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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 0-17687
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
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(Exact name of Registrant as specified in its charter)
Georgia 58-1755230
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12444 Powerscourt Dr., Suite 100
St. Louis, Missouri 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act
Name of each exchange
Title of each Class on which registered
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Units of Limited Partnership Interest None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant - all of the registrant's 79,818 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/Growth Program Six-A, 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
September 23, 1987. The general partners of the partnership are Enstar
Communications Corporation, a Georgia corporation (the "corporate general
partner"), and Robert T. Graff, Jr. (the "individual general partner"). On
November 12, 1999, Charter Communications Holdings Company, LLC, an entity
controlled by Charter Communications, Inc., acquired both the corporate general
partner, as well as Falcon Communications, L.P., the entity that provided
management and certain other services to the partnership. Charter is the
nation's fourth largest cable operator, serving 6.2 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.
In accordance with the partnership agreement, the corporate
general partner has implemented a plan for liquidating the partnership. In
connection with that strategy, the corporate general partner has entered into an
agreement with a cable broker to market the partnership's cable systems to third
parties. Should the partnership receive offers from third parties for such
assets, the corporate general partner will prepare a proxy for submission to the
limited partners for the purpose of approving or disapproving such sale. Should
such a sale be approved, the corporate general partner will proceed to liquidate
the partnership following the settlement of all final liabilities of the
partnership. We can give no assurance, however, that we will be able to generate
a sale of the partnership's 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:
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* 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
- 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. Due to a general
lack of channel capacity available for adding new channels, our management
cannot predict the impact of such potential payments on our business. See Item
7., "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
We began our cable television business operations in January
1989 with the acquisition of two cable television systems that provide service
to customers in and around the municipalities of Dyer, Tennessee. During March
1989, we expanded our cable operations by acquiring certain cable television
systems providing service to customers in and around the municipalities of Flora
and Salem, Illinois. During October 1989, we expanded our operations by
acquiring a cable television system providing service to customers in and around
the communities of Farmersville and Raymond, Illinois. As of December 31, 1999,
we served approximately 8,600 basic subscribers. We do not expect to make any
additional acquisitions during the remaining term of the partnership.
Charter receives a management fee and reimbursement of
expenses from the corporate general partner for managing our cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of the 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."
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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," certain of our cable
television systems have no available channel capacity with which to add new
channels or to provide pay-per-view offerings to customers. As a result,
significant amounts of capital for future upgrades will be required in order to
increase available channel capacity in those systems, improve quality of service
and facilitate the expansion of new services such as advertising, pay-per-view,
new unregulated tiers of satellite-delivered services and home shopping, so that
our cable television systems remain competitive within the industry.
As discussed in prior reports, we 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
partnership's business and access to capital. As a result, our cable television
systems are significantly less technically advanced than had been expected prior
to the implementation of reregulation. The partnership is party to a loan
agreement with an affiliate which provides for a revolving loan facility of
$4,563,000. Upon the acquisition of the corporate general partner by Charter on
November 12, 1999, the facility was reduced to $3.6 million. Prior to listing
our cable television systems for sale, we had expected to use borrowings under
the loan facility to upgrade our cable television systems. Our upgrade program
is presently estimated to require aggregate capital expenditures of
approximately $4.0 million. Two of our franchise areas, which together serve 63%
of the Partnership's total customer base, require upgrades to increase channel
capacity. One of the upgrades is required in an existing franchise agreement.
The estimated cost to upgrade the cable system in this franchise area is
approximately $2.5 million and must be completed by June 2000. Another of our
franchise agreements is under negotiation for renewal and we believe that the
renewed franchise agreement may require us to upgrade our cable plant at an
estimated cost of $1.5 million within 24 months. Capital expenditures in 1999
were $492,000, including $272,000 for the two rebuild projects. Capital
expenditures planned for 2000 are approximately $3.3 million for the improvement
and upgrade of plant assets, including approximately $2.5 million for the
required upgrade. Our management expects to use borrowings under the facility in
the future to fund the upgrade of our systems. However, in the event our systems
are not sold to a third party, our borrowing capacity and our present cash
reserves will be insufficient to fund our entire upgrade program. Consequently,
we would need to rely on increased cash flow from operations or new sources of
borrowing in order to meet our future liquidity requirements. There can be no
assurance that such cash flow increases can be attained, or that additional
future borrowings will be available to us on acceptable terms. These factors
will most likely impact any offers we receive for our cable television systems.
As a result, the value of our systems will be lower than that of systems built
to a higher technical standard. See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Decentralized Management
The corporate general partner manages the 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.
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Marketing
Our marketing strategy is to provide added value to increasing
levels of subscription services through "packaging." In addition to the basic
service package, customers in substantially all of our cable television systems
may purchase additional unregulated packages of satellite-delivered services and
premium services. We have employed a variety of targeted marketing techniques to
attract new customers by focusing on delivering value, choice, convenience and
quality. We employ direct mail, radio and local newspaper advertising,
telemarketing and door-to-door selling utilizing demographic "cluster codes" to
target specific messages to target audiences. In some cable television systems,
we offer discounts to customers who purchase premium services on a limited trial
basis in order to encourage a higher level of service subscription. We also have
a coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the initial decision to subscribe and encourage
customers to purchase higher service levels.
Customer Service and Community Relations
We place a strong emphasis on customer service and community
relations and believe that success in these areas is critical to our business.
We have developed and implemented a wide range of monthly internal training
programs for employees, including our regional managers, that focus on our
operations and employee interaction with customers. The effectiveness of our
training program as it relates to the employees' interaction with customers is
monitored on an ongoing basis. We are also committed to fostering strong
community relations in the towns and cities we serve. We support many local
charities and community causes in various ways, including marketing promotions
to raise money and supplies for persons in need, and in-kind donations that
include production services and free air-time on major cable networks. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate.
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Description of the Partnership's Systems
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The table below sets forth certain operating statistics for
the Partnership's 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)
- ------ ------ ----------- ----------- ----- ----------- ----------
Dyer, TN 3,750 2,331 62.2% 355 15.2% $34.11
Flora, IL 9,020 6,242 69.2% 1,356 21.7% $32.55
----- ----- -----
Total 12,770 8,573 67.1% 1,711 20.0% $32.97
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1 Homes passed refers to our estimates of the approximate number of
dwelling units in a particular community that can be connected to the
distribution system without any further extension of principal transmission
lines. Such estimates are based upon a variety of sources, including billing
records, house counts, city directories and other local sources.
2 Basic subscribers as a percentage of homes passed by cable.
3 Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
4 Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
5 Average monthly revenue per basic subscriber has been computed based
on revenue for the year ended December 31, 1999.
Customer Rates and Services
Our cable television systems offer customers packages of
services that include the local area network, independent and educational
television stations, a limited number of television signals from distant cities,
numerous satellite-delivered, non-broadcast channels such as CNN, MTV, USA,
ESPN, TNT and The Disney Channel and certain information and public access
channels. For an extra monthly charge, we also provide certain premium
television services, such as HBO and Showtime. We also offer other cable
television services to our customers. For additional charges, in most of our
cable television systems, we also rent remote control devices and VCR compatible
devices, which are devices that make it easier for a customer to tape a program
from one channel while watching a program on another.
Our service options vary from system to system, depending upon
a cable system's channel capacity and viewer interests. Rates for services also
vary from market to market and according to the type of services selected.
Under the 1992 Cable Act, most cable television systems are
subject to rate regulation of the basic service tier, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of our cable television systems not deemed to
be subject to effective competition under the FCC's definition. Currently, none
of our cable television systems are subject to effective competition. See
"Legislation and Regulation."
At December 31, 1999, our monthly rates for basic cable
service for residential customers, including certain discounted rates, ranged
from $14.82 to $23.88 and our premium service rate was $11.95, excluding special
promotions offered periodically in conjunction with our marketing programs. A
one-time installation fee, which we may wholly or partially waive during a
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promotional period, is usually charged to new customers. We charge commercial
customers, such as hotels, motels and hospitals, a negotiated, non-recurring fee
for installation of service and monthly fees based upon a standard discounting
procedure. We offer most multi-unit dwellings a negotiated bulk rate in exchange
for single-point billing and basic service to all units. These rates are also
subject to regulation.
Employees
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The various personnel required to operate our business are
employed by the partnership, the corporate general partner, its subsidiary
corporation and Charter. As of February 19, 2000, we had seven employees, the
cost of which is charged directly to the partnership. The employment costs
incurred by the corporate general partner, its subsidiary corporation and
Charter are allocated and charged to the partnership for reimbursement pursuant
to the partnership agreement and management agreement. Other personnel required
to operate our business are employed by affiliates of the corporate general
partner. The cost of such employment is allocated and charged to the
partnership. The amounts of these reimbursable costs are set forth below in Item
11., "Executive Compensation."
Technological Developments
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As part of our commitment to customer service, we seek to
apply technological advances in the cable television industry to our cable
television systems on the basis of cost effectiveness, capital availability,
enhancement of product quality and service delivery and industry-wide
acceptance. Currently, our cable television systems have an average channel
capacity of 58, which is 67% utilized, in systems that serve 27% of our
customers, and an average channel capacity of 38, which is 96% utilized, in
cable television systems that serve 73% of our customers. We believe that system
upgrades would enable us to provide customers with greater programming
diversity, better picture quality and alternative communications delivery
systems made possible by the introduction of fiber optic technology and by the
application of digital compression. See "Business Strategy - Capital
Expenditures," "Legislation and Regulation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial
cable is playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels and, accordingly, its
utilization is essential to the enhancement of a cable television system's
technical capabilities. Our current policy is to utilize fiber optic technology
where applicable in rebuild projects which 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.
As of December 31, 1999, approximately 63% of our customers
were served by cable television systems that utilize addressable technology.
Addressable technology permits the cable operator to activate from a central
control point the cable television services to be delivered to a customer if
that customer has also been supplied with an addressable converter box. To date,
we have supplied addressable converter boxes to customers of the systems
utilizing addressable technology who subscribe to one or more premium services
and, in selected systems, to customers who subscribe to certain new product
tiers. As a result, if the system utilizes addressable technology and the
customer has been supplied with an addressable converter box, we can upgrade or
downgrade services immediately, without the delay or expense associated with
dispatching a technician to the home. Addressable technology also reduces pay
service theft, is an effective enforcement tool in collecting delinquent
payments and allows us to offer pay-per-view services. See "Customer Rates and
Services."
Digital Compression
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We have been closely monitoring developments in the area of
digital compression, a technology that enables cable operators to increase the
channel capacity of cable television systems by permitting a significantly
increased number of video signals to fit in a cable television system's existing
bandwidth. Depending on the technical characteristics of the existing system, we
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believe that the utilization of digital compression technology will enable our
cable television systems to increase channel capacity in a manner that could, in
the short term, be more cost efficient than rebuilding such cable television
systems with higher capacity distribution plant. However, we believe that unless
the cable television system has sufficient unused channel capacity and
bandwidth, the use of digital compression to increase channel offerings is not a
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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We purchase basic and premium programming for our systems from
Charter. In turn, Charter charges the partnership for these costs at its costs,
which are generally based on a fixed fee per customer or a percentage of the
gross receipts for the particular service. Prior to the acquisition of the
corporate general partner, Falcon Communications charged the partnership for
these services based on an estimate of what the corporate general partner could
negotiate for such programming services for the 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
partnership's cable television systems fees in return for carrying their
service. Due to a lack of channel capacity available for adding new channels,
our management cannot predict the impact of such potential payments on our
business. In addition, the FCC may require that such payments from programmers
be offset against the programming fee increases which can be passed through to
subscribers under the FCC's rate regulations. Charter's programming contracts
are generally for a fixed period of time and are subject to negotiated renewal.
Accordingly, no assurance can be given that its, and correspondingly our
programming costs will not increase substantially in the near future, or that
other materially adverse terms will not be added to Charter's programming
contracts. Management believes, however, that Charter's relations with its
programming suppliers generally are good.
Our cable programming costs have increased in recent years and
are expected to continue to increase due to additional programming being
provided to our basic customers, requirements to carry channels under
retransmission carriage agreements entered into with certain programming
sources, increased costs to produce or purchase cable programming generally
(including sports programming), inflationary increases and other factors. The
1996 retransmission carriage agreement negotiations resulted in the partnership
agreeing to carry one new service in our Flora system, for which we expect to
receive reimbursement of certain costs related to launching the service. All
other negotiations were completed with essentially no change to the previous
agreements. Under the FCC's rate regulations, increases in programming costs for
regulated cable services occurring after the earlier of March 1, 1994, or the
date a system's basic cable service became regulated, may be passed through to
customers. 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."
As of December 31, 1999, we operated cable systems in 16
franchise areas. These franchises, all of which are non-exclusive, provide for
the payment of fees to the issuing authority. Annual franchise fees imposed on
our systems range up to 5% of the gross revenues generated by a system. The 1984
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.
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The following table groups the franchises of our cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of basic
subscribers for each group as of December 31, 1999.
Number of Percentage of
Year of Number of Basic Basic
Franchise Expiration Franchises Subscribers Subscribers
-------------------- ---------- ----------- -----------
Prior to 2000 7 2,758 32.2%
2000 - 2004 5 4,286 50.0%
2005 and after 4 1,045 12.2%
- ----- ----
Total 16 8,089 94.4%
== ===== ====
As of December 31, 1999, the franchise agreements have expired
in seven of our franchise areas where we serve 2,758 basic subscribers. We
continue to serve these customers while we are in negotiations to extend the
franchise agreements and continue to pay franchise fees to the franchise
authorities. We operate cable television systems which serve multiple
communities and, in some circumstances, portions of such systems extend into
jurisdictions for which we believe no franchise is necessary. In the aggregate,
approximately 484 customers, comprising approximately 5.6% of our customers, are
served by unfranchised portions of such systems. In certain instances, where a
single franchise comprises a large percentage of the customers in an operating
region, the loss of such franchise could decrease the economies of scale
achieved by our clustering strategy. We have never had a franchise revoked for
any of our systems and we believe that we have satisfactory relationships with
substantially all of our franchising authorities.
The 1984 Cable Act provides, among other things, for an
orderly franchise renewal process in which franchise renewal will not be
unreasonably withheld or, if renewal is denied and the franchising authority
acquires ownership of the system or effects a transfer of the system to another
person, the operator generally is entitled to the "fair market value" for the
system covered by such franchise, but no value may be attributed to the
franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable
Act, establishes comprehensive renewal procedures which require that an
incumbent franchisee's renewal application be assessed on its own merit and not
as part of a comparative process with competing applications. See "Legislation
and Regulation."
Competition
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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
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competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the FCC will
provide incumbent television licenses with the ability to deliver high
definition television pictures and multiple digital-quality program streams, as
well as advanced digital services such as subscription video.
DBS. Direct broadcast satellite, known as DBS, has emerged as
significant competition to cable systems. The DBS industry has grown rapidly
over the last several years, far exceeding the growth rate of the cable
television industry, and now serves approximately 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.
-10-
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.
-11-
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 6% 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 additional 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 service regulation is a
-12-
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 cable operators. These developments
-13-
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" status. Less popular stations
-14-
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.
-15-
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.
-16-
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.
-17-
Item 2. PROPERTIES
We own or lease parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices,
and own or lease our service vehicles. We believe that our properties, both
owned and leased, are in good condition and are suitable and adequate for our
business operations.
We own substantially all of the assets related to our cable
television operations, including our program production equipment, headend
(towers, antennas, electronic equipment and satellite earth stations), cable
plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
Item 3. LEGAL PROCEEDINGS
We are periodically a party to various legal proceedings.
These legal proceedings are ordinary and routine litigation proceedings that are
incidental to our business. 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 state of Illinois, customers have filed a punitive
class action lawsuit on behalf of all persons residing in the state who are or
were customers of the partnership's cable television service, and who have been
charged a fee for delinquent payment of their cable bill. The action challenges
the legality of the processing fee and seeks declaratory judgment, injunctive
relief and unspecified damages. At present, the partnership is not able to
project the outcome of the action. Approximately 73% of the partnership's basic
subscribers reside in Illinois where the claim was filed.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-18-
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 1,939 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.
Pursuant to documents filed with the Securities and Exchange
Commission on April 21, 1999, Madison Liquidity Investors 104, LLC ("Madison")
initiated a tender offer to purchase up to approximately 8.6% of the outstanding
units for $50 per unit. On May 5, 1999, we filed a Recommendation Statement on
Schedule 14D-9 and distributed a letter to unitholders recommending that
unitholders reject Madison's offer.
Distributions
- -------------
The amended partnership agreement generally provides that all
cash flow be distributed 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. The partnership agreement also
provides that all partnership operating profits be allocated to the partners in
the same proportion as cash flow distributions are made. After the limited
partners have received cash flow equal to their initial investment, the general
partners will receive a 1% distribution of proceeds from a disposition or
refinancing of a system until the limited partners have received an annual
simple interest return of at least 8% of their initial investment less any
distributions from previous dispositions or refinancing of systems. Thereafter,
proceeds from a disposition or refinancing of a system shall be distributed 80%
to the limited partners and 20% to the general partners. Gains from dispositions
of systems are first allocated in the same manner as the proceeds from such
dispositions. This occurs until the dispositions result in the aggregate fair
market value of the partnership's remaining system(s) being less than or equal
to 50% of the aggregate contributions to the capital of the partnership by the
partners. Once this level of dispositions has occurred, gain is allocated to the
partners so that distributions upon liquidation of the partnership in accordance
with capital account balances will result in the same amounts being distributed
to the partners as if distributions were made in the same manner as they are
prior to a liquidation.
Any losses, whether resulting from operations or the sale or
disposition of a system, are allocated 99% to the limited partners and 1% to the
general partners until the limited partners' capital account balances are equal
to or less than zero. Thereafter, all losses are allocated to the corporate
general partner.
Upon dissolution of the partnership, distributions are to be
made to the partners in accordance with their capital account balances. No
partners other than general partners shall be obligated to restore any negative
capital account balance existing upon dissolution of a partnership. All
allocations to individual limited partners will be based on their respective
limited partnership ownership interests.
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 monthly basis throughout the operational life of the
partnership, assuming the availability of sufficient cash flow from partnership
operations. The amount of such distributions, if any, will vary from month to
month depending upon the partnership's results of operations and the corporate
general partners' determination of whether otherwise available funds are needed
for the partnership's ongoing working capital and liquidity requirements.
We began making periodic cash distributions from operations in
January 1989 and discontinued distributions in May 1993. No distributions were
made in 1997, 1998 and 1999.
-19-
Our ability to pay distributions, the actual level of
distributions and the continuance of distributions, if any, 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
financing, 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 assurance regarding the level or timing of
future distributions, if any. The Partnership's present 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. However, as a result of the Partnership's pending rebuild program,
management has concluded that it is not prudent for the Partnership to resume
paying distributions at this time.
-20-
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the partnership
for the five years ended December 31, 1999. This data should be read in
conjunction with the partnership's financial statements included in Item 8
hereof and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7.
Year Ended December 31,
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OPERATIONS STATEMENT DATA 1995 1996 1997 1998 1999
------------- -------------- -------------- ------------- -------------
Revenues $ 3,267,000 $ 3,510,700 $ 3,644,700 $ 3,630,300 $ 3,463,300
Costs and expenses (1,976,300) (2,061,600) (2,266,500) (2,081,100) (2,056,600)
Depreciation and amortization (1,815,600) (1,618,000) (888,900) (837,900) (1,025,300)
------------- -------------- -------------- ------------- -------------
Operating income (loss) (524,900) (168,900) 489,300 711,300 381,400
Interest expense (361,200) (295,200) (252,300) (214,900) (149,900)
Interest income 23,700 12,600 18,300 31,000 22,700
Gain (loss) on sale of cable assets - (1,000) 100 500 -
------------- -------------- -------------- ------------- -------------
Net income (loss) $ (862,400) $ (452,500) $ 255,400 $ 527,900 $ 254,200
============= ============== ============== ============= =============
Per unit of limited
partnership interest:
Net income (loss) $ (10.70) $ (5.61) $ 3.17 $ 6.55 $ 3.15
============= ============== ============== ============= =============
OTHER OPERATING DATA
Net cash provided by operating activities $ 1,044,800 $ 1,109,200 $ 1,275,200 $ 1,204,900 $ 1,166,400
Net cash used in investing activities (830,300) (240,600) (157,000) (239,300) (536,800)
Net cash used in financing activities (617,900) (875,000) (628,200) (1,083,000) (495,700)
EBITDA (1) 1,290,700 1,449,100 1,378,200 1,549,200 1,406,700
EBITDA to revenues 39.5% 41.3% 37.8% 42.7% 40.6%
Total debt to EBITDA 3.2x 2.2x 1.8x 0.87x 0.75x
Capital expenditures $ 806,300 $ 246,000 $ 123,800 $ 215,200 $ 492,400
As of December 31,
----------------------------------------------------------------------------------
BALANCE SHEET DATA 1995 1996 1997 1998 1999
------------- -------------- -------------- ------------- -------------
Total assets $ 6,957,300 $ 5,657,200 $ 5,359,000 $ 4,638,800 $ 4,365,400
Total debt 4,125,000 3,125,000 2,500,000 1,350,000 1,050,000
General partners' deficit (141,800) (146,300) (143,700) (138,400) (135,900)
Limited partners' capital 2,230,500 1,782,500 2,035,300 2,557,900 2,809,600
- ----------
(1) EBITDA is calculated as operating income before depreciation and
amortization. Based on our experience in the cable television industry, we
believe that EBITDA and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television companies
in several areas, such as liquidity, operating performance and leverage. 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. You should not consider EBITDA as an alternative to net income as an
indicator of our financial performance or as an alternative to cash flows as a
measure of liquidity. In addition, our definition of EBITDA may not be identical
to similarly titled measures used by other companies.
-21-
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.
RESULTS OF OPERATIONS
- ---------------------
1999 Compared to 1998
Our revenues decreased from $3,630,300 to $3,463,300, or by
4.6%, for the year ended December 31, 1999 as compared to 1998. Of the $167,000
decrease, $190,900 was due to decreases in the number of subscriptions for
basic, premium, tier and equipment rental services and $41,500 was due to
decreases in other revenue producing items. These decreases were partially
offset by a $65,400 increase in regulated service rates that were implemented by
us in 1999. As of December 31, 1999, we had approximately 8,700 basic
subscribers and 1,700 premium service units.
Our service costs increased from $1,125,800 to $1,126,300, 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 increase was primarily due to higher personnel costs.
Our general and administrative expenses increased from
$432,800 to $474,800, or by 9.7%, for the year ended December 31, 1999 as
compared to 1998, primarily due to increases in insurance premiums and
professional fees, including legal and audit fees.
Management fees and reimbursed expenses decreased from
$522,500 to $455,500, or by 12.8%, for the year ended December 31, 1999 as
compared to 1998. Management fees decreased in direct relation to decreased
revenues as described above. Reimbursed expenses decreased principally due to
lower allocated personnel costs.
Our depreciation and amortization expense increased from
$837,900 to $1,025,300, or by 22.4%, for the year ended December 31, 1999 as
compared to 1998, due to the depreciation of plant asset additions.
Our operating income decreased from $711,300 to $381,400, or
46.4%, for the year ended December 31, 1999 as compared to 1998, due primarily
to decreased revenues and increases in insurance premiums, professional fees and
depreciation and amortization as described above.
Our interest expense decreased from $214,900 to $149,900, or
by 30.2%, for the year ended December 31, 1999 as compared to 1998, due to a
decrease in average outstanding borrowings during 1999.
-22-
Our interest income decreased from $31,000 to $22,700, or by
26.8%, for the year ended December 31, 1999 as compared to 1998, due to lower
average cash balances available for investment in 1999.
Due to the factors described above, our net income decreased
from $527,900 to $254,200, or by 51.8%, 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 42.7% during 1998 to 40.6% in 1999. The
decrease was primarily caused by increases in insurance premiums and
professional fees. EBITDA decreased from $1,549,200 to $1,406,700, or by 9.2%,
in 1999 compared to 1998.
1998 Compared to 1997
Our revenues decreased from $3,644,700 to $3,630,300, or by
less than 1.0%, for the year ended December 31, 1998 as compared to 1997. Of the
$14,400 decrease, $170,300 was due to decreases in the number of subscriptions
for basic, premium, tier and equipment rental services. These decreases were
partially offset by a $155,200 increase in regulated service rates that were
implemented by us in 1997, and by a $700 increase in other revenue producing
items. As of December 31, 1998, we had approximately 8,900 basic subscribers and
2,000 premium service units.
Our service costs decreased from $1,245,300 to $1,125,800, or
by 9.6%, 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 lower copyright fees.
Our general and administrative expenses decreased from
$496,000 to $432,800, or by 12.7%, for the year ended December 31, 1998 as
compared to 1997, primarily due to decreases in insurance costs, customer
billing expenses and professional fees, including legal and audit fees.
Management fees and reimbursed expenses decreased from
$525,200 to $522,500, or by less than 1.0%, for the year ended December 31, 1998
as compared to 1997. Management fees decreased in direct relation to decreased
revenues as described above. Reimbursed expenses decreased principally due to
lower allocated personnel costs.
Our depreciation and amortization expense decreased from
$888,900 to $837,900, or by 5.7%, for the year ended December 31, 1998 as
compared to 1997, due to the effect of certain intangible assets becoming fully
amortized.
Our operating income increased from $489,300 to $711,300, or
45.4%, for the year ended December 31, 1998 as compared to 1997, due primarily
to decreases in copyright fees and depreciation and amortization as described
above.
Our interest expense decreased from $252,300 to $214,900, or
by 14.8%, for the year ended December 31, 1998 as compared to 1997, due to a
decrease in average borrowings during 1998.
Our interest income increased from $18,300 to $31,000, or by
69.4%, for the year ended December 31, 1998 as compared to 1997, due to higher
average cash balances available for investment in 1998.
Due to the factors described above, our net income increased
from $255,400 to $527,900 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 37.8% during 1997 to 42.7% in 1998. The
increase was primarily caused by decreases in copyright fees and insurance
expense. EBITDA increased from $1,378,200 to $1,549,200, or by 12.4%, as a
result.
-23-
Distributions to Partners
As provided in our agreement, distributions to partners are
funded from operating income before depreciation and amortization, if any, after
providing for working capital and other liquidity requirements, including debt
service and capital expenditures not otherwise funded by borrowings. No
distributions were paid in 1997, 1998 or in 1999. Our loan facility does not
restrict the payment of distributions to partners unless an event of default
exists thereunder or our ratio of debt to cash flow is greater than 4 to 1.
However, as a result of our pending upgrade program, management has concluded
that it is not prudent for us to resume paying distributions at this time.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our primary objective, having invested net offering proceeds
in cable television systems, is to distribute to our partners all available cash
flow from operations and proceeds from the sale of cable systems, if any, after
providing for expenses, debt service and capital requirements. In general, these
capital requirements involve expansion, improvement and upgrade of our existing
cable systems. Our capital expenditures were $492,400 in 1999, including
$272,000 for rebuild activity discussed below.
In accordance with the partnership agreement, the corporate
general partner has implemented a plan for liquidating the partnership. In
connection with that strategy, the corporate general partner has entered into an
agreement with a cable broker to market the partnership's cable systems to third
parties. Should the partnership receive offers from third parties for such
assets, the corporate general partner will prepare a proxy for submission to the
limited partners for the purpose of approving or disapproving such sale. Should
such a sale be approved, the corporate general partner will proceed to liquidate
the partnership following the settlement of all final liabilities of the
partnership. We can give no assurance, however, that we will be able to generate
a sale of the partnership's cable assets.
Two of the partnership's franchise areas, which together serve
63% of the partnership's total customer base, require upgrades to increase
channel capacity. One of the upgrades is required in an existing franchise
agreement. The estimated cost to upgrade the cable system in this franchise area
is approximately $2.5 million and must be completed by June 2000. Another of the
partnership's franchise agreements is under negotiation for renewal and the
partnership believes that the renewed franchise agreement may require the
partnership to upgrade its cable plant at an estimated cost of $1.5 million
within 24 months. The full upgrade program is estimated to require aggregate
capital expenditures of approximately $4.0 million. In addition to the required
upgrades described above, capital expenditures budgeted for 2000 are $802,700
for the upgrade of other assets and to extend the partnership's cable plant into
new service areas.
We are party to a loan agreement with Enstar Finance Company,
LLC, a subsidiary of the corporate general partner. The loan agreement provides
for a revolving loan facility of $4,563,000. We prepaid $300,000 of our
outstanding borrowings under the facility during 1999 such that total
outstanding borrowings were $1,050,000 at December 31, 1999. On November 12,
1999, in connection with the sale of the corporate general partner to Charter,
the facility was reduced to $3.6 million. We expect to increase borrowings under
the facility in the future to fund the upgrade of our systems. However,
borrowing capacity and our present cash reserves will be insufficient to fund
our entire upgrade program. Consequently, if our systems are not sold, we will
need to rely on increased cash flow from operations or new sources of financing
in order to meet our future liquidity requirements. There can be no assurance
that such cash flow increases can be attained, or that additional future
financing will be available to us on acceptable terms. If we are not able to
attain such cash flow increases, or obtain new sources of borrowings, we will
not be able to complete our full upgrade program. As a result, the value of our
systems will be lower than that of systems rebuilt to a higher technical
standard.
Our loan 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, we are required to make mandatory
-24-
prepayments, which permanently reduce the maximum commitment under the loan
facility. The loan 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. We believe that we are in compliance with the covenants at December
31, 1999. The loan facility does not restrict the payment of distributions to
partners unless an event of default exists thereunder or our ratio of debt to
cash flow is greater than 4 to 1. However, due to the upgrade program discussed
above, the corporate general partner believes it is critical to conserve cash
and borrowing capacity and, consequently, has concluded that it would not be
prudent for the partnership to resume paying distributions at this time.
The corporate general partner contributed its $269,300
receivable balance from us for past due management fees and reimbursed expenses
as an equity contribution to Enstar Finance Company LLC. This balance remains an
outstanding obligation of ours.
Beginning in August 1997, the corporate general partner
elected to self-insure our cable distribution plant and subscriber connections
against property damage as well as possible business interruptions caused by
such damage. The decision to self-insure was made due to significant increases
in the cost of insurance coverage and decreases in the amount of insurance
coverage available.
In October 1998, Falcon Communications, L.P. reinstated third
party insurance coverage for all of the cable television properties owned or
managed by it to cover damage to cable distribution plant and subscriber
connections and against business interruptions resulting from such damage. This
coverage is subject to a significant annual deductible which applies to all of
the cable television properties formerly owned or managed by Falcon
Communications, L.P. through November 12, 1999, and currently managed by
Charter, including those of the partnership.
Approximately 73% of the Partnership's subscribers are served
by its system in Flora, Illinois and neighboring communities. Significant damage
to the system due to seasonal weather conditions or other events could have a
material adverse effect on the Partnership's liquidity and cash flows. The
Partnership continues to purchase insurance coverage in amounts its management
views as appropriate for all other property, liability, automobile, workers'
compensation and other types of insurable risks.
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 any Year 2000
problems going forward. We spent approximately $55,200 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
Our operating activities provided $38,500 less cash in 1999
than in 1998. Changes in receivables and prepaid expenses used $88,400 more cash
in 1999 than in 1998, primarily due to the payment of prepaid expenses. We used
$135,600 less cash to pay amounts owed to third party creditors due to
differences in the timing of payments.
We used $297,500 more cash in investing activities in 1999
than in the prior year due to an increase of $277,200 in expenditures for
tangible assets and $19,800 for intangible assets. Financing activities used
$587,300 less cash during 1999 than in 1998. We used $850,000 less cash for the
repayment of debt and used $265,100 more cash to pay amounts owed to the
corporate general partner and other affiliates due to differences in the timing
of payments. We used $2,400 less cash in 1999 than in 1998 for the payment of
deferred loan costs related to our loan facility.
1998 vs. 1997
Our operating activities provided $70,300 more cash in 1998
than in 1997. Changes in receivables and prepaid expenses provided $104,600 less
cash in 1998 than in 1997, primarily due to timing differences in the collection
of subscriber receivables and in the payment of prepaid expenses. We used
$173,200 more cash to pay amounts owed to third party creditors due to
differences in the timing of payments.
-25-
We used $82,300 more cash in investing activities in 1998 than
in the prior year due to an increase of $91,400 in expenditures for tangible
assets, partially offset by a decrease of $8,700 in expenditures for intangible
assets. Financing activities used $454,800 more cash during 1998 than in 1997.
We used $525,000 more cash for the repayment of debt, net of new borrowings, and
$3,700 more cash to pay amounts owed to the corporate general partner and other
affiliates due to differences in the timing of payments. We used $66,500 less
cash in 1998 than in 1997 for the payment of deferred loan costs related to our
loan facility.
INFLATION
- ---------
Certain of our expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation. However, we do not believe that our financial results have been,
or will be, adversely affected by inflation in a material way, provided that we
are able to increase our service rates periodically, of which there can be no
assurance. See "Legislation and Regulation."
Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in
interest rates from our long-term debt arrangements. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to
interest rate changes. An increase in interest rates of 1% in 1999 would have
increased our interest expense for the year ended December 31, 1999 by
approximately $21,000 with a corresponding decrease to our net income.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information
required to be filed hereunder are indexed on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-26-
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 television systems
with 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
manager with Arthur Andersen LLP. Mr. Kent received a bachelor's degree and
M.B.A. from Washington University.
-27-
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.
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.
-28-
The sole director of the corporate general partner is elected
to a one-year term at the annual shareholder meeting to serve until the next
annual shareholder meeting and thereafter until his respective successor is
elected and qualified. Officers are appointed by and serve at the discretion of
the directors of the corporate general partner.
Item 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
- --------------
The partnership has a management agreement with Enstar Cable
Corporation, a wholly owned subsidiary of the corporate general partner,
pursuant to which Enstar Cable manages our systems and provides all operational
support for our activities. For these services, Enstar Cable receives a
management fee of 5% of our gross revenues, excluding revenues from the sale of
cable television systems or franchises, calculated and paid monthly. In
addition, we reimburse Enstar Cable for operating expenses incurred by Enstar
Cable in the day-to-day operation of our cable systems. The management agreement
also requires us to indemnify Enstar Cable (including its officers, employees,
agents and shareholders) against loss or expense, absent negligence or
deliberate breach by Enstar Cable of the management agreement. The management
agreement is terminable by the partnership upon 60 days written notice to Enstar
Cable. Enstar Cable had, prior to November 12, 1999, engaged Falcon
Communications, L.P. to provide management services for us and paid Falcon
Communications, L.P. a portion of the management fees it received in
consideration of such services and reimbursed Falcon Communications, L.P. for
expenses incurred by Falcon Communications, L.P. on its behalf. Subsequent to
November 12, 1999, Charter, as successor-by-merger to Falcon Communications,
L.P., has provided such services and received such payments. Additionally, we
receive system operating management services from affiliates of Enstar Cable in
lieu of directly employing personnel to perform those services. We reimburse the
affiliates for our allocable share of their operating costs. The corporate
general partner also performs supervisory and administrative services for the
partnership, for which it is reimbursed.
For the fiscal year ended December 31, 1999, Enstar Cable
charged us management fees of approximately $173,200 and reimbursed expenses of
$282,300. We also reimbursed affiliates approximately $20,900 for system
operating management services. In addition, programming services were purchased
through Falcon Communications, L.P. and, subsequent to November 12, 1999,
through Charter. We paid Falcon Communications and Charter approximately
$802,800 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."
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 Everest Cable Investors LLC 4,726(1) 5.9%
Interest 199 South Los Robles Ave., Suite 440
Pasadena, CA 91101
(1) As reported to us by our transfer agent, Gemisys Corporation.
-29-
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
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
-30-
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.
-31-
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.
-32-
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/GROWTH PROGRAM SIX-A, 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.
-33-
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Balance Sheets - December 31, 1998 and 1999 F-3
Financial Statements for each of
the three years in the period
ended December 31, 1999:
Statements of Operations F-4
Statements of Partnership Capital (Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income/Growth Program Six-A, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income/Growth Program
Six-A, 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/Growth Program
Six-A, 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, 2000
F-2
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
BALANCE SHEETS
=========================================
December 31,
-------------------------------------
1998 1999
----------------- ------------------
ASSETS:
Cash and cash equivalents $ 542,000 $ 675,900
Accounts receivable, less allowance of $6,000 and
$2,300 for possible losses 34,400 46,500
Prepaid expenses and other assets 33,700 119,900
Property, plant and equipment, less accumulated
depreciation and amortization 3,048,800 2,767,600
Franchise cost, net of accumulated
amortization of $2,622,600 and $2,871,500 927,400 722,900
Deferred loan costs and other deferred charges, net 52,500 32,600
----------------- ----------------
$ 4,638,800 $ 4,365,400
================= ================
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 292,700 $ 260,800
Due to affiliates 576,600 380,900
Note payable - affiliate 1,350,000 1,050,000
----------------- ----------------
TOTAL LIABILITIES 2,219,300 1,691,700
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (138,400) (135,900)
Limited partners 2,557,900 2,809,600
----------------- ----------------
TOTAL PARTNERSHIP CAPITAL 2,419,500 2,673,700
----------------- ----------------
$ 4,638,800 $ 4,365,400
================= ================
See accompanying notes to financial statements.
F-3
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
STATEMENTS OF OPERATIONS
=========================================
Year Ended December 31,
--------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
:
REVENUES $ 3,644,700 $ 3,630,300 $ 3,463,300
---------------- ---------------- ----------------
OPERATING EXPENSES:
Service costs 1,245,300 1,125,800 1,126,300
General and administrative expenses 496,000 432,800 474,800
General Partner management fees
and reimbursed expenses 525,200 522,500 455,500
Depreciation and amortization 888,900 837,900 1,025,300
---------------- ---------------- ----------------
3,155,400 2,919,000 3,081,900
---------------- ---------------- ----------------
Operating income 489,300 711,300 381,400
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (252,300) (214,900) (149,900)
Interest income 18,300 31,000 22,700
Gain on sale of cable assets 100 500 -
---------------- ---------------- ----------------
(233,900) (183,400) (127,200)
---------------- ---------------- ----------------
NET INCOME $ 255,400 $ 527,900 $ 254,200
================ ================ ================
Net income allocated to General Partners $ 2,600 $ 5,300 $ 2,500
================ ================ ================
Net income allocated to Limited Partners $ 252,800 $ 522,600 $ 251,700
================ ================ ================
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 3.17 $ 6.55 $ 3.15
================ ================ ================
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING
DURING THE YEAR 79,818 79,818 79,818
================ ================ ================
See accompanying notes to financial statements.
F-4
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
=============================================
General Limited
Partners Partners Total
--------------- --------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1997 $ (146,300) $ 1,782,500 $ 1,636,200
Net income for year 2,600 252,800 255,400
--------------- --------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1997 (143,700) 2,035,300 1,891,600
Net income for year 5,300 522,600 527,900
--------------- --------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1998 (138,400) 2,557,900 2,419,500
Net income for year 2,500 251,700 254,200
--------------- --------------- --------------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1999 $ (135,900) $ 2,809,600 $ 2,673,700
=============== =============== ==============
See accompanying notes to financial statements.
F-5
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
STATEMENTS OF CASH FLOWS
=============================================
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 255,400 $ 527,900 $ 254,200
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 888,900 837,900 1,025,300
Amortization of deferred loan costs 30,600 17,000 17,100
Gain on sale of cable assets (100) (500) -
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets 94,700 (9,900) (98,300)
Accounts payable 5,700 (167,500) (31,900)
--------------- --------------- --------------
Net cash provided by operating activities 1,275,200 1,204,900 1,166,400
--------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (123,800) (215,200) (492,400)
Increase in intangible assets (33,300) (24,600) (44,400)
Proceeds from sale of property, plant and
equipment 100 500 -
--------------- --------------- --------------
Net cash used in investing activities (157,000) (239,300) (536,800)
--------------- --------------- --------------
Cash flows from financing activities:
Repayment of debt (3,125,000) - -
Borrowings from affiliate 2,500,000 - -
Repayment of borrowings from affiliate - (1,150,000) (300,000)
Deferred loan costs (68,900) (2,400) -
Due to affiliates 65,700 69,400 (195,700)
--------------- --------------- --------------
Net cash used in financing activities (628,200) (1,083,000) (495,700)
--------------- --------------- --------------
Net increase (decrease) in cash and
cash equivalents 490,000 (117,400) 133,900
Cash and cash equivalents at beginning of year 169,400 659,400 542,000
--------------- --------------- --------------
Cash and cash equivalents at end of year $ 659,400 $ 542,000 $ 675,900
=============== =============== ==============
See accompanying notes to financial statements.
F-6
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income/Growth Program Six-A, L.P., a Georgia limited
partnership (the "Partnership"), owns and operates cable television systems in
rural areas of Illinois and Tennessee.
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 a maturity of three
months or less to be cash equivalents.
Cash equivalents at December 31, 1999 include $5,000 of
short-term investments in certificates of deposit.
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
In 1998, the Partnership revised the estimated useful life of
its existing plant assets in an Illinois franchise area from 15 years to
approximately 11.3 years. The Partnership implemented the reduction as a result
of a system upgrade that is required to be completed by June 2000 as provided
for in the franchise agreement. The impact of this change in the life of the
assets was to increase depreciation expense by approximately $16,700 in 1998 and
in 1999.
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and the renewal of existing franchises. These costs are
amortized using the straight-line method over the lives of the franchises,
ranging up to 15 years. The Partnership periodically evaluates the amortization
periods of these intangible assets to determine whether events or circumstances
warrant revised estimates of useful lives. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. The Partnership is in
the process of negotiating the renewal of expired franchise agreements for seven
of the Partnership's 16 franchises, which include approximately 32% of the
Partnership's basic subscribers at December 31, 1999.
F-7
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES
Costs related to obtaining new loan agreements are capitalized
and amortized to interest expense over the life of the related loan. Other
deferred charges are amortized using the straight-line method over two years.
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the
recoverability of intangible and capitalized plant assets based on estimates of
future undiscounted cash flows compared to net book value. If the future
undiscounted cash flow estimate were less than net book value, net book value
would then be reduced to estimated fair value, which would generally approximate
discounted cash flows. The Partnership also evaluates the amortization periods
of 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, Enstar Income/Growth Program Six-A, L.P.
pays no income taxes. All of the income, gains, losses, deductions and credits
of the Partnership are passed through to its partners. The basis in the
Partnership's assets and liabilities differs for financial and tax reporting
purposes. At December 31, 1999, the book basis of the Partnership's net assets
exceeds its tax basis by $2,070,600.
The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differ from the
financial statements prepared for tax purposes due to the different treatment of
various items as specified in the Internal Revenue Code. The net effect of these
accounting differences is that the Partnership's net income for 1999 in the
financial statements is $188,600 as compared to its tax loss of $340,100 for the
same period. The difference is principally due to timing differences in
depreciation and amortization and depreciation expense.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses have been allocated 99% to the limited
partners and 1% to the general partners. Earnings and losses per unit of limited
partnership interest 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.
F-8
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - PARTNERSHIP MATTERS
The Partnership was formed on September 23, 1987 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, 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 January 1988, and the initial closing took place in February 1988. The
Partnership continued to raise capital until $20,000,000 (the maximum) was sold
by November 1988. The Partnership began its cable television business operations
in January 1989 with the acquisition of its first cable television property.
The amended partnership agreement generally provides that all
cash flows be distributed 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. The amended partnership agreement
also provides that all partnership operating profits be allocated to the
partners in the same proportion as cash flow distributions are made. After the
limited partners have received cash flow equal to their initial investment, the
general partners will only receive a 1% distribution of proceeds from a
disposition or refinancing of a system until the limited partners have received
an annual simple interest return of at least 8% of their initial investment less
any distributions from previous dispositions or refinancing of systems.
Thereafter, proceeds from a disposition or refinancing of a system shall be
distributed 80% to the limited partners and 20% to the general partners. Gains
from dispositions of systems are first allocated in the same manner as the
proceeds from such dispositions. This occurs until the dispositions result in
the aggregate fair market value of the Partnership's remaining system(s) being
less than or equal to 50% of the aggregate contributions to the capital of the
Partnership by the partners.
F-9
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 2 - PARTNERSHIP MATTERS (Continued)
Any losses, whether resulting from operations or the sale or
disposition of a system, are allocated 99% to the limited partners and 1% to the
general partners until the limited partners' capital account balances are equal
to zero. Thereafter, all losses are allocated to the Corporate General Partner.
Upon dissolution of the Partnership, distributions are to be
made to the partners in accordance with their capital account balances. No
partners other than general partners shall be obligated to restore any negative
capital account balance existing upon dissolution of the Partnership. All
allocations to individual limited partners will be based on their respective
limited partnership ownership interests.
The amended partnership agreement limits the amount of debt
the Partnership may incur.
NOTE 3 - POTENTIAL SALE OF PARTNERSHIP ASSETS
In accordance with the partnership agreement, the Corporate
General Partner has implemented a plan for liquidating the Partnership. In
connection with that strategy, the Corporate General Partner has entered into an
agreement with a cable broker to market the Partnership's cable systems to third
parties. Should the Partnership receive offers from third parties for such
assets, the Corporate General Partner will prepare a proxy for submission to the
limited partners for the purpose of approving or disapproving such sale. Should
such a sale be approved, the Corporate General Partner will proceed to liquidate
the Partnership following the settlement of its final liabilities. The Corporate
General Partner can give no assurance, however, that it will be able to generate
a sale of the Partnership's cable assets. The financial statements do not
reflect any adjustments that may result from the outcome of this uncertainty.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
------------------------------------
1998 1999
---------------- ----------------
Cable television systems $ 8,000,800 $ 8,317,600
Vehicles, furniture and
equipment, and leasehold
improvements 444,200 571,000
----------------- ----------------
8,445,000 8,888,600
Less accumulated depreciation
and amortization (5,396,200) (6,121,000)
----------------- ----------------
$ 3,048,800 $ 2,767,600
================= ================
F-10
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short
maturity of those instruments.
Note Payable - Affiliate
The carrying amount approximates fair value due to the
variable rate nature of the note payable.
NOTE 6 - 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 provided for a revolving loan facility of $4,563,000 (the
"Facility"). Total outstanding borrowings were $1,050,000 at December 31, 1999.
On November 12, 1999, in connection with the sale of the Corporate General
Partner to Charter, the Facility was reduced to $3.6 million.
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 Partnership's Facility are
collateralized by substantially all assets of the Partnership. 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. The Partnership believes it was in compliance with the covenants at
December 31, 1999.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Partnership leases buildings and tower sites associated
with its systems under operating leases expiring in various years through 2008.
F-11
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
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 $ 3,900
2001 4,000
2002 4,100
2003 4,100
2004 1,200
Thereafter 4,800
-----------------
$ 22,100
=================
Rentals, other than pole rentals, charged to operations
approximated $17,700, $17,900 and $15,900 in 1997, 1998 and 1999, respectively.
Pole rentals approximated $46,100, $42,300 and $35,900 in 1997, 1998 and 1999,
respectively.
Other commitments include approximately $2.5 million at
December 31, 1999 to upgrade the Partnership's Salem, Illinois system by June
2000.
The Partnership is subject to regulation by various federal,
state and local government entities. The Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act") provides for, among other
things, federal and local regulation of rates charged for basic cable service,
cable programming service tiers ("CPSTs") and equipment and installation
services. Regulations issued in 1993 and significantly amended in 1994 by the
Federal Communications Commission (the "FCC") have resulted in changes in the
rates charged for the Partnership's cable services. The Partnership believes
that compliance with the 1992 Cable Act has had a significant negative impact on
its operations and cash flow.
It also believes that any potential future liabilities for
refund claims or other related actions would not be material. The
Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on
February 8, 1996. As it pertains to cable television, the 1996 Telecom Act,
among other things, (i) ends the regulation of certain CPSTs in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions.
Beginning in August 1997, the Corporate General Partner
elected to self-insure the Partnership's cable distribution plant and subscriber
connections against property damage as well as possible business interruptions
caused by such damage. The decision to self-insure was made due to significant
increases in the cost of insurance coverage and decreases in the amount of
insurance coverage available.
In October 1998, FCLP reinstated third party insurance
coverage for all of the cable television properties owned or managed by FCLP to
cover damage to cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. This coverage is subject to a
significant annual deductible which applies to all of the cable television
properties formerly owned or managed by FCLP through November 12, 1999, and
currently managed by Charter, including the Partnership.
F-12
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Approximately 73% of the Partnership's subscribers are served
by its system in Flora, Illinois and neighboring communities. Significant damage
to the system due to seasonal weather conditions or other events could have a
material adverse effect on the Partnership's liquidity and cash flows. The
Partnership continues to purchase insurance coverage in amounts its management
views as appropriate for all other property, liability, automobile, workers'
compensation and other types of insurable risks.
In the state of Illinois, customers have filed a punitive
class action lawsuit on behalf of all persons residing in the state who are or
were customers of the Partnership's cable television service, and who have been
charged a fee for delinquent payment of their cable bill. The action challenges
the legality of the processing fee and seeks declaratory judgment, injunctive
relief and unspecified damages. At present, the Partnership is not able to
project the outcome of the action. Approximately 73% of the Partnership's basic
subscribers reside in Illinois where the claim has been filed.
NOTE 8 - EMPLOYEE BENEFIT PLAN
The Partnership participates in a cash or deferred profit
sharing plan (the "Profit Sharing Plan") sponsored by a subsidiary of the
Corporate General Partner, which covers substantially all of its employees. The
Profit Sharing Plan provides that each participant may elect to make a
contribution in an amount up to 15% of the participant's annual compensation
which otherwise would have been payable to the participant as salary. Prior to
1999, the Partnership's contribution to the Profit Sharing Plan, as determined
by management, was discretionary but could not exceed 15% of the annual
aggregate compensation (as defined) paid to all participating employees.
Effective January 1, 1999, the Profit Sharing Plan was amended, whereby the
Partnership would make an employer contribution equal to 100% of the first 3%
and 50% of the next 2% of the participants' contributions. A contribution of
$4,000 was made during 1999. There were no contributions charged against
operations of the Partnership for the Profit Sharing Plan in 1997 or 1998.
NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership 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 Partnership. Management fee expense was $182,200, $181,500 and $173,200
in 1997, 1998 and 1999, respectively.
In addition to the monthly management fee, the Partnership
reimburses the Manager for direct expenses incurred on behalf of the
Partnership, and for the Partnership's allocable share of operational costs
associated with services provided by the Manager. All cable television
properties managed by the Corporate General Partner and its subsidiaries are
charged a proportionate share of these expenses. Charter and its affiliates
provide management services for the Partnership. Such services were provided by
FCLP and its affiliates prior to November 12, 1999. Corporate office allocations
and district office expenses are charged to the properties served based
primarily on the respective percentage of basic customers served within the
designated service areas. The total amount charged to the Partnership for these
services approximated $343,000, $341,000 and $282,300 in 1997, 1998 and 1999,
respectively.
On June 30, 1997, the Corporate General Partner and an
affiliate formed EFC. The Corporate General Partner contributed a $269,300
receivable balance due from the Partnership for deferred management fees and
reimbursed expenses as an equity contribution to EFC. This balance remains an
outstanding obligation of the Partnership. In the normal course of business, the
Partnership pays interest and principal to EFC.
F-13
ENSTAR INCOME/GROWTH PROGRAM SIX-A, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (Continued)
The Partnership also receives certain system operating
management services from an affiliate of the Corporate General Partner in
addition to the Manager. The Partnership reimburses the affiliate for its
allocable share of the affiliate's operational costs. The total amount charged
to the Partnership for these costs approximated $44,200, $15,600 and $20,900 in
1997, 1998 and 1999, respectively. No management fee is payable to the affiliate
by the Partnership and there is no duplication of reimbursed expenses and costs
paid to the Manager.
Substantially all programming services had been purchased
through FCLP, and since November 12, 1999, have been purchased through Charter.
FCLP charged the Partnership for these costs based on an estimate of what the
Corporate General Partner could negotiate for such programming services for the
15 partnerships managed by the Corporate General Partner as a group. Charter
charges the Partnership for these costs based on its costs. The Partnership
recorded programming fee expense of $789,000, $801,400 and $802,800 in 1997,
1998, and 1999, respectively. Programming fees are included in service costs in
the statements of operations.
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest amounted to $215,200, $230,600 and
$165,000 in 1997, 1998 and 1999, respectively.
F-14
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3 Third Amended and Restated Agreement of Limited Partnership of Enstar
Income/Growth Program Six-A, L.P., as of December 23, 1988.(1)
10.1 Management Agreement between Enstar Income/Growth Program Six-A, L.P.
and Enstar Cable Corporation.(1)
10.2 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Dyer, Tennessee.(1)
10.3 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Kenton, Tennessee.(1)
10.4 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Rutherford, Tennessee.(1)
10.5 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Gibson
County, Tennessee.(1)
10.6 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Flora, Illinois.(1)
10.7 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Salem, Illinois.(1)
10.8 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Sandoval, Illinois.(1)
10.9 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the city of
Odin, Illinois.(1)
10.10 Franchise ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the Village
of Raymond, Illinois.(1)
10.11 Service agreement between Enstar Communications Corporation, Enstar
Cable Corporation and Falcon Holding Group, Inc. dated as of October
1, 1988.(1)
10.12 Credit agreement between Enstar Income/Growth Program Six-A, L.P. and
NCNB Texas National Bank dated December 29, 1989.(3)
10.13 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Gibson
County, Tennessee.(4)
10.14 First Amendment to Credit Agreement, between Enstar Income/Growth
Program Six-A, L.P., and NationsBank of Texas, N.A., a national
banking association (formerly NCNB Texas National Bank).(5)
10.15 Franchise ordinance granting a non-exclusive community antenna
television franchise for the city of Sandoval, Illinois.(7)
10.16 A resolution of the Village Board of Odin, Illinois extending the
Cable Television Franchise of Enstar Cable. Passed and adopted
December 12, 1994.(7)
E-1
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.17 Second Amendment to Credit Agreement between Enstar Income/Growth
Program Six-A, L.P. and NationsBank of Texas, N.A., a national banking
association (formerly NCNB Texas National Bank).(6)
10.18 Third Amendment to Credit Agreement between Enstar Income/Growth
Program Six-A, L.P. and NationsBank of Texas, N.A., a national banking
association (formerly NCNB Texas National Bank).(7)
10.19 Fourth Amendment to Credit Agreement between Enstar Income/Growth
Program Six-A, L.P. and NationsBank of Texas, N.A., a national banking
association (formerly NCNB Texas National Bank).(8)
10.20 Loan Agreement between Enstar Income/Growth Program Six-A, L.P. and
Enstar Finance Company, LLC dated September 30, 1997.(9)
10.21 Franchise ordinance granting a non-exclusive community antenna
television franchise for the city of Salem, Illinois.(10)
10.22 A resolution of the village of Junction City, Illinois extending the
Cable Television Franchise of Enstar Income/Growth Program Six-A.
Adopted April 19, 1999. (11)
21.1 Subsidiaries: None.
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. 0-17687 for the fiscal year ended
December 31, 1988.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1989.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1990.
(4) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-17687 for the quarter ended June 30,
1993.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1993.
(6) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1994.
(7) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1995.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-17687 for the fiscal year ended
December 31, 1996.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-17687 for the quarter ended September
30, 1997.
(10) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-17687 for the quarter ended September
30, 1998.
(11) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-17687 for the quarter ended June 30,
1999.