telecommunications
Act of 1996. Among other changes, the 1996 Telecommunications Act caused the
regulation of certain cable programming service tier rates to terminate on March
31, 1999. There can be no assurance as to what, if any, further action may be
taken by the FCC, Congress or any other regulatory authority or court, or their
effect on our business. See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
-3-
Clustering
We have sought to acquire cable television operations in
communities that are proximate to other owned or affiliated systems in order to
achieve the economies of scale and operating efficiencies associated with
regional "clusters." We believe clustering can reduce marketing and personnel
costs and can also reduce capital expenditures in cases where cable service can
be delivered through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments," 69% of our
subscribers are served by cable television systems with no available channel
capacity with which to add new channels or to further expand their use of
pay-per-view offerings to customers. As a result, in the event we are not able
to sell our cable television systems to a third party, significant amounts of
capital for future upgrades will be required in order to increase available
channel capacity in those systems, improve quality of service and facilitate the
expansion of new services such as advertising, pay-per-view, new unregulated
tiers of satellite-delivered services and home shopping, so that our cable
television systems remain competitive within the industry.
Our management has selected a technical standard that
incorporates the use of fiber optic technology where applicable in its
engineering design for the majority of our cable television systems that are to
be rebuilt. A system built with this type of architecture can provide for future
channels of analog service as well as new digital services. Such a system will
also permit the introduction of high speed data transmission/Internet access and
telephony services in the future after incurring incremental capital
expenditures related to these services. We are also evaluating the use of
digital compression technology in our cable television systems. See
"Technological Developments" and "Digital Compression."
The Macoupin Joint Venture completed the rebuild of its cable
system in Auburn, Illinois and surrounding communities in 1999 at an estimated
total cost of approximately $1,471,100, including approximately $42,000 in 1999
to complete the project. The Macoupin Joint Venture also is required by a
provision of its franchise agreement with the city of Carlinville, Illinois to
upgrade its cable system in the community by December 2001 at an estimated cost
of $1.1 million. Construction is scheduled to begin in 2001. Additionally, the
Macoupin Joint Venture expects to upgrade its cable plant in Girard, Illinois in
the future at an estimated cost of approximately $1.0 million provided the
franchise agreement is renewed. The franchise agreement under negotiation with
Girard may require completion of the upgrade within two years. The PBD Joint
Venture expects to upgrade its Mt. Carmel, Illinois and Poplar Bluff, Missouri
cable systems beginning in 2000 for approximately $1.3 million and $6.2 million,
respectively, provided franchise renewals are obtained and adequate funds are
available. Although both franchise agreements are still under negotiation, the
PBD Joint Venture anticipates that each will require an upgrade. The franchise
agreement with Mt. Carmel, Illinois is expected to require completion of the
upgrade within 24 months. The agreement under negotiation with Poplar Bluff,
Missouri may include a similar requirement. Capital expenditures for 1999 by the
Macoupin Joint Venture and PBD Joint Venture were approximately $196,400 and
$580,800, respectively. Other capital expenditures planned for 2000 for similar
improvements are $158,500 and $819,700, respectively. As discussed in prior
reports, the Joint Ventures postponed a number of rebuild and upgrade projects
because of the uncertainty related to implementation of the 1992 Cable Act and
the negative impact thereof on the Joint Ventures' business and access to
capital. As a result, a majority of the Joint Ventures' systems are
significantly less technically advanced than had been expected prior to the
implementation of reregulation. In the event we are not able to sell our cable
television systems to a third party, the partnership expects to use cash flow
from the operations of the Joint Ventures and any future borrowings it may be
able to obtain for the rebuild and upgrade of the Joint Ventures' systems. These
rebuild requirements will most likely negatively impact any offers the Joint
Ventures receive for their cable television systems. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
-4-
Decentralized Management
The corporate general partner manages the partnership's cable
television systems on a decentralized basis. The corporate general partner
believes that its decentralized management structure, by enhancing management
presence at the system level, increases its sensitivity to the needs of its
customers, enhances the effectiveness of its customer service efforts,
eliminates the need for maintaining a large centralized corporate staff and
facilitates the maintenance of good relations with local governmental
authorities.
Marketing
The Joint Ventures' marketing strategy is to provide added
value to increasing levels of subscription services through "packaging." In
addition to the basic service package, customers in substantially all of the
Joint Ventures' cable television systems may purchase additional unregulated
packages of satellite-delivered services and premium services. The Joint
Ventures have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. The
Joint Ventures employed direct mail, radio and local newspaper advertising,
telemarketing and door-to-door selling utilizing demographic "cluster codes" to
target specific messages to target audiences. In some cable television systems,
the Joint Ventures offer discounts to customers who purchase premium services on
a limited trial basis in order to encourage a higher level of service
subscription. The Joint Ventures also have a coordinated strategy for retaining
customers that includes televised retention advertising to reinforce the initial
decision to subscribe and encourage customers to purchase higher service levels.
Customer Service and Community Relations
We place a strong emphasis on customer service and community
relations and believe that success in these areas is critical to our business.
We have developed and implemented a wide range of monthly internal training
programs for employees, including our regional managers, that focus on our
operations and employee interaction with customers. The effectiveness of our
training program as it relates to the employees' interaction with customers is
monitored on an ongoing basis. We are also committed to fostering strong
community relations in the towns and cities we serve. We support many local
charities and community causes in various ways, including marketing promotions
to raise money and supplies for persons in need, and in-kind donations that
include production services and free air-time on major cable networks. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate.
-5-
Description of the Joint Ventures' Systems
The table below sets forth certain operating statistics for
the Joint Ventures' cable systems as of December 31, 1999.
Premium Average Monthly
Homes Basic Basic Service Premium Revenue Per Basic
System Passed(1) Subscribers Penetration(2) Units(3) Penetration(4) Subscriber(5)
------ ------ ----------- ----------- ----- ----------- ----------
Enstar IV/PBD
Systems Venture:
Poplar Bluff, MO 15,609 10,092 64.7% 2,514 24.9% $36.01
Mt. Carmel, IL 3,327 2,474 74.4% 548 22.2% $34.68
----- ----- ---
Total 18,936 12,566 66.4% 3,062 24.4% $35.74
====== ====== =====
Enstar Cable of
Macoupin County:
Macoupin, IL 6,749 4,712 69.8% 1,120 23.8% $36.37
1 Homes passed refers to estimates by the Joint Ventures of the
approximate number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
2 Basic subscribers as a percentage of homes passed by cable.
3 Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
4 Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
5 Average monthly revenue per basic subscriber has been computed based
on revenue for the year ended December 31, 1999.
CUSTOMER RATES AND SERVICES
- ---------------------------
The Joint Ventures' cable television systems offer customers
packages of services that include the local area network, independent and
educational television stations, a limited number of television signals from
distant cities, numerous satellite-delivered, non-broadcast channels such as
CNN, MTV, USA, ESPN, TNT and The Disney Channel and certain information and
public access channels. For an extra monthly charge, the Joint Ventures' cable
television systems also provide certain premium television services, such as HBO
and Showtime. The Joint Ventures' cable television systems also offer other
cable television services to its customers. For additional charges, in most of
its cable television systems, the Joint Ventures also rent remote control
devices and VCR compatible devices, which are devices that make it easier for a
customer to tape a program from one channel while watching a program on another.
The Joint Ventures' service options vary from system to
system, depending upon a cable system's channel capacity and viewer interests.
Rates for services also vary from market to market and according to the type of
services selected.
Under the 1992 Cable Act, most cable television systems are
subject to rate regulation of the basic service tier, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of
-6-
the Joint Ventures' cable television systems not deemed to be subject to
effective competition under the FCC's definition. Currently, none of the Joint
Ventures' cable television systems are subject to effective competition. See
"Legislation and Regulation."
At December 31, 1999, the Joint Ventures' monthly rates for
basic cable service for residential customers, including certain discounted
rates, ranged from $18.13 to $23.95 and our premium service rate was $11.95,
excluding special promotions offered periodically in conjunction with the Joint
Ventures' marketing programs. A one-time installation fee, which the Joint
Ventures may wholly or partially waive during a promotional period, is usually
charged to new customers. The Joint Ventures charge commercial customers, such
as hotels, motels and hospitals, a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. The Joint Ventures offer most multi-unit dwellings a negotiated bulk
rate in exchange for single-point billing and basic service to all units. These
rates are also subject to regulation.
EMPLOYEES
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The various personnel required to operate the Joint Ventures'
businesses are employed by the Joint Ventures, the corporate general partner,
its subsidiary corporation and Charter. As of February 19, 2000, the PBD Joint
Venture had 8 employees, the cost of which is charged directly to the PBD Joint
Venture. The Macoupin Joint Venture had no employees. The employment costs
incurred by the corporate general partner, its subsidiary corporation and
Charter are allocated and charged to the Joint Ventures for reimbursement
pursuant to the partnership agreement and management agreement. Other personnel
required to operate the Joint Ventures' business are employed by affiliates of
the corporate general partner. The cost of such employment is allocated and
charged to the Joint Ventures. The amounts of these reimbursable costs are set
forth below in Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
- --------------------------
As part of their commitment to customer service, the Joint
Ventures seek to apply technological advances in the cable television industry
to their cable television systems on the basis of cost effectiveness, capital
availability, enhancement of product quality and service delivery and industry
wide acceptance. Currently, the PBD Joint Venture's systems have an average
channel capacity of 39. The Macoupin Joint Venture's Auburn system, representing
24% of its customers, has a 123-channel capacity, 46% of which is currently
utilized. The remainder of the Macoupin Joint Venture's systems have an average
channel capacity of 38, which is completely utilized. The Joint Ventures believe
that cable television system upgrades would enable them to provide customers
with greater programming diversity, better picture quality and alternative
communications delivery systems made possible by the introduction of fiber optic
technology and by the application of digital compression. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial
cable is playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels and, accordingly, its
utilization is essential to the enhancement of a cable television system's
technical capabilities. The Joint Ventures' current policy is to utilize fiber
optic technology where applicable in rebuild projects which it undertakes. The
benefits of fiber optic technology over traditional coaxial cable distribution
plant include lower ongoing maintenance and power costs and improved picture
quality and reliability.
DIGITAL COMPRESSION
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The Joint Ventures have been closely monitoring developments
in the area of digital compression, a technology that will enable cable
operators to increase the channel capacity of cable television systems by
permitting a significantly increased number of video signals to fit in a cable
television system's existing bandwidth. Depending on the technical
characteristics of the existing system, the Joint Ventures believe that the
utilization of digital compression technology will enable their cable television
systems to increase channel capacity in a manner that could, in the short term,
be more cost efficient than rebuilding such
-7-
cable television systems with higher capacity distribution plant. However, the
Joint Ventures believe that unless the cable television system has sufficient
unused channel capacity and bandwidth, the use of digital compression to
increase channel offerings is not a substitute for the rebuild of the cable
television system, which will improve picture quality, system reliability and
quality of service. The use of digital compression will expand the number and
types of services these cable television systems offer and enhance the
development of current and future revenue sources. This technology has been
under frequent management review.
PROGRAMMING
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The Joint Ventures purchase basic and premium programming for
their systems from Charter. In turn, Charter charges the Joint Ventures for
these costs at its costs which are generally based on a fixed fee per customer
or a percentage of the gross receipts for the particular service. Prior to the
acquisition of the corporate general partner, Falcon Communications charged the
Joint Ventures for these services based on an estimate of what the corporate
general partner could negotiate for such programming services for the 15
partnerships managed by the corporate general partner as a group (approximately
81,100 basic subscribers at December 31, 1999). Other channels have also offered
Charter and the Joint Ventures' cable television systems fees in return for
carrying their service. Due to a lack of channel capacity available for adding
new channels, the Joint Ventures' management cannot predict the impact of such
potential payments on its business. In addition, the FCC may require that such
payments from programmers be offset against the programming fee increases which
can be passed through to subscribers under the FCC's rate regulations. Charter's
programming contracts are generally for a fixed period of time and are subject
to negotiated renewal. Accordingly, no assurance can be given that its, and
correspondingly the Joint Ventures', programming costs will not continue to
increase substantially in the near future, or that other materially adverse
terms will not be added to Charter's programming contracts. Management believes,
however, that Charter's relations with its programming suppliers generally are
good.
The Joint Ventures' cable programming costs have increased in
recent years and are expected to continue to increase due to additional
programming being provided to basic customers, requirements to carry channels
under retransmission carriage agreements entered into with some programming
sources, increased costs to produce or purchase cable programming generally
(including sports programming), inflationary increases and other factors. The
1996 retransmission carriage agreement negotiations were completed with
essentially no change to the previous agreements. Under the FCC's rate
regulations, increases in programming costs for regulated cable services
occurring after the earlier of March 1, 1994, or the date a system's basic cable
service became regulated, may be passed through to customers. Generally,
programming costs are charged among systems on a per customer basis.
FRANCHISES
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Cable television systems are generally constructed and
operated under non-exclusive franchises granted by local governmental
authorities. These franchises typically contain many conditions, such as time
limitations on commencement and completion of construction; conditions of
service, including number of channels, types of programming and the provision of
free service to schools and other public institutions; and the maintenance of
insurance and indemnity bonds. The provisions of local franchises are subject to
federal regulation under the Cable Communications Policy Act of 1984, or the
"1984 Cable Act", the 1992 Cable Act and the 1996 Telecommunications Act. See
"Legislation and Regulation."
PBD Joint Venture
As of December 31, 1999, the PBD Joint Venture operated cable
systems in four franchise areas. These franchises, all of which are
non-exclusive, provide for the payment of fees to the issuing authority. Annual
franchise fees imposed on the PBD Joint Venture's systems range up to 5% of the
gross revenues generated by a system. The 1984 Cable Act prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues and
also permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances.
-8-
The following table groups the franchises of the PBD Joint
Ventures' 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, 1999.
Number Number of Percentage of
Year of of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
-------------------- ---------- ----------- -----------
Prior to 2001 3 7,884 62.8%
2001 - 2005 - - -
2006 and after 1 2,557 20.3%
- ----- ----
Total 4 10,441 83.1%
= ====== ====
As of December 31, 1999, the franchise agreements have expired
in three of the PBD Joint Venture's franchise areas where it serves 7,884 basic
subscribers. The PBD Joint Venture 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. The PBD Joint Venture operates
cable television systems which serve multiple communities and, in some
circumstances, portions of such systems extend into jurisdictions for which the
PBD Joint Venture believes no franchise is necessary. In the aggregate,
approximately 2,125 customers, comprising approximately 16.9% of the PBD Joint
Venture's customers, are served by unfranchised portions of such systems. In
certain instances, where a single franchise comprises a large percentage of the
customers in an operating region, the loss of such franchise could decrease the
economies of scale achieved by the PBD Joint Venture's clustering strategy.
The franchise agreement with the city of Poplar Bluff,
Missouri expired in 1997 and the PBD Joint Venture has been negotiating renewal
of the agreement with the city since that time. On February 8, 2000, voters in
the city of Poplar Bluff approved the sale of bonds to finance construction of a
municipally-owned and operated cable system. The system is intended to compete
directly with the PBD Joint Venture's cable system both in the city and in
Butler County, Missouri. The city-owned cable system may be built to a higher
technical standard than the system owned by the PBD Joint Venture and may offer
a greater number of channels at a lower monthly subscriber rate. The city
estimates that its new system may be operational within two years. The PBD Joint
Venture believes that the competing system, if built, will have a material
adverse impact on its subscriber numbers, financial condition and results of
operations. As of December 31, 1999, there were approximately 4,900 and 1,200
basic subscribers in the city of Poplar Bluff and Butler County, respectively.
Macoupin Joint Venture
As of December 31, 1999, the Macoupin Joint Venture operated a
cable system in seven franchise areas. These franchises, all of which are
non-exclusive, provide for the payment of fees to the issuing authority. Annual
franchise fees imposed on the Macoupin Joint Venture's systems range up to 5% of
the gross revenues generated by a system. The 1984 Cable Act prohibits
franchising authorities from imposing franchise fees in excess of 5% of gross
revenues and also permits the cable system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
-9-
The following table groups the franchises of the Macoupin
Joint Venture's cable television system 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, 1999.
Number Number of Percentage of
Year of of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
-------------------- ---------- ----------- -----------
Prior to 2001 3 1,526 32.4%
2001-2005 4 3,186 67.6%
- ----- -----
Total 7 4,712 100.0%
= ===== ======
As of December 31, 1999, the franchise agreements have expired
in three of the Macoupin Joint Venture's franchise areas where it serves 1,526
basic subscribers. The Macoupin Joint Venture 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. 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 Joint Venture's clustering strategy. The Joint Venture has never
had a franchise revoked for any of its systems and believes that it has
satisfactory relationships with its franchising authorities.
The 1984 Cable Act provides, among other things, for an
orderly franchise renewal process in which franchise renewal will not be
unreasonably withheld or, if renewal is denied and the franchising authority
acquires ownership of the system or effects a transfer of the system to another
person, the operator generally is entitled to the "fair market value" for the
system covered by such franchise, but no value may be attributed to the
franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable
Act, establishes comprehensive renewal procedures which require that an
incumbent franchisee's renewal application be assessed on its own merit and not
as part of a comparative process with competing applications. See "Legislation
and Regulation."
COMPETITION
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We face competition in the areas of price, service offerings,
and service reliability. We compete with other providers of television signals
and other sources of home entertainment. In addition, as we expand into
additional services such as Internet access, interactive services and telephony,
we will face competition from other providers of each type of service.
To date, we believe that we have not lost a significant number
of customers, or a significant amount of revenue, to our competitors' systems.
However, competition from other providers of the technologies we expect to offer
in the future may have a negative impact on our business in the future.
Through mergers such as the recent merger of
Tele-Communications, Inc. and AT&T, customers will come to expect a variety of
services from a single provider. While the TCI/AT&T merger has no direct or
immediate impact on our business, it encourages providers of cable and
telecommunications services to expand their service offerings. It also
encourages consolidation in the cable industry as cable operators recognize the
competitive benefits of a large customer base and expanded financial resources.
Key competitors today include:
BROADCAST TELEVISION. Cable television has long competed with
broadcast television, which consists of television signals that the viewer is
able to receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through
-10-
"off-air" reception compared to the services provided by the local cable
system. The recent licensing of digital spectrum by the FCC will provide
incumbent television licenses with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
DBS. Direct broadcast satellite, known as DBS, has emerged as
significant competition to cable systems. The DBS industry has grown rapidly
over the last several years, far exceeding the growth rate of the cable
television industry, and now serves approximately 10 million subscribers
nationwide. DBS service allows the subscriber to receive video services directly
via satellite using a relatively small dish antenna. Moreover, video compression
technology allows DBS providers to offer more than 100 digital channels, thereby
surpassing the typical analog cable system. DBS companies historically were
prohibited from retransmitting popular local broadcast programming, but a change
to the existing copyright laws in November 1999 eliminated this legal
impediment. After an initial six-month grace period, DBS companies will need to
secure retransmission consent from the popular broadcast stations they wish to
carry, and they will face mandatory carriage obligations of less popular
broadcast stations as of January 2002. In response to the legislation, DirecTV,
Inc. and EchoStar Communications Corporation already have initiated plans to
carry the major network stations in the nation's top television markets. DBS,
however, is limited in the local programming it can provide because of the
current capacity limitations of satellite technology. It is, therefore, expected
that DBS companies will offer local broadcast programming only in the larger
U.S. markets for the foreseeable future. The same legislation providing for DBS
carriage of local broadcast stations reduced the compulsory copyright fees paid
by DBS companies and allows them to continue offering distant network signals to
rural customers. America Online Inc., the nation's leading provider of Internet
services has recently announced a plan to invest $1.5 billion in Hughes
Electronics Corp., DirecTV's parent company, and these companies intend to
jointly market America Online's prospective Internet television service to
DirecTV's DBS customers.
DSL. The deployment of digital subscriber line technology,
known as DSL, will allow Internet access to subscribers at data transmission
speeds greater than those of modems over conventional telephone lines. Several
telephone companies and other companies are introducing DSL service. The FCC
recently released an order in which it mandated that incumbent telephone
companies grant access to the high frequency portion of the local loop over
which they provide voice services. This will enable competitive carriers to
provide DSL services over the same telephone lines simultaneously used by
incumbent telephone companies to provide basic telephone service. However, in a
separate order the FCC declined to mandate that incumbent telephone companies
unbundle their internal packet switching functionality or related equipment for
the benefit of competitive carriers. This functionality or equipment could
otherwise have been used by competitive carriers directly to provide DSL or
other high-speed broadband services. We are unable to predict whether the FCC's
decisions will be sustained upon administrative or judicial appeal, the
likelihood of success of the Internet access offered by our competitors or the
impact on our business and operations of these competitive ventures.
TRADITIONAL OVERBUILDS. Cable television systems are operated
under non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that
franchise might contain terms and conditions more favorable than those afforded
us. In addition, entities willing to establish an open video system, under which
they offer unaffiliated programmers non-discriminatory access to a portion of
the system's cable system may be able to avoid local franchising requirements.
Well financed businesses from outside the cable industry, such as public
utilities which already possess fiber optic and other transmission lines in the
areas they serve may over time become competitors. There has been a recent
increase in the number of cities that have constructed their own cable systems,
in a manner similar to city-provided utility services. Constructing a competing
cable system is a capital intensive process which involves a high degree of
risk. We believe that in order to be successful, a competitor's overbuild would
need to be able to serve the homes and businesses in the overbuilt area on a
more cost-effective basis than us. Any such overbuild operation would require
either significant access to capital or access to facilities already in place
that are capable of delivering cable television programming.
-11-
TELEPHONE COMPANIES AND UTILITIES. The competitive environment
has been significantly affected by both technological developments and
regulatory changes enacted in the 1996 Telecommunications Act, which were
designed to enhance competition in the cable television and local telephone
markets. Federal cross-ownership restrictions historically limited entry by
local telephone companies into the cable television business. The 1996
Telecommunications Act modified this cross-ownership restriction, making it
possible for local exchange carriers who have considerable resources to provide
a wide variety of video services competitive with services offered by cable
systems.
If we expand our offerings to include Internet and other
telecommunications services, we will be subject to competition from other
telecommunications providers. The telecommunications industry is highly
competitive and includes competitors with greater financial and personnel
resources, who have brand name recognition and long-standing relationships with
regulatory authorities. Moreover, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, local exchange
carriers and others may result in providers capable of offering cable
television, Internet, and telecommunications services in direct competition with
us.
Several telephone companies have obtained or are seeking cable
television franchises from local governmental authorities and are constructing
cable systems. Cross-subsidization by local exchange carriers of video and
telephony services poses a strategic advantage over cable operators seeking to
compete with local exchange carriers that provide video services. Some local
exchange carriers may choose to make broadband services available under the open
video regulatory framework of the FCC. In addition, local exchange carriers
provide facilities for the transmission and distribution of voice and data
services, including Internet services, in competition with our existing or
potential interactive services ventures and businesses, including Internet
service, as well as data and other non-video services. We cannot predict the
likelihood of success of the broadband services offered by our competitors or
the impact on us of such competitive ventures. The entry of telephone companies
as direct competitors in the video marketplace, however, is likely to become
more widespread and could adversely affect the profitability and valuation of
the systems.
Additionally, we are subject to competition from utilities
which possess fiber optic transmission lines capable of transmitting signals
with minimal signal distortion.
SMATV. Additional competition is posed by satellite master
antenna television systems known as "SMATV systems" serving multiple dwelling
units, referred to in the cable industry as "MDU's", such as condominiums,
apartment complexes, and private residential communities. These private cable
systems may enter into exclusive agreements with such MDUs, which may preclude
operators of franchise systems from serving residents of such private complexes.
Such private cable systems can offer both improved reception of local television
stations and many of the same satellite-delivered program services which are
offered by cable systems. SMATV systems currently benefit from operating
advantages not available to franchised cable systems, including fewer regulatory
burdens and no requirement to service low density or economically depressed
communities. Exemption from regulation may provide a competitive advantage to
certain of our current and potential competitors.
WIRELESS DISTRIBUTION. Cable television systems also compete
with wireless program distribution services such as multi-channel multipoint
distribution systems or "wireless cable", known as MMDS. MMDS uses low-power
microwave frequencies to transmit television programming over-the-air to paying
customers. Wireless distribution services generally provide many of the
programming services provided by cable systems, and digital compression
technology is likely to increase significantly the channel capacity of their
systems. Both analog and digital MMDS services require unobstructed "line of
sight" transmission paths.
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LEGISLATION AND REGULATION
The following summary addresses the key regulatory
developments and legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by
the FCC, some state governments and most local governments. The 1996
Telecommunications Act has altered the regulatory structure governing the
nation's communications providers. It removes barriers to competition in both
the cable television market and the local telephone market. Among other things,
it also reduces the scope of cable rate regulation and encourages additional
competition in the video programming industry by allowing local telephone
companies to provide video programming in their own telephone service areas.
The 1996 Telecommunications Act requires the FCC to undertake
a host of implementing rulemakings. Moreover, Congress and the FCC have
frequently revisited the subject of cable regulation. Future legislative and
regulatory changes could adversely affect our operations, and there have been
calls in Congress and at the FCC to maintain or even tighten cable regulation in
the absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive
rate regulation regime on the cable television industry, which limited the
ability of cable companies to increase subscriber fees. Under that regime, all
cable systems are subject to rate regulation, unless they face "effective
competition" in their local franchise area. Federal law now defines "effective
competition" on a community-specific basis as requiring satisfaction of
conditions rarely satisfied in the current marketplace.
Although the FCC has established the underlying regulatory
scheme, local government units, commonly referred to as local franchising
authorities, are primarily responsible for administering the regulation of the
lowest level of cable--the basic service tier, which typically contains local
broadcast stations and public, educational and government access channels.
Before a local franchising authority begins basic service rate regulation, it
must certify to the FCC that it will follow applicable federal rules. Many local
franchising authorities have voluntarily declined to exercise their authority to
regulate basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 1999, approximately 14% of our local
franchising authorities were certified to regulate basic tier rates. The 1992
Cable Act permits communities to certify and regulate rates at any time, so that
it is possible that localities served by the systems may choose to certify and
regulate rates in the future.
The FCC historically administered rate regulation of cable
programming service tiers, which is the expanded basic programming package that
offers services other than basic programming and which typically contains
satellite-delivered programming. As of December 31, 1999, we had no cable
programming service tier rate complaints pending at the FCC. Under the 1996
Telecommunications Act, however, the FCC's authority to regulate cable
programming service tier rates terminated on March 31, 1999. The FCC has taken
the position that it will still adjudicate pending cable programming service
tier complaints but will strictly limit its review, and possible refund orders,
to the time period predating the termination date. The elimination of cable
programming service tier regulation on a prospective basis affords us
substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were
required to reduce their basic service tier and cable programming service tier
rates in 1993 and 1994, and have since had their rate increases governed by a
complicated price cap scheme that allows for the recovery of inflation and
certain increased costs, as well as providing some incentive for expanding
channel carriage. The FCC has modified its rate adjustment regulations to allow
for annual rate increases and to minimize previous problems associated with
regulatory lag. Operators also have the opportunity to bypass this "benchmark"
regulatory scheme in favor of traditional "cost-of-service" regulation in cases
where the latter methodology appears favorable. Cost of
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service regulation is a traditional form of rate regulation, under which a
utility is allowed to recover its costs of providing the regulated service, plus
a reasonable profit. The FCC and Congress have provided various forms of rate
relief for smaller cable systems owned by smaller operators. Premium cable
services offered on a per-channel or per program basis remain unregulated.
However, federal law requires that the basic service tier be offered to all
cable subscribers and limits the ability of operators to require purchase of any
cable programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which terminates in 2002.
As noted above, FCC regulation of cable programming service
tier rates for all systems, regardless of size, terminated under the 1996
Telecommunications Act on March 31, 1999. As a result, the regulatory regime
just discussed is now essentially applicable only to basic services tier and
cable equipment. Some legislators, however, have called for new rate regulations
if unregulated rates increase dramatically. The 1996 Telecommunications Act also
relaxes existing "uniform rate" requirements by specifying that uniform rate
requirements do not apply where the operator faces "effective competition," and
by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996
Telecommunications Act creates a more favorable environment for us to provide
telecommunications services beyond traditional video delivery. It provides that
no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. A cable operator is authorized under the 1996
Telecommunications Act to provide telecommunications services without obtaining
a separate local franchise. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles, beginning in
2001, if the operator provides telecommunications service, as well as cable
service, over its plant. The FCC recently clarified that a cable operator's
favorable pole rates are not endangered by the provision of Internet access.
Cable entry into telecommunications will be affected by the
regulatory landscape now being developed by the FCC and state regulators. One
critical component of the 1996 Telecommunications Act to facilitate the entry of
new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. In July
1997, the Eighth Circuit Court of Appeals vacated certain aspects of the FCC
initial interconnection order but most of that decision was reversed by the U.S.
Supreme Court in January 1999. The Supreme Court effectively upheld most of the
FCC interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
subject to administrative and judicial appeal. If the FCC's current list of
unbundled network elements is upheld on appeal, it would make it easier for us
to provide telecommunications service.
INTERNET SERVICE. Although there is at present no significant
federal regulation of cable system delivery of Internet services, and the FCC
recently issued several reports finding no immediate need to impose such
regulation, this situation may change as cable systems expand their broadband
delivery of Internet services. In particular, proposals have been advanced at
the FCC and Congress that would require cable operators to provide access to
unaffiliated Internet service providers and online service providers. Certain
Internet service providers also are attempting to use existing modes of access
that are commercially leased to gain access to cable system delivery. A petition
on this issue is now pending before the FCC. Finally, some local franchising
authorities are considering the imposition of mandatory Internet access
requirements as part of cable franchise renewals or transfers. A federal
district court in Portland, Oregon recently upheld the legal ability of local
franchising authorities to impose such conditions, but an appeal was filed with
the Ninth Circuit Court of Appeals, oral argument has been held and the parties
are awaiting a decision. Other local authorities have imposed or may impose
mandatory Internet access requirements on
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cable operators. These developments could, if they become widespread, burden
the capacity of cable systems and complicate our own plans for providing
Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996
Telecommunications Act allows telephone companies to compete directly with cable
operators by repealing the historic telephone company/cable cross-ownership ban.
Local exchange carriers, including the regional telephone companies, can now
compete with cable operators both inside and outside their telephone service
areas with certain regulatory safeguards. Because of their resources, local
exchange carriers could be formidable competitors to traditional cable
operators. Various local exchange carriers already are providing video
programming services within their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire facilities
and the use of wireless transmission.
Under the 1996 Telecommunications Act, local exchange carriers
or any other cable competitor providing video programming to subscribers through
broadband wire should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the FCC's open video system rules, including its preemption of local
franchising. The FCC recently revised the applicable rules to eliminate this
general preemption, thereby leaving franchising discretion to state and local
authorities. It is unclear what effect this ruling will have on the entities
pursuing open video system operation.
Although local exchange carriers and cable operators can now
expand their offerings across traditional service boundaries, the general
prohibition remains on local exchange carrier buyouts of co-located cable
systems. Co-located cable systems are cable systems serving an overlapping
territory. Cable operator buyouts of co-located local exchange carrier systems,
and joint ventures between cable operators and local exchange carriers in the
same market are also prohibited. The 1996 Telecommunications Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecommunications Act also provides
the FCC with the limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE
TELEVISION. The 1996 Telecommunications Act provides that registered utility
holding companies and subsidiaries may provide telecommunications services,
including cable television, despite restrictions in the Public Utility Holding
Company Act. Electric utilities must establish separate subsidiaries, known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Like telephone companies, electric utilities have substantial
resources at their disposal, and could be formidable competitors to traditional
cable systems. Several such utilities have been granted broad authority by the
FCC to engage in activities which could include the provision of video
programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecommunications
Act eliminates statutory restrictions on broadcast/cable cross-ownership,
including broadcast network/cable restrictions, but leaves in place existing FCC
regulations prohibiting local cross-ownership between co-located television
stations and cable systems.
Under the 1992 Cable Act, the FCC adopted rules precluding a
cable system from devoting more than 40% of its activated channel capacity to
the carriage of affiliated national video program services. Also under the 1992
Cable Act, the FCC has adopted rules that preclude any cable operator from
serving more than 30% of all U.S. domestic multichannel video subscribers,
including cable and direct broadcast satellite subscribers. However, this
provision has been stayed pending further judicial review.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains
broadcast signal carriage requirements. Broadcast signal carriage is the
transmission of broadcast television signals over a cable system to cable
customers. These requirements, among other things, allow local commercial
television broadcast stations to elect once every three years between "must
carry" status or "retransmission consent"
-15-
status. Less popular stations typically elect must carry, which is the
broadcast signal carriage requirement that allows local commercial television
broadcast stations to require a cable system to carry the station. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent which is the broadcast signal carriage requirement that
allows local commercial television broadcast stations to negotiate for payments
for granting permission to the cable operator to carry the stations. Must carry
requests can dilute the appeal of a cable system's programming offerings because
a cable system with limited channel capacity may be required to forego carriage
of popular channels in favor of less popular broadcast stations electing must
carry. Retransmission consent demands may require substantial payments or other
concessions. Either option has a potentially adverse effect on our business. The
burden associated with must carry may increase substantially if broadcasters
proceed with planned conversion to digital transmission and the FCC determines
that cable systems must carry all analog and digital broadcasts in their
entirety. This burden would reduce capacity available for more popular video
programming and new internet and telecommunication offerings. A rulemaking is
now pending at the FCC regarding the imposition of dual digital and analog must
carry.
ACCESS CHANNELS. Local franchising authorities can include
franchise provisions requiring cable operators to set aside certain channels for
public, educational and governmental access programming. Federal law also
requires cable systems to designate a portion of their channel capacity, up to
15% in some cases, for commercial leased access by unaffiliated third parties.
The FCC has adopted rules regulating the terms, conditions and maximum rates a
cable operator may charge for commercial leased access use. We believe that
requests for commercial leased access carriages have been relatively limited. A
new request has been forwarded to the FCC, however, requesting that unaffiliated
Internet service providers be found eligible for commercial leased access.
Although we do not believe such use is in accord with the governing statute, a
contrary ruling could lead to substantial leased activity by Internet service
providers and disrupt our own plans for Internet service.
ACCESS TO PROGRAMMING. To spur the development of independent
cable programmers and competition to incumbent cable operators, the 1992 Cable
Act imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting
terrestrially delivered programming to the program access requirements.
Terrestrially delivered programming is programming delivered other than by
satellite. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy.
INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997,
the FCC established rules that require an incumbent cable operator upon
expiration of a multiple dwelling unit service contract to sell, abandon, or
remove "home run" wiring that was installed by the cable operator in a multiple
dwelling unit building. These inside wiring rules are expected to assist
building owners in their attempts to replace existing cable operators with new
programming providers who are willing to pay the building owner a higher fee,
where such a fee is permissible. The FCC has also proposed abrogating all
exclusive multiple dwelling unit service agreements held by incumbent operators,
but allowing such contracts when held by new entrants. In another proceeding,
the FCC has preempted restrictions on the deployment of private antenna on
rental property within the exclusive use of a tenant, such as balconies and
patios. This FCC ruling may limit the extent to which we along with multiple
dwelling unit owners may enforce certain aspects of multiple dwelling unit
agreements which otherwise prohibit, for example, placement of digital broadcast
satellite receiver antennae in multiple dwelling unit areas under the exclusive
occupancy of a renter. These developments may make it even more difficult for us
to provide service in multiple dwelling unit complexes.
-16-
OTHER REGULATIONS OF THE FCC. In addition to the FCC
regulations noted above, there are other regulations of the FCC covering such
areas as:
* equal employment opportunity,
* subscriber privacy,
* programming practices, including, among other things,
(1) syndicated program exclusivity, which is a FCC rule which requires
a cable system to delete particular programming offered by a
distant broadcast signal carried on the system which duplicates the
programming for which a local broadcast station has secured
exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
* 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,
* technical standards,
* consumer electronics equipment compatibility, and
* emergency alert systems.
The FCC recently ruled that cable customers must be allowed to
purchase cable converters from third parties and established a multi-year
phase-in during which security functions, which would remain in the operator's
exclusive control, would be unbundled from basic converter functions, which
could then be satisfied by third party vendors.
The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities used in
connection with cable operations.
-17-
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. A prior voluntarily
negotiated agreement with Broadcast Music has now expired, and is subject to
further proceedings. The governing rate court recently set retroactive and
prospective cable industry rates for American Society of Composers music based
on the previously negotiated Broadcast Music rate. Although we cannot predict
the ultimate outcome of these industry proceedings or the amount of any license
fees we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
STATE AND LOCAL REGULATION. Cable television systems generally
are operated pursuant to 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
failed to comply with material provisions.
The specific terms and conditions of franchises vary
materially between jurisdictions. Each franchise generally contains provisions
governing cable operations, service rates, franchising fees, system construction
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards, and indemnification protections. A
number of states, including Connecticut, subject cable systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Although local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect
incumbent franchisees against arbitrary denials of renewal. Even if a franchise
is renewed, the local franchising authority may seek to impose new and more
onerous requirements such as significant upgrades in facilities and service or
increased franchise fees as a condition of renewal. Similarly, if a local
franchising authority's consent is required for the purchase or sale of a cable
system or franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecommunications Act, cable operators are not
required to obtain franchises for the provision of telecommunications services,
and local franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of such services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a franchise transfer. The 1996 Telecommunications Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that a cable operator derives from providing new
telecommunications services.
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Item 2. PROPERTIES
The Joint Ventures own or lease parcels of real property for
signal reception sites (antenna towers and headends), microwave facilities and
business offices, and own or lease our service vehicles. The Joint Ventures
believe that their properties, both owned and leased, are in good condition and
are suitable and adequate for our business operations.
The Joint Ventures own substantially all of the assets related
to their cable television operations, including program production equipment,
headend (towers, antennas, electronic equipment and satellite earth stations),
cable plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
Item 3. LEGAL PROCEEDINGS
We are periodically a party to various legal proceedings.
These legal proceedings are ordinary and routine litigation proceedings that are
incidental to our business. Except for the item noted below, management believes
that the outcome of pending legal proceedings will not, in the aggregate, have a
material adverse effect on our financial condition.
In the states of Missouri and Illinois, customers have filed
punitive class action lawsuits on behalf of all persons residing in the states
who are or were customers of the Joint Ventures' cable television service, and
who have been charged a fee for delinquent payment of their cable bill. The
actions challenge the legality of the processing fee and seek declaratory
judgment, injunctive relief and unspecified damages. At present, the Joint
Ventures are not able to project the outcome of the actions. All of the Joint
Ventures' basic subscribers reside in Missouri and Illinois where the claims
have been filed.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED
SECURITY HOLDER MATTERS
Liquidity
- ---------
While our equity securities, which consist of units of limited
partnership interests, are publicly held, there is no established public trading
market for the units and we do not expect that a market will develop. The
approximate number of equity security holders of record was 963 as of December
31, 1999. In addition to restrictions on the transferability of units contained
in our partnership agreement, the transferability of units may be affected by
restrictions on resales imposed by federal or state law.
Distributions
- -------------
The amended partnership agreement generally provides that all
cash distributions (as defined) be allocated one percent 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 one percent 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 one percent 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.
The policy of the corporate general partner (although there is
no contractual obligation to do so) is to cause the partnership to make cash
distributions on a quarterly basis throughout the operational life of the
partnership, assuming the availability of sufficient cash flow from the Joint
Venture operations. The amount of such distributions, if any, will vary from
quarter to quarter depending upon the Joint Venture's results of operations and
the corporate general partner's determination of whether otherwise available
funds are needed for the Joint Venture's ongoing working capital and liquidity
requirements.
We began making periodic cash distributions to limited
partners from operations during 1986 and distributed $498,100 ($12.50 per unit)
in each of 1997, 1998 and 1999. The distributions were primarily funded from
cash flow generated by Partnership operations, which consisted of cash flow
distributions received by the Partnership from the Joint Ventures. The
Partnership will continue to determine its ability to pay distributions on a
quarter-by-quarter basis. See Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
-20-
Our ability to pay distributions in the future, the actual
level of any such distributions and the continuance of distributions if
commenced, will depend on a number of factors, including: the amount of cash
flow from operations, projected capital expenditures, provision for contingent
liabilities, availability of bank refinancing, regulatory or legislative
developments governing the cable television industry, and growth in customers.
Some of these factors are beyond our control, and consequently, we cannot make
assurances regarding the level or timing of future distributions, if any. The
partnership's loan facility does not restrict the payment of distributions to
partners unless an event of default exists thereunder or the partnership's ratio
of debt to cash flow is greater than 4 to 1. See Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership,
Enstar IV/PBD Systems Venture and Enstar Cable of Macoupin County. This data
should be read in conjunction with the Partnership's and Joint Ventures'
financial statements included in Item 8 hereof and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7.
I. THE PARTNERSHIP
Year Ended December 31,
---------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- -------------
Costs and expenses $ (28,100) $ (29,000) $ (39,200) $ (30,600) $ (36,800)
Interest expense (125,200) (118,500) (108,800) (36,400) (34,400)
Interest income 12,500 29,300 24,800 13,200 11,100
Equity in net income of
Enstar IV/PBD Systems Venture 216,200 627,400 1,001,100 1,039,500 920,800
Equity in net income of Enstar
Cable of Macoupin County 28,000 123,500 131,900 207,100 237,200
-------------- -------------- -------------- -------------- --------------
Net income $ 103,400 $ 632,700 $ 1,009,800 $ 1,192,800 $ 1,097,900
============== ============== ============== ============== ==============
Distributions to partners $ 503,100 $ 503,100 $ 503,100 $ 503,100 $ 503,100
============== ============== ============== ============== ==============
Per unit of limited
partnership interest:
Net income $ 2.57 $ 15.72 $ 25.09 $ 29.64 $ 27.28
============== ============== ============== ============== ==============
Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
============== ============== ============== ============== ==============
OTHER OPERATING DATA
Net cash used in operating activities $ (117,300) $ (95,800) $ (90,300) $ (47,800) $ (46,900)
Net cash provided by investing activities 333,000 980,000 1,380,000 460,200 568,500
Net cash used in financing activities (503,100) (503,100) (1,551,200) (504,900) (503,100)
As of December 31,
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
Total assets $ 2,881,800 $ 3,016,800 $ 2,530,200 $ 3,213,400 $ 3,808,400
Total debt 1,000,000 1,000,000 - - -
General partners' deficit (64,500) (63,200) (58,100) (51,200) (45,200)
Limited partners' capital 1,927,300 2,055,600 2,557,200 3,240,000 3,828,800
-21-
II. ENSTAR IV/PBD SYSTEMS VENTURE
Year Ended December 31,
---------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- -------------
Revenues $ 5,075,500 $ 5,428,600 $ 5,584,600 $ 5,589,000 $ 5,485,400
Costs and expenses (2,992,300) (3,194,100) (3,210,100) (3,152,000) (3,257,600)
Depreciation and amortization (1,692,800) (1,013,000) (475,500) (449,700) (494,100)
-------------- -------------- -------------- -------------- --------------
Operating income 390,400 1,221,500 1,899,000 1,987,300 1,733,700
Interest income, net 42,000 34,800 103,200 88,000 107,900
Gain (loss) on sale of cable assets - (1,500) - 3,700 -
-------------- -------------- -------------- -------------- --------------
Net income $ 432,400 $ 1,254,800 $ 2,002,200 $ 2,079,000 $ 1,841,600
============== ============== ============== ============== ==============
Distributions to venturers $ 666,000 $ 1,260,000 $ 2,710,000 $ 895,400 $ 1,067,000
============== ============== ============== ============== ==============
OTHER OPERATING DATA
Net cash provided by operating activities $ 2,006,100 $ 2,180,800 $ 2,644,200 $ 2,517,400 $ 1,879,600
Net cash used in investing activities (878,400) (265,800) (255,800) (349,000) (587,700)
Net cash used in financing activities (666,000) (1,260,000) (2,710,000) (895,400) (1,067,000)
EBITDA (1) 2,083,200 2,234,500 2,374,500 2,437,000 2,227,800
EBITDA to revenues 41.0% 41.2% 42.5% 43.6% 40.6%
Capital expenditures $ 791,600 $ 190,300 $ 215,600 $ 326,300 $ 580,800
As of December 31,
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
Total assets $ 4,188,300 $ 4,224,300 $ 3,558,400 $ 4,736,900 $ 5,215,900
Venturers' capital 3,544,000 3,538,800 2,831,000 4,014,600 4,789,200
-22-
III. ENSTAR CABLE OF MACOUPIN COUNTY
Year Ended December 31,
---------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- -------------
Revenues $ 1,646,000 $ 1,870,600 $ 1,975,900 $ 2,003,000 $ 1,993,600
Costs and expenses (959,200) (898,300) (1,020,900) (1,060,500) (1,113,700)
Depreciation and amortization (634,800) (614,400) (575,400) (344,500) (217,800)
-------------- -------------- -------------- -------------- --------------
Operating income 52,000 357,900 379,600 598,000 662,100
Interest income, net 32,000 12,000 16,100 23,300 49,500
Gain on sale of cable assets - 600 - - -
-------------- -------------- -------------- -------------- --------------
Net income $ 84,000 $ 370,500 $ 395,700 $ 621,300 $ 711,600
============== ============== ============== ============== ==============
Distributions to venturers $ - $ 1,050,000 $ 75,000 $ 37,500 $ 105,000
============== ============== ============== ============== ==============
OTHER OPERATING DATA
Net cash provided by operating activities $ 799,900 $ 860,200 $ 838,000 $ 1,010,200 $ 737,700
Net cash used in investing activities (340,000) (439,800) (689,400) (205,100) (232,700)
Net cash used in financing activities - (1,050,000) (75,000) (37,500) (105,000)
EBITDA (1) 686,800 972,300 955,000 942,500 879,900
EBITDA to revenues 41.7% 52.0% 48.3% 47.1% 44.1%
Capital expenditures $ 325,500 $ 411,200 $ 677,900 $ 170,900 $ 196,400
As of December 31,
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
Total assets $ 2,840,100 $ 2,084,400 $ 2,564,000 $ 3,053,500 $ 3,538,900
Venturers' capital 2,484,600 1,805,100 2,125,800 2,709,600 3,316,200
- ----------
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on their experience in the cable television industry, the
Joint Ventures believe that EBITDA and related measures of cash flow serve as
important financial analysis tools for measuring and comparing cable television
companies in several areas, such as liquidity, operating performance and
leverage. In addition, the covenants in the primary debt instrument of the
Partnership use EBITDA-derived calculations as a measure of financial
performance. EBITDA is not a measurement determined under generally accepted
accounting principles ("GAAP") and does not represent cash generated from
operating activities in accordance with GAAP. EBITDA should not be considered by
the reader as an alternative to net income as an indicator of the Joint
Ventures' financial performance or as an alternative to cash flows as a measure
of liquidity. In addition, the Joint Ventures' definition of EBITDA may not be
identical to similarly titled measures used by other companies.
-23-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
- ------------
The 1992 Cable Act required the Federal Communications
Commission to, among other things, implement extensive regulation of the rates
charged by cable television systems for basic and programming service tiers,
installation, and customer premises equipment leasing. Compliance with those
rate regulations has had a negative impact on our revenues and cash flow. The
1996 Telecommunications Act substantially changed the competitive and regulatory
environment for cable television and telecommunications service providers. Among
other changes, the 1996 Telecommunications Act ended the regulation of cable
programming service tier rates on March 31, 1999. There can be no assurance as
to what, if any, further action may be taken by the FCC, Congress or any other
regulatory authority or court, or their effect on our business. Accordingly, our
historical financial results as described below are not necessarily indicative
of future performance.
This annual report includes certain forward-looking statements
regarding, among other things, our future results of operations, regulatory
requirements, competition, capital needs and general business conditions
applicable to the partnership. Such forward-looking statements involve risks and
uncertainties including, without limitation, the uncertainty of legislative and
regulatory changes and the rapid developments in the competitive environment
facing cable television operators such as the partnership, as discussed more
fully elsewhere in this Report.
All of the Partnership's cable television business operations
are conducted through its participation as a general partner in both the PBD
Joint Venture and the Macoupin Joint Venture. The Partnership has a 50% interest
in the PBD Joint Venture and a one-third (1/3) interest in the Macoupin Joint
Venture. The PBD Joint Venture is owned equally by the Partnership and an
affiliated partnership (Enstar Income Program IV-1, L.P.). The Macoupin Joint
Venture is owned equally by the Partnership and two affiliated partnerships
(Enstar Income Program IV-1, L.P. and Enstar Income Program IV-3, L.P.). The
Partnership participates in the Joint Ventures equally with its co-partners,
based on its proportionate interest, with respect to capital contributions,
obligations and commitments, and results of operations. Accordingly, in
considering the financial condition and results of operations of the
Partnership, consideration must also be made of those matters as they relate to
the Joint Ventures. The following discussion reflects such consideration, and
with respect to Results of Operations, a separate discussion is provided for
each entity.
RESULTS OF OPERATIONS
- ---------------------
The Partnership
As discussed above, all of our cable television business
operations are conducted through our participation as a partner in the Joint
Ventures. The Joint Ventures distributed $1,380,000, $460,200 and $568,500 to
us, representing our pro rata share of the cash flow distributed from the Joint
Ventures' respective operations, during 1997, 1998 and 1999, respectively. We
distributed $503,100 to our partners in each of 1997, 1998 and 1999.
Interest expense decreased from $36,400 to $34,200, or by
6.0%, for the year ended December 31, 1999 compared to 1998 and from $108,800 to
$36,400, or by 66.5%, for the year ended December 31, 1998 compared to 1997. The
decrease in 1998 compared to 1997 was primarily due to the repayment of our
outstanding borrowings under our previous credit facility on September 30, 1997.
The decrease in 1999 compared to 1998 resulted from a decrease in commitment
fees due to a reduction in our credit facility on November 12, 1999. See
"Liquidity and Capital Resources" below.
-24-
The PBD Joint Venture
1999 Compared to 1998
The Joint Venture's revenues decreased from $5,589,000 to
$5,485,400, or by 1.9%, for the year ended December 31, 1999 as compared to
1998. Of the $103,600 decrease, $232,300 was due to decreases in the number of
subscriptions for basic, premium, tier and equipment rental services. These
decreases were partially offset by a $104,400 increase due to increases in
regulated service rates that were implemented by the Joint Venture in 1999 and a
$24,300 increase in other revenue producing items. As of December 31, 1999, the
Joint Venture had approximately 12,600 basic subscribers and 3,100 premium
service units.
Service costs decreased from $1,848,000 to $1,846,300, or by
less than 1.0%, for the year ended December 31, 1999 as compared to 1998.
Service costs represent costs directly attributable to providing cable services
to customers. The decrease was primarily due to increases in capitalization of
labor and overhead costs resulting from more capital projects in 1999. The
decrease was largely offset by higher programming fees, which increased due to
increases in rates charged by program suppliers.
General and administrative expenses increased from $737,000 to
$858,600, or by 16.5%, for the year ended December 31, 1999 as compared to 1998.
The increase was attributable to increases in insurance premiums, personnel
costs and professional fees, primarily legal fees.
Management fees and reimbursed expenses decreased from
$567,000 to $552,700, or by 2.5%, for the year ended December 31, 1999 as
compared to 1998. Management fees decreased in direct relation to decreased
revenues as discussed above. Reimbursed expenses decreased in 1999 due to lower
allocated personnel costs.
Depreciation and amortization expense increased from $449,700
to $494,100, or by 9.9%, for the year ended December 31, 1999 as compared to
1998, due to an increase in plant asset additions.
Operating income decreased from $1,987,300 to $1,733,700, or
by 12.8%, for the year ended December 31, 1999 as compared to 1998, primarily
due to decreased revenues and increased programming expense and professional
fees as discussed above.
Interest income, net of interest expense, increased from
$88,000 to $107,900, or by 22.6%, for the year ended December 31, 1999 as
compared to 1998. The increase was primarily due to higher average cash balances
available for investment.
Due to the factors described above, the Joint Venture's net
income decreased from $2,079,000 to $1,841,600, or by 11.4%, for the year ended
December 31, 1999 as compared to 1998.
EBITDA is calculated as operating income before depreciation
and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 43.6% during 1998 to 40.6% in 1999. The
decrease was primarily caused by higher programming expense and professional
fees as described above. EBITDA decreased from $2,437,000 to $2,227,800, or by
8.6%, as a result.
1998 Compared to 1997
The Joint Venture's revenues increased from $5,584,600 to
$5,589,000, or by less than 1.0%, for the year ended December 31, 1998 as
compared to 1997. Of the $4,400 increase, $80,700 was due to increases in
regulated service rates that were implemented by the Joint Venture in 1997 and
$21,400 was due to increases in other revenue producing items. These increases
were substantially offset by a $97,700 decrease due to decreases in the number
of subscriptions for basic, premium, tier and equipment rental services. As of
December 31, 1998, the Joint Venture had approximately 13,000 basic subscribers
and 3,400 premium service units.
-25-
Service costs decreased from $1,917,400 to $1,848,000, or by
3.6%, for the year ended December 31, 1998 as compared to 1997. Service costs
represent costs directly attributable to providing cable services to customers.
The decrease was primarily due to decreases in copyright fees, partially offset
by an increase in programming expense. The decrease in copyright fees was
principally due to 1997 copyright fee expense estimates that were reduced in
1998 and due to the industry-wide change in status of one satellite service that
resulted in lower 1998 copyright fees. Programming fees increased as a result of
higher rates charged by program suppliers.
General and administrative expenses increased from $699,600 to
$737,000, or by 5.3%, for the year ended December 31, 1998 as compared to 1997.
The increase was primarily due to increases in telephone expense and insurance
premiums paid in 1998.
Management fees and reimbursed expenses decreased from
$593,100 to $567,000, or by 4.4%, for the year ended December 31, 1998 as
compared to 1997. Management fees increased in direct relation to increased
revenues as discussed above. Reimbursed expenses decreased in 1998 due to lower
allocated personnel costs resulting from a reduction in staff and office rental
expense.
Depreciation and amortization expense decreased from $475,500
to $449,700, or by 5.4%, for the year ended December 31, 1998 as compared to
1997, due to the effect of certain intangible assets becoming fully amortized.
Operating income increased from $1,899,000 to $1,987,300, or
by 4.6%, for the year ended December 31, 1998 as compared to 1997, primarily due
to decreased copyright fees and depreciation and amortization expense as
discussed above.
Interest income, net of interest expense, decreased from
$103,200 to $88,000, or by 14.7%, for the year ended December 31, 1998 as
compared to 1997. The decrease was primarily due to lower average cash balances
available for investment.
Due to the factors described above, the Joint Venture's net
income increased from $2,002,200 to $2,079,000, or by 3.8%, for the year ended
December 31, 1998 as compared to 1997.
EBITDA is calculated as operating income before depreciation
and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues increased from 42.5% during 1997 to 43.6% in 1998. The
increase was primarily caused by lower copyright fees as described above. EBITDA
increased from $2,374,500 to $2,437,000, or by 2.6%, as a result.
Distributions Made By The PBD Joint Venture
The PBD Joint Venture distributed $2,710,000, $895,400 and
$1,067,000 equally between its two partners during 1997, 1998 and 1999,
respectively.
The Macoupin Joint Venture
1999 Compared to 1998
The Joint Venture's revenues decreased from $2,003,000 to
$1,993,600, or by less than 1.0%, for the year ended December 31, 1999 as
compared to 1998. Of the $9,400 decrease, $28,700 was due to decreases in the
number of subscriptions for basic, premium, tier and equipment rental services
and $2,300 was due to a decrease in other revenue producing items. These
decreases were partially offset by a $21,600 increase due to increases in
regulated service rates that were implemented by the Joint Venture in 1999. As
of December 31, 1999, the Joint Venture had approximately 4,700 basic
subscribers and 1,100 premium service units.
Service costs increased from $626,000 to $664,300, or by 6.1%,
for the year ended December 31, 1999 as compared to 1998. Service costs
represent costs directly attributable to providing cable services
-26-
to customers. The increase was primarily due to higher programming expense and
lower capitalization of labor and overhead costs resulting from fewer capital
projects in 1999. Programming expense increased as a result of higher rates
charged by program suppliers.
General and administrative expenses increased from $124,700 to
$158,200, or by 26.9%, for the year ended December 31, 1999 as compared to 1998.
The increase was primarily due to higher insurance premiums and customer billing
expense.
Management fees and reimbursed expenses decreased from
$309,800 to $291,200, or by 6.0%, for the year ended December 31, 1999 as
compared to 1998. Management fees decreased in direct relation to decreased
revenues as discussed above. Reimbursed expenses decreased in 1999 due to lower
allocated personnel costs and telephone expenses.
Depreciation and amortization expense decreased from $344,500
to $217,800, or by 36.8%, for the year ended December 31, 1999 as compared to
1998, due to the effect of certain tangible assets becoming fully depreciated
and certain intangible assets becoming fully amortized.
Operating income increased from $598,000 to $662,100, or by
10.7%, for the year ended December 31, 1999 as compared to 1998, primarily due
to decreased depreciation and amortization as discussed above.
Interest income, net of interest expense, increased from
$23,300 to $49,500 for the year ended December 31, 1999 as compared to 1998. The
increase was primarily due to higher average cash balances available for
investment.
Due to the factors described above, the Joint Venture's net
income increased from $621,300 to $711,600, or by 14.5%, for the year ended
December 31, 1999 as compared to 1998.
EBITDA is calculated as operating income before depreciation
and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 47.1% in 1998 to 44.1% in 1999. The
decrease was primarily due to higher programming fees, insurance premiums and
professional fees as described above. EBITDA decreased from $942,500 to
$879,900, or by 6.6%, as a result.
1998 Compared to 1997
The Joint Venture's revenues increased from $1,975,900 to
$2,003,000, or by 1.4%, for the year ended December 31, 1998 as compared to
1997. Of the $27,100 increase, $93,800 was due to increases in regulated service
rates that were implemented by the Joint Venture in 1997 and $1,100 was due to
an increase in other revenue producing items. These increases were partially
offset by a $67,800 decrease in the number of subscriptions for basic, premium,
tier and equipment rental services. As of December 31, 1998, the Joint Venture
had approximately 4,400 basic subscribers and 1,300 premium service units.
Service costs increased from $573,000 to $626,000, or by 9.2%,
for the year ended December 31, 1998 as compared to 1997. Service costs
represent costs directly attributable to providing cable services to customers.
The increase was primarily due to higher programming expense and lower
capitalization of labor and overhead costs resulting from reductions in 1998
construction activity in the Auburn, Illinois franchise area. Programming
expense increased as a result of higher rates charged by program suppliers.
General and administrative expenses decreased from $149,200 to
$124,700, or by 16.4%, for the year ended December 31, 1998 as compared to 1997.
The decrease was primarily due to lower insurance costs.
Management fees and reimbursed expenses increased from
$298,700 to $309,800, or by 3.7%, for the year ended December 31, 1998 as
compared to 1997. Management fees increased in direct relation to increased
revenues as discussed above. Reimbursed expenses increased in 1998 due to higher
allocated personnel costs resulting from staff additions.
-27-
Depreciation and amortization expense decreased from $575,400
to $344,500, or by 40.1%, for the year ended December 31, 1998 as compared to
1997, due to the effect of certain tangible assets becoming fully depreciated
and certain intangible assets becoming fully amortized.
Operating income increased from $379,600 to $598,000, or by
57.5%, for the year ended December 31, 1998 as compared to 1997, primarily due
to decreased depreciation and amortization as discussed above.
Interest income, net of interest expense, increased from
$16,100 to $23,300, or by 44.7%, for the year ended December 31, 1998 as
compared to 1997. The increase was primarily due to higher average cash balances
available for investment.
Due to the factors described above, the Joint Venture's net
income increased from $395,700 to $621,300, or by 57.0%, for the year ended
December 31, 1998 as compared to 1997.
EBITDA is calculated as operating income before depreciation
and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 48.3% in 1997 to 47.1% in 1998. The
decrease was primarily due to higher programming fees as described above. EBITDA
decreased from $955,000 to $942,500, or by 1.3%, as a result.
Distributions to Partners
The Macoupin Joint Venture distributed $75,000, $37,500 and
$105,000 equally among its three partners in 1997, 1998 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our primary objective, having invested our net offering
proceeds in the Joint Ventures, is to distribute to our partners distributions
of cash flow received from the Joint Ventures' operations and proceeds from the
sale of the Joint Ventures' cable television systems, if any, after providing
for expenses, debt service and capital requirements relating to the expansion,
improvement and upgrade of such cable television systems.
In accordance with the partnership agreement, the corporate
general partner has implemented a plan for liquidating the partnership. In
connection with that strategy, the corporate general partner has entered into an
agreement with a cable broker to market the Joint Ventures' cable systems to
third parties. Should the Joint Ventures receive offers from third parties for
such assets, the corporate general partner will prepare a proxy for submission
to the limited partners for the purpose of approving or disapproving such sale.
Should such a sale be approved, the corporate general partner will proceed to
liquidate the partnership and Joint Ventures following the settlement of their
final liabilities. We can give no assurance, however, that we will be able to
generate a sale of the Joint Ventures' cable assets.
The Joint Ventures rely upon the availability of cash
generated from operations and possible borrowings to fund their ongoing capital
requirements. In general, these requirements involve expansion, improvement and
upgrade of the Joint Ventures' existing cable television systems. The Macoupin
Joint Venture completed the rebuild of its cable system in Auburn, Illinois, as
required under a provision of its franchise agreement, and in communities
surrounding Auburn. Rebuild expenditures in 1999 approximated $42,000.
The Macoupin Joint Venture is required by a provision of its
franchise agreement with the city of Carlinville, Illinois to upgrade its cable
system in that community by December 2001 at an estimated cost of $1.1 million,
and plans to upgrade its cable plant in Girard, Illinois at an estimated cost of
approximately $1.0 million provided the franchise agreement is renewed. The
franchise agreement under negotiation with Girard is expected to require
completion of a plant upgrade in the franchise area within two years. The
Macoupin Joint Venture is budgeted to spend approximately $158,500 in 2000 for
the upgrade of other assets. The PBD Joint Venture will upgrade its Mt. Carmel,
Illinois and Poplar Bluff, Missouri cable
-28-
systems at an estimated cost of approximately $1.3 million and $6.2 million
respectively, provided franchise renewals are obtained and adequate funds are
available. Although both franchise agreements are still under negotiation, the
PBD Joint Venture anticipates that each will require an upgrade. The franchise
agreement with Mt. Carmel, Illinois is expected to require completion of the
upgrade within 24 months. The agreement under negotiation with Poplar Bluff,
Missouri may include a similar requirement. The PBD Joint Venture is budgeted to
spend approximately $819,700 in 2000 for the improvement of other assets. The
Macoupin Joint Venture and PBD Joint Venture spent $196,400 and $580,800,
respectively, in the year ended December 31, 1999 on its cable systems.
The franchise agreement with the city of Poplar Bluff expired
in 1997 and the PBD Joint Venture has been negotiating renewal of the agreement
with the city since that time. On February 8, 2000, voters in the city of Poplar
Bluff approved the sale of bonds to finance construction of a municipally-owned
and operated cable system. The system is intended to compete directly with the
PBD Joint Venture's cable system both in the city and in Butler County,
Missouri. The city-owned cable system may be built to a higher technical
standard than the system owned by the PBD Joint Venture and may offer a greater
number of channels at a lower monthly subscriber rate. The city estimates that
its new system will be operational within two years. The PBD Joint Venture
believes that the competing system, if built, will have a material adverse
impact on its subscriber numbers, financial condition and results of operations.
As of December 31, 1999, there were approximately 4,900 and 1,200 basic
subscribers in the city of Poplar Bluff and Butler County, respectively.
We believe that cash generated by operations of the Joint
Ventures, together with available cash, will be adequate to fund capital
expenditures, debt service and other liquidity requirements in 2000 and beyond.
As a result, the Joint Ventures intend to use their cash for such purposes.
On September 30, 1997, Enstar Finance Company, LLC ("EFC"), a
subsidiary of the corporate general partner, obtained a secured bank facility of
$35 million from two agent banks in order to obtain funds that would in turn be
advanced to us and certain of the other partnerships managed by the corporate
general partner. Our maximum loan commitment was approximately $3,320,700
through November 12, 1999. After that date, our commitment available under the
EFC facility was reduced to $1.8 million.
The partnership paid distributions totaling $503,100 during
the year ended December 31, 1999. However, there can be no assurance regarding
the level, timing or continuation of future distributions.
Beginning in August 1997, the corporate general partner
elected to self-insure the Joint Ventures' cable distribution plant and
subscriber connections against property damage as well as possible business
interruptions caused by such damage. The decision to self-insure was made due to
significant increases in the cost of insurance coverage and decreases in the
amount of insurance coverage available.
In October 1998, Falcon Communications, L.P. reinstated third
party insurance coverage for all of the cable television properties owned or
managed by it to cover damage to cable distribution plant and subscriber
connections and against business interruptions resulting from such damage. This
coverage is subject to a significant annual deductible which applies to all of
the cable television properties formerly owned or managed by Falcon
Communications, L.P. through November 12, 1999, and currently managed by
Charter, including those of the Joint Ventures.
Approximately 86% of the Joint Ventures' subscribers are
served by their systems in Poplar Bluff, Missouri and Carlinville, Illinois and
neighboring communities. Significant damage to these systems due to seasonal
weather conditions or other events could have a material adverse effect on the
Joint Ventures' liquidity and cash flows. The Joint Ventures continue to
purchase insurance coverage in amounts their management views as appropriate for
all other property, liability, automobile, workers' compensation and other types
of insurable risks.
We have not experienced any system failures or other
disruptions caused by Year 2000 problems since January 1, 2000 through the date
of this report, and do not anticipate that we will encounter
-29-
any Year 2000 problems going forward. We spent approximately $83,200 in the
fourth quarter of 1999 to complete our preparation for the arrival of January 1,
2000 with respect to the Year 2000 date change. Such costs will not be incurred
in the future.
1999 vs. 1998
Operating activities used $900 less cash during 1999 than in
1998. Changes in prepaid expenses and liabilities owed to affiliates and
third-party creditors provided $7,100 more cash in 1999 due to differences in
the timing of payments.
Investing activities provided $108,300 more cash in 1999 than
in 1998 due to an increase in distributions from the Joint Ventures. The
partnership used $1,800 less cash in financing activities during 1999 than in
1998, primarily due to a decrease in the payment of deferred loan costs related
to the partnership's loan facility.
1998 vs. 1997
Operating activities used $42,500 less cash during 1998 than
in 1997. Changes in prepaid expenses and liabilities owed to affiliates and
third-party creditors provided $9,900 less cash in 1998 due to differences in
the timing of payments.
Investing activities provided $919,800 less cash in 1998 than
in 1997 due to a decrease in distributions from the Joint Ventures. The
partnership used $1,046,300 less cash in financing activities during 1998 than
in 1997, primarily due to the repayment of the Partnership's previous $1.0
million note payable in 1997. The partnership used $46,300 less cash in 1998 for
the payment of deferred loan costs related to its loan facility.
INFLATION
- ---------
Certain of the Joint Venture's expenses, such as those for
wages and benefits, equipment repair and replacement, and billing and marketing
generally increase with inflation. However, we do not believe that our financial
results have been, or will be, adversely affected by inflation in a material
way, provided that the Joint Venture is able to increase our service rates
periodically, of which there can be no assurance. See "Legislation and
Regulation."
Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to material market risks associated with
financial instruments.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information
required to be filed hereunder are indexed on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-30-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The general partners of the partnership may be considered, for
certain purposes, the functional equivalents of directors and executive
officers. The corporate general partner is Enstar Communications Corporation,
and Robert T. Graff, Jr. is the individual general partner. As part of Falcon
Cablevision's September 30, 1988 acquisition of the corporate general partner,
Falcon Cablevision received an option to acquire Mr. Graff's interest as
individual general partner of the partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the corporate general partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993 pursuant to which, among other things, the corporate general
partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which was originally granted to Falcon
Cablevision. Since its incorporation in Georgia in 1982, the corporate general
partner has been engaged in the cable/telecommunications business, both as a
general partner of 15 limited partnerships formed to own and operate cable
television systems and through a wholly-owned operating subsidiary. As of
December 31, 1999, the corporate general partner managed cable systems serving
approximately 81,100 basic subscribers.
Following the acquisition of the corporate general partner in
November 1999 by a Charter Communications-controlled entity, the directors and
executive officers of the corporate general partner have been changed to the
persons named below all of whom have their principal employment in a comparable
position with Charter Communications, Inc.:
NAME POSITION
- ---- --------
Jerald L. Kent Director, President and Chief Executive Officer
David G. Barford Senior Vice President of Operations - Western Division
Mary Pat Blake Senior Vice President - Marketing and Programming
Eric A. Freesmeier Senior Vice President - Administration
Thomas R. Jokerst Senior Vice President - Advanced Technology Development
Kent D. Kalkwarf Senior Vice President and Chief Financial Officer
Ralph G. Kelly Senior Vice President - Treasurer
David L. McCall Senior Vice President of Operations - Eastern Division
John C. Pietri Senior Vice President - Engineering
Michael E. Riddle Senior Vice President and Chief Information Officer
Steven A. Schumm Executive Vice President, Assistant to the President
Curtis S. Shaw Senior Vice President, General Counsel and Secretary
Steven E. Silva Senior Vice President - Corporate Development and Technology
Except for Mr. Riddle, our executive officers were appointed
to their position following our formation in July 1999, and became employees of
Charter Communications, Inc., upon completion of our initial public offering.
Prior to that time, they were employees of Charter Investment, Inc. All of our
executive officers simultaneously serve in the same capacity with Charter
Investment, Inc.
JERALD L. KENT, 43 Director, President and Chief Executive Officer. Mr. Kent
co-founded Charter Communications Investment, Inc. in 1993. Mr. Kent was
executive vice president and chief financial officer of Cencom Cable Associates,
Inc. Mr. Kent, a certified public accountant, attained the position of tax
-31-
manager with Arthur Andersen LLP. Mr. Kent received a bachelor's degree and
M.B.A. from Washington University.
DAVID G. BARFORD, 41 Senior Vice President of Operations - Western Division.
Prior to joining Charter Communications Investment, Inc. in 1995, Mr. Barford
held various senior marketing and operating roles during nine years at Comcast
Cable Communications, Inc. He received a B.A. from California State University,
Fullerton, and an M.B.A. from National University.
MARY PAT BLAKE, 44 Senior Vice President - Marketing and Programming. Prior to
joining Charter Communications Investment, Inc. in 1995, Ms. Blake was active in
the emerging business sector and formed Blake Investments, Inc. in 1993. She has
18 years of experience with senior management responsibilities in marketing,
sales, finance, systems, and general management. Ms. Blake received a B.S. from
the University of Minnesota and an M.B.A. from the Harvard Business School.
ERIC A. FREESMEIER, 46 Senior Vice President - Administration. From 1986 until
joining Charter Investment, Inc. in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward. Mr. Freesmeier holds
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, 50 Senior Vice President - Advanced Technology Development.
Mr. Jokerst joined Charter Investment, Inc. in 1994. Previously he served as a
vice president of Cable Television Laboratories and as a regional director of
engineering for Continental Cablevision. He is a graduate of Ranken Technical
Institute and of Southern Illinois University.
KENT D. KALKWARF, 40 Senior Vice President and Chief Financial Officer. Prior to
joining Charter Investment, Inc. in 1995, Mr. Kalkwarf was employed for 13 years
by Arthur Andersen LLP where he attained the position of senior tax manager. He
has extensive experience in cable, real estate, and international tax issues.
Mr. Kalkwarf has a B.S. from Illinois Wesleyan University and is a certified
public accountant.
RALPH G. KELLY, 43 Senior Vice President - Treasurer. Prior to joining Charter
Investment, Inc. in 1993, Mr. Kelly was controller and then treasurer of Cencom
Cable Associates. He left Charter in 1994, to become chief financial officer of
CableMaxx, Inc., and returned in 1996. Mr. Kelly received his bachelor's degree
in accounting from the University of Missouri - Columbia and his M.B.A. from
Saint Louis University.
DAVID L. MCCALL, 44 Senior Vice President of Operations - Eastern Division.
Prior to joining Charter Investment, Inc. in 1995, Mr. McCall was associated
with Crown Cable and its predecessor company, Cencom Cable Associates, Inc. from
1983 to 1994. Earlier he was system manager of Coaxial Cable Developers. Mr.
McCall has served as a director of the South Carolina Cable Television
Association for the past 10 years.
JOHN C. PIETRI, 50 Senior Vice President - Engineering. Prior to joining Charter
Investment, Inc. in 1998, Mr. Pietri was with Marcus Cable for eight years, most
recently serving as senior vice president and chief technical officer. Earlier
he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
MICHAEL E. RIDDLE, 41 Senior Vice President and Chief Information Officer. Prior
to joining Charter Investment, Inc. in 1999, Mr. Riddle was director, applied
technologies of Cox Communications for four years. Prior to that, he held
technical and management positions during four years at Southwestern Bell and
its subsidiaries. Mr. Riddle attended Fort Hays State University.
STEVEN A. SCHUMM, 47 Executive Vice President and Assistant to the President.
Prior to joining Charter Investment, Inc. in 1998, Mr. Schumm was managing
partner of the St. Louis office of Ernst & Young LLP, where he was a partner for
14 of 24 years. He served as one of 10 members of the firm's National Tax
Committee. Mr. Schumm earned a B.S. degree from Saint Louis University.
CURTIS S. SHAW, 51 Senior Vice President, General Counsel and Secretary. Prior
to joining Charter Investment, Inc. in 1997, Mr. Shaw served as corporate
counsel to NYNEX since 1988. He has over 25 years of experience as a corporate
lawyer, specializing in mergers and acquisitions, joint ventures, public
offerings, financings, and federal securities and antitrust law. Mr. Shaw
received a B.A. from Trinity College and a J.D. from Columbia University School
of Law.
-32-
STEVEN E. SILVA, 40 Senior Vice President - Corporate Development and
Technology. From 1983 until joining Charter Investment, Inc. in 1995, Mr. Silva
served in various management positions at U.S. Computer Services, Inc. He is a
member of the board of directors of High Speed Access Corp.
The sole director of the corporate general partner is elected
to a one-year term at the annual shareholder meeting to serve until the next
annual shareholder meeting and thereafter until his respective successor is
elected and qualified. Officers are appointed by and serve at the discretion of
the directors of the corporate general partner.
Item 11. EXECUTIVE COMPENSATION
Management Fee
- --------------
The partnership has a management agreement with Enstar Cable
Corporation, a wholly owned subsidiary of the corporate general partner,
pursuant to which Enstar Cable manages the Joint Ventures' systems and provides
all operational support for the Joint Ventures' activities. For these services,
Enstar Cable receives a management fee of 5% of the PBD Joint Venture's gross
revenues and 4% of the Macoupin Joint Venture's gross revenues, excluding
revenues from the sale of cable television systems or franchises, calculated and
paid monthly. The Macoupin Joint Venture also is required to distribute 1% of
its gross revenues to the corporate general partner in respect of its interest
as the corporate general partner of the partnership. In addition, the Joint
Ventures reimburse Enstar Cable for operating expenses incurred by Enstar Cable
in the day-to-day operation of our cable systems. The management agreement also
requires us to indemnify Enstar Cable (including its officers, employees, agents
and shareholders) against loss or expense, absent negligence or deliberate
breach by Enstar Cable of the management agreement. The management agreement is
terminable by the partnership upon 60 days written notice to Enstar Cable.
Enstar Cable had, prior to November 12, 1999, engaged Falcon Communications,
L.P. to provide management services for the Joint Ventures and paid Falcon
Communications, L.P. a portion of the management fees it receives in
consideration of such services and reimbursed Falcon Communications, L.P. for
expenses incurred by Falcon Communications, L.P. on its behalf. Subsequent to
November 12, 1999, Charter, as successor-by-merger to Falcon Communications,
L.P., has provided such services and received such payments. Additionally, the
Joint Ventures received system operating management services from affiliates of
Enstar Cable in lieu of directly employing personnel to perform those services.
The Joint Ventures reimburse the affiliates for their 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, 1999, Enstar Cable
charged the Joint Ventures management fees of approximately $354,100 and
reimbursed expenses of $469,900. In addition, the Macoupin Joint Venture paid
the corporate general partner approximately $19,900 in respect of its 1% special
interest. The Joint Ventures also reimbursed affiliates approximately $201,400
for system operating management services. In addition, programming services were
purchased through Falcon Communications, L.P. and, subsequent to November 12,
1999, through Charter. The Joint Ventures paid Falcon Communications, L.P. and
Charter approximately $1,863,100 for these programming services for fiscal year
1999.
Participation in Distributions
- ------------------------------
The general partners are entitled to share in distributions
from, and profit and losses in, the Partnership. See Item 5., "Market for
Registrant's Equity Securities and Related Security Holder Matters."
-33-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 2000, the only persons known by the Partnership
to own beneficially or that may be deemed to own beneficially more than 5% of
the units were:
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------- ------------------------------------- --------------------------- ------------
Units of Limited Partnership JJJ Group LLC 2,169(1) 5.4%
Interest 7463 East Beryl
Scottsdale, AZ 85258
(1) As reported to the Partnership by its transfer agent, Gemisys Corporation.
The corporate general partner is a wholly-owned subsidiary of
Charter Communications Holding Company, LLC. Charter Communications Holding
Company, LLC, through a subsidiary, owns a 100% interest in CC VII. As of March
30, 2000, Charter Communications Holding Company, LLC was beneficially
controlled by Paul G. Allen through his ownership and control of Charter
Communications, Inc., Charter Investment, Inc. and Vulcan Cable III, Inc.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Conflicts of Interest
- ---------------------
On November 12, 1999, Charter acquired ownership of Enstar
Communications Corporation from Falcon Holding Group, L.P. and assumed the
management services operations of Falcon Communications, L.P. Charter now
manages the operations of the partnerships of which Enstar Communications
Corporation is the corporate general partner, including the partnership.
Commencing November 13, 1999, Charter began receiving management fees and
reimbursed expenses which had previously been paid by the corporate general
partner to Falcon Communications, L.P.
The partnership and the Joint Ventures rely upon the corporate
general partner and certain of its affiliates to provide general management
services, system operating services, supervisory and administrative services and
programming. See Item 11., "Executive Compensation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
executive officers of the corporate general partner have their personal
employment with Charter Communications, Inc., and, as a result, are involved in
the management of other cable ventures. Charter expects to continue to enter
into other cable ventures. These affiliations subject Charter and the corporate
general partner and their management to conflicts of interest. These conflicts
of interest relate to the time and services that management will devote to the
partnership's affairs.
Fiduciary Responsibility and Indemnification of the General Partners
- --------------------------------------------------------------------
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that a
limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of the
partnership (a partnership derivative action) to recover damages from third
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
-34-
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 determine, a
liability insurance policy which insures the corporate general partner, Charter
and its affiliates (which include CC VII), officers and directors and persons
determined by the corporate general partner, against liabilities which they may
incur with respect to claims made against them for wrongful or allegedly
wrongful acts, including certain errors, misstatements, misleading statements,
omissions, neglect or breaches of duty. To the extent that the exculpatory
provisions purport to include indemnification for liabilities arising under the
Securities Act of 1933, it is the opinion of the Securities and Exchange
Commission that such indemnification is contrary to public policy and therefore
unenforceable.
-35-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial
Statements on page F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial
Statements on page F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits
on Page E-1.
(b) Reports on Form 8-K
None.
-36-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
30, 2000.
ENSTAR INCOME PROGRAM IV-2, L.P.
By: Enstar Communications Corporation,
General Partner
By: /s/ Jerald L. Kent
--------------------
Jerald L. Kent
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March 2000.
Signatures Title(*)
- --------------------------- -----------------------------------------------------
/s/ Jerald L. Kent Director, President and Chief Executive Officer
- -------------------- (Principal Executive Officer)
Jerald L. Kent
/s/ Kent D. Kalkwarf Senior Vice President and Chief Financial Officer
- -------------------- (Principal Financial Officer and
Kent D. Kalkwarf Principal Accounting Officer)
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the Registrant.
-37-
INDEX TO FINANCIAL STATEMENTS
PAGE
--------------------------------------------------------------------
Enstar Income Enstar IV/PBD Enstar Cable
Program Systems of Macoupin
IV-2, L.P. Venture County
------------------ ------------------- ------------------
Reports of Independent Auditors F-2 F-11 F-22
Balance Sheets - December 31, 1998 and 1999 F-3 F-12 F-23
Financial Statements for each of
the three years in the period
ended December 31, 1999:
Statements of Operations F-4 F-13 F-24
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-14 F-25
Statements of Cash Flows F-6 F-15 F-26
Notes to Financial Statements F-7 F-16 F-27
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-2, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income Program IV-2,
L.P. (A Georgia Limited Partnership) as of December 31, 1998 and 1999, and the
related statements of operations, partnership capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program IV-2,
L.P. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 24, 1999
F-2
ENSTAR INCOME PROGRAM IV-2, L.P.
BALANCE SHEETS
=============================================
December 31,
-------------------------------------
1998 1999
---------------- -----------------
ASSETS:
Cash and cash equivalents $ 265,300 $ 283,800
Prepaid expenses 3,300 2,900
------------------ ------------------
Equity in net assets of Joint Ventures:
Enstar IV/PBD Systems Venture 2,007,300 2,394,600
Enstar Cable of Macoupin County 903,200 1,105,400
------------------ ------------------
2,910,500 3,500,000
------------------ ------------------
Deferred loan costs, net 34,300 21,700
------------------ ------------------
$ 3,213,400 $ 3,808,400
================== ==================
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 5,900 $ 3,500
Due to affiliates 18,700 21,300
------------------ ------------------
TOTAL LIABILITIES 24,600 24,800
------------------ ------------------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (51,200) (45,200)
Limited partners 3,240,000 3,828,800
------------------ ------------------
TOTAL PARTNERSHIP CAPITAL 3,188,800 3,783,600
------------------ ------------------
$ 3,213,400 $ 3,808,400
================== ==================
See accompanying notes to financial statements.
F-3
ENSTAR INCOME PROGRAM IV-2, L.P.
STATEMENTS OF OPERATIONS
=============================================
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
-------------- --------------- --------------
OPERATING EXPENSES:
General and administrative expenses $ (39,200) $ (30,600) $ (36,800)
-------------- --------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (108,800) (36,400) (34,400)
Interest income 24,800 13,200 11,100
-------------- --------------- --------------
(84,000) (23,200) (23,300)
-------------- --------------- --------------
Loss before equity in net income of joint ventures (123,200) (53,800) (60,100)
-------------- --------------- --------------
EQUITY IN NET INCOME OF JOINT VENTURES:
Enstar IV/PBD Systems Venture 1,001,100 1,039,500 920,800
Enstar Cable of Macoupin County 131,900 207,100 237,200
-------------- --------------- --------------
1,133,000 1,246,600 1,158,000
-------------- --------------- --------------
NET INCOME $ 1,009,800 $ 1,192,800 $ 1,097,900
============== =============== ==============
Net income allocated to General Partners $ 10,100 $ 11,900 $ 11,000
============== =============== ==============
Net income allocated to Limited Partners $ 999,700 $ 1,180,900 $ 1,086,900
============== =============== ==============
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 25.09 $ 29.64 $ 27.28
============== =============== ==============
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,848 39,848 39,848
============== =============== ==============
See accompanying notes to financial statements.
F-4
ENSTAR INCOME PROGRAM IV-2, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
=============================================
General Limited
Partners Partners Total
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1997 $ (63,200) $ 2,055,600 $ 1,992,400
Distributions to partners (5,000) (498,100) (503,100)
Net income for year 10,100 999,700 1,009,800
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 (58,100) 2,557,200 2,499,100
Distributions to partners (5,000) (498,100) (503,100)
Net income for year 11,900 1,180,900 1,192,800
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT)
December 31,1998 (51,200) 3,240,000 3,188,800
Distributions to partners (5,000) (498,100) (503,100)
Net income for year 11,000 1,086,900 1,097,900
------------- ------------- -------------
PARTNERSHIP CAPITAL (DEFICIT)
December 31, 1999 $ (45,200) $ 3,828,800 $ 3,783,600
============= ============= =============
See accompanying notes to financial statements.
F-5
ENSTAR INCOME PROGRAM IV-2, L.P.
STATEMENTS OF CASH FLOWS
=============================================
Year Ended December 31,
-----------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 1,009,800 $ 1,192,800 $ 1,097,900
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of joint ventures (1,133,000) (1,246,600) (1,158,000)
Amortization of deferred loan costs 29,500 12,500 12,600
Increase (decrease) from changes in:
Prepaid expenses (3,300) - 400
Accounts payable and due to affiliates 6,700 (6,500) 200
---------------- ---------------- ----------------
Net cash used in operating activities (90,300) (47,800) (46,900)
---------------- ---------------- ----------------
Cash flows from investing activities:
Distributions from joint ventures 1,380,000 460,200 568,500
---------------- ---------------- ----------------
Cash flows from financing activities:
Distributions to partners (503,100) (503,100) (503,100)
Deferred loan costs (48,100) (1,800) -
Repayment of debt (1,000,000) - -
---------------- ---------------- ----------------
Net cash used in financing activities (1,551,200) (504,900) (503,100)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (261,500) (92,500) 18,500
Cash and cash equivalents at beginning of year 619,300 357,800 265,300
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 357,800 $ 265,300 $ 283,800
================ ================ ================
See accompanying notes to financial statements.
F-6
ENSTAR INCOME PROGRAM IV-2, L.P.
NOTES TO FINANCIAL STATEMENTS
=============================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program IV-2, L.P. is a Georgia limited
partnership (the "Partnership") whose cable television operations are conducted
through its participation as a co-general partner in both Enstar IV/PBD Systems
Venture and Enstar Cable of Macoupin County (the "Joint Ventures").
The financial statements do not give effect to any assets that
the partners may have outside of their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of these
instruments.
The Partnership has no cash equivalents at December 31, 1999.
INVESTMENT IN JOINT VENTURES
The Partnership's investment and share of the income or loss
in the Joint Ventures is accounted for on the equity method of accounting.
DEFERRED LOAN COSTS
Costs related to obtaining new loan agreements are capitalized
and amortized to interest expense over the life of the related loan.
INCOME TAXES
As a partnership, Enstar Income Program IV-2, L.P., pays no
income taxes. All of the income, gains, losses, deductions and credits of the
Partnership are passed through to its partners. Nominal taxes are assessed by
certain state jurisdictions. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. At December 31,
1999, the book basis of the Partnership's investment in the Joint Ventures
exceeds its tax basis by $508,300.
The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differ from the
financial statements prepared for tax purposes due to the different treatment of
various items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for 1999 in the financial statements
is $115,700 more than tax income of the Partnership for the same period, caused
principally by timing differences in depreciation expense reported by the Joint
Ventures.
F-7
ENSTAR INCOME PROGRAM IV-2, L.P.
NOTES TO FINANCIAL STATEMENTS
=============================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses have been allocated 99% to the limited
partners and 1% to the general partners. Earnings and losses per unit of limited
partnership interest are based on the weighted average number of units
outstanding during the year. The General Partners do not own units of
partnership interest in the Partnership, but rather hold a participation
interest in the income, losses and distributions of the Partnership.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed on October 16, 1985, 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 September 30, 1988, Falcon Cablevision, a California
limited partnership, purchased all of the outstanding capital stock of the
Corporate General Partner. On September 30, 1998, Falcon Holding Group, L.P.
("FHGLP") acquired ownership of the Corporate General Partner from Falcon
Cablevision. Simultaneously with the closing of that transaction, FHGLP
contributed all of its existing cable television system operations to Falcon
Communications, L.P. ("FCLP"), a California limited partnership and successor to
FHGLP. FHGLP served as the managing partner of FCLP, and the general partner of
FHGLP was Falcon Holding Group, Inc., a California corporation ("FHGI"). On
November 12, 1999, Charter Communications Holding Company, LLC, ("Charter"),
acquired the ownership of FCLP and the Corporate General Partner. The Corporate
General Partner, Charter and affiliated companies are responsible for the
day-to-day management of the Partnership and its operations.
The Partnership was formed with an initial capital
contribution of $1,100 comprising $1,000 from the Corporate General Partner and
$100 from the initial limited partner. Sale of interests in the Partnership
began in July 1986, and the initial closing took place in August 1986. The
Partnership continued to raise capital until $10,000,000 (the maximum) was sold
by November 1986.
The amended partnership agreement generally provides that all
cash distributions (as defined) be allocated 1% to the general partners and 99%
to the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The amended partnership agreement also provides that all partnership profits,
gains, operational losses, and credits (all as defined) be allocated 1% to the
general partners and 99% to the limited partners until the limited partners have
been allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 12% of their initial
investments less any distributions from previous system sales and cash
F-8
ENSTAR INCOME PROGRAM IV-2, L.P.
NOTES TO FINANCIAL STATEMENTS
=============================================
NOTE 2 - PARTNERSHIP MATTERS (Continued)
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's operating expenses, interest expense and
distributions to partners are funded primarily from distributions received from
the Joint Ventures.
The amended partnership agreement limits the amount of debt
the Partnership may incur.
NOTE 3 - EQUITY IN NET ASSETS OF JOINT VENTURES
Enstar IV/PBD Systems Venture
The Partnership and an affiliate partnership (Enstar Income
Program IV-1, L.P.) each own 50% of Enstar IV/PBD Systems Venture, a Georgia
general partnership (the "PBD Joint Venture"). The PBD Joint Venture was
initially funded through capital contributions made by each venturer during 1986
of $7,270,000 in cash and $460,000 in capitalized system acquisition and related
costs. In 1986, the PBD Joint Venture acquired cable television systems in
Missouri and Illinois. Each venturer shares equally in the profits and losses of
the PBD Joint Venture. The PBD Joint Venture generated income of $2,002,200,
$2,079,000 and $1,841,600 for 1997, 1998 and 1999, respectively, of which
$1,001,100, $1,039,500 and $920,800 was allocated to the Partnership. The
operations of the PBD Joint Venture are significant to the Partnership and
should be read in conjunction with these financial statements. Reference is made
to the accompanying financial statements of the PBD Joint Venture on pages F-11
to F-21 of this Form 10-K.
Enstar Cable of Macoupin County
The Partnership and two affiliate partnerships (Enstar Income
Program IV-1, L.P. and Enstar Income Program IV-3, L.P.) each own one third of
Enstar Cable of Macoupin County, a Georgia general partnership (the "Macoupin
Joint Venture"). The Macoupin 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
Macoupin Joint Venture acquired cable television systems in Illinois. Each
venturer shares equally in the profits and losses of the Macoupin Joint Venture.
The Macoupin Joint Venture generated income of $395,700, $621,300 and $711,600
for 1997, 1998 and 1999, respectively, of which $131,900, $207,100 and $237,200
was allocated to the Partnership for the respective years. The operations of the
Macoupin Joint Venture are significant to the Partnership and should be read in
conjunction with these financial statements. Reference is made to the
accompanying financial statements of the Macoupin Joint Venture on pages F-22 to
F-32 of this Form 10-K.
F-9
ENSTAR INCOME PROGRAM IV-2, L.P.
NOTES TO FINANCIAL STATEMENTS
=============================================
NOTE 4 - POTENTIAL SALE OF PARTNERSHIP ASSETS
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Partnership. In
connection with that strategy, the Corporate General Partner has entered into an
agreement with a cable broker to market the Joint Ventures' cable systems to
third parties. Should the Joint Ventures receive offers from third parties for
such assets, the Corporate General Partner will prepare a proxy for submission
to the limited partners for the purpose of approving or disapproving such sale.
Should such a sale be approved, the Corporate General Partner will proceed to
liquidate the Partnership and Joint Ventures following the settlement of their
final liabilities. The Corporate General Partner can give no assurance, however,
that it will be able to generate a sale of the Joint Ventures' cable assets. The
financial statements do not reflect any adjustments that may result from the
outcome of this uncertainty.
NOTE 5 - NOTE PAYABLE - AFFILIATE
The Partnership is party to a loan agreement with Enstar
Finance Company, LLC ("EFC"), a subsidiary of the Corporate General Partner. The
loan agreement provides for a revolving loan facility of $3,320,700 (the
"Facility"). No advances had been made under the Facility as of December 31,
1999. On November 12, 1999, in connection with the sale of the Corporate General
Partner to Charter, the Partnership's commitment was reduced to $1,800,000.
The Partnership's Facility matures on August 31, 2001, at
which time all amounts then outstanding are due in full. Borrowings bear
interest at the lender's base rate (8.5% at December 31, 1999) plus 0.625%, or
at an offshore rate plus 1.875%. Under certain circumstances, the Partnership is
required to make mandatory prepayments, which permanently reduce the maximum
commitment under the Facility. Borrowings under the Facility are collateralized
by substantially all assets of the Partnership and a security interest in the
assets of the PBD Joint Venture. The Facility contains certain financial tests
and other covenants including, among others, restrictions on incurrence of
indebtedness, investments, sales of assets, acquisitions and other covenants,
defaults and conditions. The Facility does not restrict the payment of
distributions to partners unless an event of default exists thereunder or the
Partnership's ratio of debt to cash flow is greater than 4 to 1.
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 5% of gross receipts, as
defined, from the operations of the Partnership. The Partnership did not own or
operate any cable television operations in 1997, 1998 or 1999 other than through
its investment in the Joint Ventures. Accordingly, no management fees were paid
by the Partnership during 1997, 1998 and 1999.
The Agreement also provides that the Partnership will
reimburse the Manager for direct expenses incurred on behalf of the Partnership
and for the Partnership's allocable share of operational costs associated with
services provided by the Manager. No reimbursable expenses were incurred on
behalf of the Partnership during 1997, 1998 or 1999.
In the normal course of business, the Partnership pays
commitment fees to EFC.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $109,000, $32,200 and
$36,700 in 1997, 1998 and 1999, respectively.
F-10
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar IV/PBD Systems Venture (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar IV/PBD Systems Venture
(A Georgia General Partnership) as of December 31, 1998 and 1999, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1999. 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 IV/PBD Systems Venture
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 24, 2000
F-11
ENSTAR IV/PBD SYSTEMS VENTURE
BALANCE SHEETS
=============================
December 31,
--------------------------------------
1998 1999
------------------ -----------------
ASSETS:
Cash and cash equivalents $ 2,904,300 $ 3,129,200
Accounts receivable, less allowance of $2,800 and
$600 for possible losses 119,500 134,400
Prepaid expenses and other assets 31,500 177,100
Property, plant and equipment, less accumulated
depreciation and amortization 1,628,900 1,731,900
Franchise cost, net of accumulated
amortization of $13,100 and $17,700 38,600 40,900
Deferred charges, net 14,100 2,400
------------------ -----------------
$ 4,736,900 $ 5,215,900
================== =================
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
LIABILITIES:
Accounts payable $ 192,400 $ 216,600
Due to affiliates 529,900 210,100
------------------ -----------------
TOTAL LIABILITIES 722,300 426,700
------------------ -----------------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 2,007,300 2,394,600
Enstar Income Program IV-2, L.P. 2,007,300 2,394,600
------------------ -----------------
TOTAL VENTURERS' CAPITAL 4,014,600 4,789,200
------------------ -----------------
$ 4,736,900 $ 5,215,900
================== =================
See accompanying notes to financial statements.
F-12
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF OPERATIONS
=============================
Year Ended December 31,
------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
REVENUES $ 5,584,600 $ 5,589,000 $ 5,485,400
-------------- -------------- --------------
OPERATING EXPENSES:
Service costs 1,917,400 1,848,000 1,846,300
General and administrative expenses 699,600 737,000 858,600
General Partner management fees
and reimbursed expenses 593,100 567,000 552,700
Depreciation and amortization 475,500 449,700 494,100
-------------- -------------- --------------
3,685,600 3,601,700 3,751,700
-------------- -------------- --------------
Operating income 1,899,000 1,987,300 1,733,700
-------------- -------------- --------------
INTEREST INCOME, net 103,200 88,000 107,900
GAIN ON SALE OF CABLE ASSETS - 3,700 -
-------------- -------------- --------------
NET INCOME $ 2,002,200 $ 2,079,000 $ 1,841,600
============== ============== ==============
See accompanying notes to financial statements.
F-13
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF VENTURERS' CAPITAL
================================
Enstar Income Enstar Income
Program Program
IV-1, L.P. IV-2, L.P. Total
------------------ ------------------ -----------------
BALANCE, January 1, 1997 $ 1,769,400 $ 1,769,400 $ 3,538,800
Distributions to venturers (1,355,000) (1,355,000) (2,710,000)
Net income for year 1,001,100 1,001,100 2,002,200
------------------ ------------------ -----------------
BALANCE, December 31, 1997 1,415,500 1,415,500 2,831,000
Distributions to venturers (447,700) (447,700) (895,400)
Net income for year 1,039,500 1,039,500 2,079,000
------------------ ------------------ -----------------
BALANCE, December 31, 1998 2,007,300 2,007,300 4,014,600
Distributions to venturers (533,500) (533,500) (1,067,000)
Net income for year 920,800 920,800 1,841,600
------------------ ------------------ -----------------
BALANCE, December 31, 1999 $ 2,394,600 $ 2,394,600 $ 4,789,200
================== ================== =================
See accompanying notes to financial statements.
F-14
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF CASH FLOWS
=============================
Year Ended December 31,
-----------------------------------------------------------
1997 1998 1999
----------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 2,002,200 $ 2,079,000 $ 1,841,600
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 475,500 449,700 494,100
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses 124,600 (6,200) (160,500)
and other assets
Accounts payable and due to affiliates 41,900 (5,100) (295,600)
----------------- ---------------- ----------------
Net cash provided by operating activities 2,644,200 2,517,400 1,879,600
----------------- ---------------- ----------------
Cash flows from investing activities:
Capital expenditures (215,600) (326,300) (580,800)
Increase in intangible assets (40,200) (22,700) (6,900)
----------------- ---------------- ----------------
Net cash used in investing activities (255,800) (349,000) (587,700)
----------------- ---------------- ----------------
Cash flows from financing activities:
Distributions to venturers (2,710,000) (895,400) (1,067,000)
----------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (321,600) 1,273,000 224,900
Cash and cash equivalents at beginning of year 1,952,900 1,631,300 2,904,300
----------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,631,300 $ 2,904,300 $ 3,129,200
================= ================ ================
See accompanying notes to financial statements.
F-15
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar IV/PBD Systems Venture, a Georgia general partnership
(the "Venture"), owns and operates cable television systems in rural areas of
Illinois and Missouri.
The financial statements do not give effect to any assets that
Enstar Income Program IV-1, L.P. and Enstar Income Program IV-2, L.P. (the
"Venturers") may have outside of their interest in the Venture, nor to any
obligations, including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of these
instruments.
There are no cash equivalents at December 31, 1999.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and the renewal of existing franchises. These costs are
amortized using the straight-line method over the lives of the franchises,
ranging up to 15 years. The Venture periodically evaluates the amortization
periods of these intangible assets to determine whether events or circumstances
warrant revised estimates of useful lives. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. The Venture is in the
process of negotiating the renewal of expired franchise agreements for three of
the Venture's four franchises, which include approximately 63% of the Venture's
basic subscribers at December 31, 1999.
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method
over two years.
F-16
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Venture also evaluates the amortization periods of assets,
including franchise costs and other intangible assets, to determine whether
events or circumstances warrant revised estimates of useful lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising
are recognized in the period that services are delivered. Installation revenue
is recognized in the period the installation services are provided to the extent
of direct selling costs. Any remaining amount is deferred and recognized over
the estimated average period that customers are expected to remain connected to
the cable television system.
INCOME TAXES
As a partnership, the Venture pays no income taxes. All of the
income, gains, losses, deductions and credits of the Venture are passed through
to the Venturers. The basis in the Venture's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1999, the book basis of
the Venture's net assets exceeds its tax basis by $566,400.
The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differ from the
financial statements prepared for tax purposes due to the different treatment of
various items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for 1999 in the financial statements
is $189,200 more than tax income of the Venture for the same period, caused
principally by timing differences in depreciation expense.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
to the 1999 presentation.
F-17
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 2 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a general
partnership agreement effective July 23, 1986 between the Venturers, two limited
partnerships sponsored by Enstar Communications Corporation as their corporate
general partner (the "Corporate General Partner"). The Venture was formed to
pool the resources of the two limited partnerships to acquire, own, operate, and
dispose of certain cable television systems. In 1986, the Venture acquired cable
television systems in Missouri and Illinois.
Under the terms of the agreement, the Venturers share equally
in profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
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.
NOTE 3 - POTENTIAL SALE OF JOINT VENTURE ASSETS
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Venture. In
connection with that strategy, the Corporate General Partner has entered into an
agreement with a cable broker to market the Venture's cable systems to third
parties. Should the Venture receive offers from third parties for such assets,
the Corporate General Partner will prepare a proxy for submission to the limited
partners of the Venturers for the purpose of approving or disapproving such
sale. Should such a sale be approved, the Corporate General Partner will proceed
to liquidate the Venture following the settlement of its final liabilities. The
Corporate General Partner can give no assurance, however, that it will be able
to generate a sale of the Venture's cable assets. The financial statements do
not reflect any adjustments that may result from the outcome of this
uncertainty.
F-18
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
----------------------------------
1998 1999
-------------- -----------------
Cable television systems $ 10,792,700 $ 11,078,600
Vehicles, furniture and equipment,
and leasehold improvements 718,500 802,000
-------------- -----------------
11,511,200 11,880,600
Less accumulated depreciation
and amortization (9,882,300) (10,148,700)
-------------- -----------------
$ 1,628,900 $ 1,731,900
============== =================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with
the systems under operating leases expiring in 2005.
Future minimum rental payments under noncancelable operating
leases that have remaining terms in excess of one year as of December 31, 1999
are as follows:
Year Amount
---- -----------------
2000 $ 2,200
2001 2,200
2002 2,200
2003 2,200
2004 2,200
Thereafter 1,700
-----------------
$ 12,700
=================
Rentals, other than pole rentals, charged to operations
amounted to $21,100, $23,200 and $22,100 in 1997, 1998 and 1999, respectively,
while pole rental expense approximated $43,600, $44,600 and $45,400 in 1997,
1998 and 1999, respectively.
The Venture has granted to Enstar Finance Company, LLC, a
subsidiary of the Corporate General Partner and a lender to the Venturers, a
security interest in its assets to collateralize the debt of Enstar Income
Program IV-1, L.P. and Enstar Income Program IV-2.
The franchise agreement with the city of Poplar Bluff expired
in 1997 and the PBD Joint Venture has been negotiating renewal of the agreement
with the city since that time. The PBD Joint Venture has continued to provide
service in the city of Poplar Bluff and pay franchise fees to the city. On
February 8, 2000, the voters in the city of Poplar Bluff approved the sale of
bonds to finance construction of a
F-19
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
municipally-owned and operated cable system that is intended to compete directly
with the PBD Joint Venture's cable system both in the city and in Butler County,
Missouri. The city-owned cable system may be built to a higher technical
standard than the system owned by the PBD Joint Venture and may offer a greater
number of channels at a lower monthly subscriber rate. The city estimates that
its new system may be operational within two years. The PBD Joint Venture
believes that the competing system, if built, will have a material adverse
impact on its subscriber numbers, financial condition and results of operations.
As of December 31, 1999, there were approximately 4,900 and 1,200 basic
subscribers in the city of Poplar Bluff and Butler County, respectively.
The Venture is subject to regulation by various federal, state
and local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other things,
federal and local regulation of rates charged for basic cable service, cable
programming service tiers ("CPSTs") and equipment and installation services.
Regulations issued in 1993 and significantly amended in 1994 by the Federal
Communications Commission (the "FCC") have resulted in changes in the rates
charged for the Venture's cable services. The Venture believes that compliance
with the 1992 Cable Act has had a significant negative impact on its operations
and cash flow. It also believes that any potential future liabilities for refund
claims or other related actions would not be material. The Telecommunications
Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As
it pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain CPSTs in 1999; (ii) expands the definition of
effective competition, the existence of which displaces rate regulation; (iii)
eliminates the restriction against the ownership and operation of cable systems
by telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
Beginning in August 1997, the Corporate General Partner
elected to self-insure the Venture's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
In October 1998, FCLP reinstated third party insurance
coverage for all of the cable television properties owned or managed by FCLP to
cover damage to cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties formerly owned or managed by FCLP through November 12, 1999, and
currently managed by Charter.
Approximately 80% of the Venture's subscribers are served by
its system in Poplar Bluff, Missouri and neighboring communities. Significant
damage to the system due to seasonal weather conditions or other events could
have a material adverse effect on the Venture's liquidity and cash flows. The
Venture continues to purchase insurance coverage in amounts its management views
as appropriate for all other property, liability, automobile, workers'
compensation and other types of insurable risks.
In the states of Missouri and Illinois, customers have filed
punitive class action lawsuits on behalf of all persons residing in the states
who are or were customers of the Venture's cable television service, and who
have been charged a fee for delinquent payment of their cable bill. The actions
challenge the legality of the processing fee and seek declaratory judgment,
injunctive relief and unspecified damages. At present, the Venture is not able
to project the outcome of the actions. All of the Venture's basic subscribers
reside in Missouri and Illinois where the claims have been filed.
F-20
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
=============================
NOTE 6 - EMPLOYEE BENEFIT PLAN
The Venture participates in a cash or deferred profit sharing
plan (the "Profit Sharing Plan") sponsored by a subsidiary of the Corporate
General Partner, which covers substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. Prior to 1999, the
Venture's contribution to the Profit Sharing Plan, as determined by management,
was discretionary but could not exceed 15% of the annual aggregate compensation
(as defined) paid to all participating employees. Effective January 1, 1999, the
Profit Sharing Plan was amended, whereby the 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 $1,500 was made during 1999.
There were no contributions charged against operations of the Venture for the
Profit Sharing Plan in 1997 or 1998.
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement with a
wholly owned subsidiary of the Corporate General Partner (the "Manager") for a
monthly management fee of 5% of gross receipts, as defined, from the operations
of the Venture. Management fee expense was $279,200, $279,500 and $274,300 in
1997, 1998 and 1999, respectively.
In addition to the monthly management fee, the Venture
reimburses 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. All cable television properties managed by the
affiliate and its subsidiaries are charged a proportionate share of these
expenses. Charter and its affiliates provide management services for the
Venture. Such services were provided by FCLP and its affiliates prior to
November 12, 1999. Corporate office allocations and district office expenses are
charged to the properties served based primarily on the respective percentage of
basic customers or homes passed (dwelling units within a system) within the
designated service areas. The total amounts charged to the Venture for these
services approximated $313,900, $287,500 and $278,400 during 1997, 1998 and
1999, respectively.
The Venture also receives certain system operating management
services from an affiliate of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
the Venture's cable systems. The Venture reimburses the affiliate for its
allocable share of the affiliate's operational costs. The total amount charged
to the Venture for these costs approximated $151,400, $168,500 and $195,600 in
1997, 1998 and 1999, respectively. No management fee is payable to the affiliate
by the Venture and there is no duplication of reimbursed expenses and costs paid
to the Manager.
Substantially all programming services had been purchased
through FCLP, and since November 12, 1999, have been purchased through Charter.
FCLP charged the Venture for these costs based on an estimate of what the
Corporate General Partner could negotiate for such programming services for the
15 partnerships managed by the Corporate General Partner as a group. Charter
charges the Partnership for these costs based on its costs. The Venture recorded
programming fee expense of $1,262,700, $1,301,800 and $1,355,600 in 1997, 1998
and 1999, respectively. Programming fees are included in service costs in the
statements of operations.
F-21
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Macoupin
County (A Georgia General Partnership) as of December 31, 1998 and 1999, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1999. 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
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles standards generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 24, 2000
F-22
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
===============================
December 31,
-------------------------------------
1998 1999
----------------- ----------------
ASSETS:
Cash and cash equivalents $ 1,283,400 $ 1,683,400
Accounts receivable, less allowance of $3,800 and
$1,600 for possible losses 37,600 66,600
Prepaid expenses and other assets 16,000 57,500
Property, plant and equipment, less accumulated
depreciation and amortization 1,656,600 1,647,500
Franchise cost, net of accumulated
amortization of $17,800 and $27,200 57,400 82,700
Deferred charges, net 2,500 1,200
----------------- ----------------
$ 3,053,500 $ 3,538,900
================= ================
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
LIABILITIES:
Accounts payable $ 174,000 $ 106,700
Due to affiliates 169,900 116,000
----------------- ----------------
TOTAL LIABILITIES 343,900 222,700
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 903,200 1,105,400
Enstar Income Program IV-2, L.P. 903,200 1,105,400
Enstar Income Program IV-3, L.P. 903,200 1,105,400
----------------- ----------------
TOTAL VENTURERS' CAPITAL 2,709,600 3,316,200
----------------- ----------------
$ 3,053,500 $ 3,538,900
================= ================
See accompanying notes to financial statements.
F-23
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
===============================
Year Ended December 31,
---------------------------------------------------------
1997 1998 1999
---------------- ----------------- ----------------
REVENUES $ 1,975,900 $ 2,003,000 $ 1,993,600
---------------- ----------------- ----------------
OPERATING EXPENSES:
Service costs 573,000 626,000 664,300
General and administrative expenses 149,200 124,700 158,200
General Partner management fees
and reimbursed expenses 298,700 309,800 291,200
Depreciation and amortization 575,400 344,500 217,800
---------------- ----------------- ----------------
1,596,300 1,405,000 1,331,500
---------------- ----------------- ----------------
Operating income 379,600 598,000 662,100
---------------- ----------------- ----------------
INTEREST INCOME, net 16,100 23,300 49,500
---------------- ----------------- ----------------
NET INCOME $ 395,700 $ 621,300 $ 711,600
================ ================= ================
See accompanying notes to financial statements.
F-24
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
================================
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, 1997 $ 601,700 $ 601,700 $ 601,700 $ 1,805,100
Distributions to venturers (25,000) (25,000) (25,000) (75,000)
Net income for year 131,900 131,900 131,900 395,700
-------------- -------------- -------------- ----------------
BALANCE, December 31, 1997 708,600 708,600 708,600 2,125,800
Distributions to venturers (12,500) (12,500) (12,500) (37,500)
Net income for year 207,100 207,100 207,100 621,300
-------------- -------------- -------------- ----------------
BALANCE, December 31, 1998 903,200 903,200 903,200 2,709,600
Distributions to venturers (35,000) (35,000) (35,000) (105,000)
Net income for year 237,200 237,200 237,200 711,600
-------------- -------------- -------------- ----------------
BALANCE, December 31, 1999 $ 1,105,400 $ 1,105,400 $ 1,105,400 $ 3,316,200
============== ============== ============== ================
See accompanying notes to financial statements.
F-25
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
===============================
Year Ended December 31,
-------------------------------------------------------
1997 1998 1999
---------------- --------------- ----------------
Cash flows from operating activities:
Net income $ 395,700 $ 621,300 $ 711,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 575,400 344,500 217,800
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses (292,000) 138,700 (70,500)
and other assets
Accounts payable and due to affiliates 158,900 (94,300) (121,200)
---------------- --------------- ----------------
Net cash provided by operating activities 838,000 1,010,200 737,700
---------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (677,900) (170,900) (196,400)
Increase in intangible assets (11,500) (34,200) (36,300)
---------------- --------------- ----------------
Net cash used in investing activities (689,400) (205,100) (232,700)
---------------- --------------- ----------------
Cash flows from financing activities:
Distributions to venturers (75,000) (37,500) (105,000)
---------------- --------------- ----------------
Net increase in cash and cash equivalents 73,600 767,600 400,000
Cash and cash equivalents at beginning of year 442,200 515,800 1,283,400
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 515,800 $ 1,283,400 $ 1,683,400
================ =============== ================
See accompanying notes to financial statements.
F-26
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership
(the "Venture"), owns and operates cable television systems in rural areas of
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") may have outside of their interest
in the Venture, nor to any obligations, including income taxes, of the
Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of these
instruments.
There are no cash equivalents at December 31, 1999.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and the renewal of existing franchises. These costs are
amortized using the straight-line method over the lives of the franchises,
ranging up to 15 years. The Venture periodically evaluates the amortization
periods of these intangible assets to determine whether events or circumstances
warrant revised estimates of useful lives. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. The Venture is in the
process of negotiating the renewal of expired franchise agreements for three of
the Venture's seven franchises, which include approximately 32% of the Venture's
basic subscribers at December 31, 1999.
DEFERRED CHARGES
Deferred charges are amortized using the straight-line method
over two years.
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing basis the recoverability of
intangible and capitalized plant assets based on estimates of future
undiscounted cash flows compared to net book value. If the future undiscounted
F-27
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
cash flow estimate were less than net book value, net book value would then be
reduced to estimated fair value, which would generally approximate discounted
cash flows. The Venture also evaluates the amortization periods of assets,
including franchise costs and other intangible assets, to determine whether
events or circumstances warrant revised estimates of useful lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising
are recognized in the period that services are delivered. Installation revenue
is recognized in the period the installation services are provided to the extent
of direct selling costs. Any remaining amount is deferred and recognized over
the estimated average period that customers are expected to remain connected to
the cable television system.
INCOME TAXES
As a partnership, the Venture pays no 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. At December 31, 1999, the book basis of
the Venture's net assets exceeds its tax basis by $675,200.
The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differ from the
financial statements prepared for tax purposes due to the different treatment of
various items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that net income for 1999 in the financial statements
is $63,200 more than tax income of the Venture for the same period, caused
principally by timing differences in depreciation expense.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
to the 1999 presentation.
NOTE 2 - 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 as their corporate
general partner (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.
F-28
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 2 - JOINT VENTURE MATTERS (Continued)
Under the terms of the agreement, the Venturers share equally
in profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
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.
NOTE 3 - POTENTIAL SALE OF JOINT VENTURE ASSETS
In accordance with the joint venture agreement, the Corporate
General Partner has implemented a plan for liquidating the Venture. In
connection with that strategy, the Corporate General Partner has entered into an
agreement with a cable broker to market the Venture's cable system to third
parties. Should the Venture receive offers from third parties for such assets,
the Corporate General Partner will prepare a proxy for submission to the limited
partners of the Venturers for the purpose of approving or disapproving such
sale. Should such a sale be approved, the Corporate General Partner will proceed
to liquidate the Venture following the settlement of all its final liabilities.
The Corporate General Partner can give no assurance, however, that it will be
able to generate a sale of the Venture's cable assets. The financial statements
do not reflect any adjustments that may result from the outcome of this
uncertainty.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
----------------------------------
1998 1999
--------------- ---------------
Cable television systems $ 3,851,700 $ 3,994,700
Vehicles, furniture and equipment
and leasehold improvements 216,500 262,600
--------------- ---------------
4,068,200 4,257,300
Less accumulated depreciation
and amortization (2,411,600) (2,609,800)
--------------- ---------------
$ 1,656,600 $ 1,647,500
=============== ===============
F-29
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with
the systems under operating leases expiring in 2004.
Future minimum rental payments under non-cancelable operating
leases that have remaining terms in excess of one year as of December 31, 1999
are as follows:
Year Amount
------- -----------
2000 $ 5,800
2001 5,900
2002 5,900
2003 6,000
2004 2,700
-----------
$ 26,300
===========
Rentals, other than pole rentals, charged to operations
approximated $7,700, $8,600 and $8,900 in 1997, 1998 and 1999, respectively,
while pole rental expense approximated $16,900, $18,100 and $19,000 in 1997,
1998 and 1999, respectively.
Other commitments include approximately $1.1 million at
December 31, 1999 to upgrade the Venture's system in the community of
Carlinville, Illinois by December 2001.
The Venture is subject to regulation by various federal, state
and local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other things,
federal and local regulation of rates charged for basic cable service, cable
programming service tiers ("CPSTs") and equipment and installation services.
Regulations issued in 1993 and significantly amended in 1994 by the Federal
Communications Commission (the "FCC") have resulted in changes in the rates
charged for the Venture's cable services. The Venture believes that compliance
with the 1992 Cable Act has had a significant negative impact on its operations
and cash flow. It also believes that any potential future liabilities for refund
claims or other related actions would not be material. The Telecommunications
Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As
it pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain CPSTs in 1999; (ii) expands the definition of
effective competition, the existence of which displaces rate regulation; (iii)
eliminates the restriction against the ownership and operation of cable systems
by telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
Beginning in August 1997, the Corporate General Partner
elected to self-insure the Venture's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
In October 1998, FCLP reinstated third party insurance
coverage for all of the cable television properties owned or managed by FCLP to
cover damage to cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties formerly owned or managed by FCLP through November 12, 1999, and
currently managed by Charter.
F-30
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
All of the Venture's subscribers are served by its system in
Carlinville, Illinois and neighboring communities. Significant damage to the
system due to seasonal weather conditions or other events could have a material
adverse effect on the Venture's liquidity and cash flows. The Venture continues
to purchase insurance coverage in amounts its management views as appropriate
for all other property, liability, automobile, workers' compensation and other
types of insurable risks.
In the state of Illinois, customers have filed a punitive
class action lawsuit on behalf of all persons residing in the state who are or
were customers of the Venture's cable television service, and who have been
charged a fee for delinquent payment of their cable bill. The action challenges
the legality of the processing fee and seeks declaratory judgment, injunctive
relief and unspecified damages. At present, the Venture is not able to project
the outcome of the action. All of the Venture's basic subscribers reside in
Illinois where the claim has been filed.
NOTE 6 - EMPLOYEE BENEFIT PLAN
The Venture participates in a cash or deferred profit sharing
plan (the "Profit Sharing Plan") sponsored by a subsidiary of the Corporate
General Partner, which covers substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. Prior to 1999, the
Venture's contribution to the Profit Sharing Plan, as determined by management,
was discretionary but may not exceed 15% of the annual aggregate compensation
(as defined) paid to all participating employees. Effective January 1, 1999, the
Profit Sharing Plan was amended, whereby the Venture would make an employer
contribution equal to 100% of the first 3% and 50% of the next 2% of the
participants' contributions. There were no contributions charged against
operations of the Venture for the Profit Sharing Plan in 1997, 1998 or 1999.
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement with a
wholly owned subsidiary of the Corporate General Partner (the "Manager") for a
monthly management fee of 4% of gross receipts, as defined, from the operations
of the Venture. Management fees approximated $79,000, $80,200 and $79,800 in
1997, 1998 and 1999, respectively. In addition, the Venture is required to
distribute 1% of its gross revenues to the Corporate General Partner in respect
of its interest as the Corporate General Partner. This fee approximated $19,800,
$20,000 and $19,900 in 1997, 1998 and 1999, respectively.
The Venture also reimburses 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. All cable
television properties managed by the Corporate General Partner and its
subsidiaries are charged a proportionate share of these expenses. Charter and
its affiliates provide management services for the Venture. Such services were
provided by FCLP and its affiliates prior to November 12, 1999. Corporate office
allocations and district office expenses are charged to the properties served
based primarily on the respective percentage of basic customers or homes passed
(dwelling units within a system) within the designated service areas. The total
amounts charged to the Venture for these services approximated $199,900,
$209,600 and $191,500 during 1997, 1998 and 1999, respectively.
F-31
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
===============================
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (Continued)
The Venture also receives certain system operating management
services from affiliates of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
the Venture's cable system. The Venture reimburses the affiliates for its
allocable share of the affiliates' operational costs. The total amount charged
to the Venture for these costs approximated $20,000, $4,600 and $5,800 in 1997,
1998 and 1999, respectively. No management fee is payable to the affiliates by
the Venture and there is no duplication of reimbursed expenses and costs paid to
the Manager.
Substantially all programming services have been purchased
through FCLP, and since November 12, 1999, have been purchased through Charter.
FCLP charged the Venture for these costs based on an estimate of what the
Corporate General Partner could negotiate for such programming services for the
15 partnerships managed by the Corporate General Partner as a group. Charter
charges the Venture for these costs based on its costs. Programming fee expense
was $433,300, $474,500 and $507,500 in 1997, 1998 and 1999, respectively.
Programming fees are included in service costs in the statements of operations.
F-32
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3 Second Amended and Restated Agreement of Limited Partnership of Enstar
Income Program IV-2, L.P., dated as of August 1, 1988.(3)
10.1 Amended and Restated Partnership Agreement of Enstar IV/PBD Systems
Venture, as of December 15, 1986.(1)
10.2 Management Agreement between Enstar IV/PBD Systems Venture and Enstar
Cable Corporation.(1)
10.3 Management Agreement between Enstar Income Program IV-2, L.P. and
Enstar Cable Corporation.(1)
10.4 Partnership Agreement of Enstar Cable of Macoupin County, dated as of
December 30, 1987.(2)
10.5 Management Agreement between Enstar Cable of Macoupin County and
Enstar Cable Corporation.(3)
10.6 Revolving Credit and Term Note Agreement dated September 23, 1986
between Enstar Income Program IV-2 and Rhode Island Hospital Trust
National Bank, as amended.(3)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Poplar Bluff, MO.(3)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Dexter, MO.(3)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Bloomfield, MO.(2)
10.10 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Mt. Carmel, IL.(2)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Carlinville, IL.(2)
10.12 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Virden, IL.(2)
10.13 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Girard, IL.(2)
10.14 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Thayer, IL.(2)
10.15 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Auburn, IL.(2)
10.16 Service agreement between Enstar Communications Corporation, Enstar
Cable Corporation and Falcon Holding Group, Inc. dated as of October
1, 1988.(4)
E-1
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.17 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated
September 23, 1986 between Enstar Income Program IV-2 and Rhode Island
Hospital Trust National Bank, dated January 18, 1989.(5)
10.18 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated
September 23, 1986 between Enstar Income Program IV-2 and Rhode Island
Hospital Trust National Bank, dated June 15, 1990.(5)
10.19 Loan Agreement between Enstar Income Program IV-2, L.P. and
Kansallis-Osake-Pankki, dated December 9, 1993.(6)
10.20 Amended and Restated Partnership Agreement of Enstar Cable of Macoupin
County, as of October 1, 1993. (7)
10.21 Loan Agreement between Enstar Income Program IV-2, L.P. and Enstar
Finance Company, LLC, dated September 30, 1997.(8)
10.22 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for the
City of Auburn, IL.(8)
10.23 A resolution of the City of Carlinville, Illinois extending the Cable
Television Franchise of Enstar Cable of Macoupin County. Adopted
December 1, 1997.(9)
10.24 An agreement by the City of Mt. Carmel, Illinois extending the Cable
Television Franchise of Enstar IV/PBD Systems Venture, dated December
8, 1997.(9)
10.25 Franchise Ordinance granting a non-exclusive community antenna
television system franchise for the City of Carlinville, Illinois.
(10)
21.1 Subsidiaries: Enstar IV/PBD Systems Venture and Enstar Cable of
Macoupin County
27.1 Financial Data Schedule.
E-2
EXHIBIT INDEX
-------------
FOOTNOTE REFERENCES
-------------------
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1986.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1987.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1988.
(4) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1989.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1990.
(6) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1993.
(7) Incorporated by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q, File No. 0-15706 for the quarter ended
March 31, 1995.
(8) Incorporated by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q, File No. 0-15706 for the quarter ended
September 30, 1997.
(9) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1997.
(10) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15706 for the fiscal year ended
December 31, 1998.
E-3