-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R8omNjMGEI6O5mdIKBXYgm4mu/NkjTIVqLPfkF3coPaZYYuUCe7E5qJsLiDvFqm7 x5ajZO9rYF0ip1YNzskimg== 0000950123-02-003193.txt : 20020415 0000950123-02-003193.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003193 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENSTAR INCOME PROGRAM II-1 LP CENTRAL INDEX KEY: 0000757595 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 581628877 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14508 FILM NUMBER: 02593734 BUSINESS ADDRESS: STREET 1: 12444 POWERSCOURT DR CITY: ST LOUIS STATE: MO ZIP: 63131 BUSINESS PHONE: 3108249990 MAIL ADDRESS: STREET 1: 474 SOUTH RAYMOND AVE #200 CITY: PASADENA STATE: CA ZIP: 91105 10-K405 1 y58746e10-k405.txt ENSTAR INCOME PROGRAM II-I, L.P. ================================================================================ 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to__________ Commission File Number: 000-14508 ENSTAR INCOME PROGRAM II-1, L.P. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Georgia 58-1628877 - ---------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 12405 Powerscourt Drive St. Louis, Missouri 63131 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 965-0555 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Units of Limited Partnership Interest None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting equity securities held by non-affiliates of the registrant: All of the registrant's 29,936 units of limited partnership interests, its only class of equity securities, are held by non-affiliates. There is no public trading market for the units, and transfers of units are subject to certain restrictions; accordingly, the registrant is unable to state the market value of the units held by non-affiliates. ================================================================================ The Exhibit Index is located at Page E-1. ENSTAR INCOME PROGRAM II-1, L.P. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I Page ---- Item 1. Business ......................................................... 3 Item 2. Properties ....................................................... 18 Item 3. Legal Proceedings ................................................ 18 Item 4. Submission of Matters to a Vote of Security Holders .............. 18 PART II Item 5. Market for the Registrant's Equity Securities and Related Security Holder Matters .......................................... 19 Item 6. Selected Financial Data .......................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 21 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....... 27 Item 8. Financial Statements and Supplementary Data ...................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................................... 27 PART III Item 10. Directors and Executive Officers of the Registrant ............... 28 Item 11. Executive Compensation ........................................... 31 Item 12. Security Ownership of Certain Beneficial Owners and Management. .. 32 Item 13. Certain Relationships and Related Transactions ................... 32 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 35 Signatures ....................................................... 36
This Annual Report on Form 10-K is for the year ended December 31, 2001. This Annual Report modifies and supersedes documents filed prior to this Annual Report. In addition, information that we file with the Securities and Exchange Commission in the future will automatically update and supersede information contained in this Annual Report. In this Annual Report, "we," "us," and "our" refers to Enstar Income Program II-1, L.P. - 2 - PART I Item 1. BUSINESS Introduction Enstar Income Program II-1, L.P., a Georgia Limited Partnership (the "Partnership"), is engaged in the ownership and operation of cable television systems serving approximately 6,300 basic customers at December 31, 2001 in and around the cities of Taylorville, Litchfield and Gillespie, Illinois, and portions of unincorporated Christian County, Illinois. The General Partners of the Partnership are Enstar Communications Corporation, a Georgia corporation (the "Corporate General Partner") and Robert T. Graff, Jr. (the "Individual General Partner"). Since its incorporation in Georgia in 1982, the Corporate General Partner has been engaged in the cable/telecommunications business, both as a General Partner of 14 Limited Partnerships formed to own and operate cable television systems and through a wholly-owned operating subsidiary. As of December 31, 2001, the Corporate General Partner managed cable television systems serving approximately 68,500 basic customers. On November 12, 1999, the Corporate General Partner became an indirect controlled subsidiary of Charter Communications, Inc. (also called Charter), the nation's fourth largest cable operator, serving approximately seven million customers. The Corporate General Partner is responsible for day-to-day management of the Partnership and its operations. Charter and its affiliates provide management and other services to the Partnership, for which they receive a management fee and reimbursement of expenses. The principal executive offices of the Partnership and the Corporate General Partner are located at 12405 Powerscourt Drive, St. Louis, MO 63131-0555 and their telephone number is (314) 965-0555. Proposed Sale of Assets On August 29, 2001, the Partnership entered into an asset purchase agreement providing for the sale of all of the Partnership's cable television systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate of the Corporate General Partner and an indirect subsidiary of Charter, for a total sale price of approximately $14,706,800 in cash ($2,258 per customer acquired), anticipated to result in a post-closing distribution of approximately $510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The Charter Sale is part of a larger transaction in which the Partnership and five other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their assets used in the operation of their respective Illinois cable television systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash sale price of $63,000,000. The total sale price has been allocated among the Selling Partnerships based on the number of customers served by each of the Selling Partnerships' respective Illinois cable systems as of June 30, 2001. Each Selling Partnership will receive the same value per customer. Closing of the Charter Sale is subject to closing sale price adjustments, regulatory approvals, customary closing conditions and the approval by the limited partners of the five other affiliated Selling Partnerships of the sale of their respective Illinois cable systems. In addition, unless waived by the Purchasers, the limited partners of each of the Selling Partnerships must approve an amendment to their respective partnership agreement to allow the sale of assets to an affiliate of such partnership's general partner. The Purchasers are each indirect subsidiaries of the Corporate General Partner's ultimate parent company, Charter, and, therefore, are affiliates of the Partnership and each of the other Selling Partnerships. The Purchasers have indicated that they may waive the requirement of limited partner approval by all six Selling Partnerships. If the Purchasers do waive this requirement, then they might purchase the Illinois systems in more than one closing, and only with respect to those Selling Partnerships that have received the approval of their limited partners. Although it is presently expected that the sale of the Partnership's Illinois systems will be consummated in the second quarter of 2002, there is no assurance regarding completion of the transaction. The financial statements continue to be presented on a going concern basis. If the sale is approved in accordance with the terms of the purchase agreement, the Partnership will immediately change to a liquidation basis of accounting. -3- The proposed Charter Sale resulted from a sale process actively pursued since 1999, when the Corporate General Partner sought purchasers for all of the cable television systems of the Selling Partnerships, as well as eight other, affiliated limited partnership cable operators of which the Corporate General Partner is also the general partner. This effort was undertaken primarily because, based on the Corporate General Partner's experience in the cable television industry, it was concluded that generally applicable market conditions and competitive factors were making (and would increasingly make) it extremely difficult for smaller operators of rural cable systems (such as the Partnership and the other affiliated partnerships) to effectively compete and be financially successful. This determination was based on the anticipated cost of electronics and additional equipment to enable the Partnership's systems to operate on a two-way basis with improved technical capacity, insufficiency of Partnership cash reserves and cash flows from operations to finance such expenditures, limited customer growth potential due to the Partnership's systems' rural location, and a general inability of a small cable system operator such as the Partnership to benefit from economies of scale and the ability to combine and integrate systems that large cable operators have. Although significant plant upgrades have been made to increase channel capacity and enhance the value of the Partnership's systems, the Corporate General Partner projected that if the Partnership made the comprehensive additional upgrades deemed necessary to enable enhanced and competitive services, particularly activation of two-way capability, the Partnership would not recoup the costs or regain its ability to operate profitably within the remaining term of its franchises, and as a result, making these upgrades would not be economically prudent. As a result of marketing efforts using an independent broker experienced in the sale of cable systems, the Partnership, together with certain affiliated partnerships for which the Corporate General partner also served as a general partner (collectively, the "Gans Selling Partnerships"), entered into a purchase and sale agreement, dated as of August 8, 2000, as amended as of September 29, 2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to acquire the assets comprising the Partnership's system, as well as certain assets of the other Gans Selling Partnerships. Following a series of discussions and meetings, the Partnership and Gans determined that they were not able to agree on certain further amendments to the Gans Agreement required to satisfy conditions precedent to close the transactions. In light of these conditions and existing economic and financial market conditions, and their impact on Gans' inability to arrange financing in order to close the acquisitions, on April 18, 2001, the parties agreed to terminate the Gans Agreement. Following termination of the Gans Agreement, the broker once again attempted to market the various Illinois systems of the affiliated partnerships, including the Partnership's system. As a result of a "sealed-bid" auction process, six bids were received and the bid submitted by certain affiliates of the Corporate General Partner was the highest, and exceeded the next highest bid by 25%. Following this second sale process, the Partnership entered into the asset purchase agreement for the Charter Sale. Distribution of Sale Proceeds and Liquidation of the Partnership. After paying its debts and obligations and paying or providing for the payment of the expenses of the Charter Sale, the Partnership will terminate and dissolve, and the Corporate General Partner will make one or more liquidating distributions to itself and the Limited Partners of the Partnership's remaining assets, in accordance with the Partnership Agreement. We currently estimate that pre-tax liquidating distributions to the Limited Partners from the Charter Sale will total approximately $510 per Unit, after estimated closing adjustments and closing and liquidation expenses. As the holder of a 1% interest in the Partnership, the Corporate General Partner will receive a liquidating distribution of approximately $154,300. Description of the Partnership's Systems At December 31, 2001, the Partnership's cable systems operated from headends located in Litchfield and Taylorville, Illinois. The systems passed approximately 11,354 homes, and served 6,267 basic customers, or 55.2% of the homes passed. In addition to the basic cable television channels, the Partnership -4- offers single premium channel services (such as HBO) for a monthly fee per channel. As of December 31, 2001, the Partnership had 1,100 premium service units, or 17.6% of homes subscribing to cable service. The Partnership's average monthly revenue per basic customer during the year ended December 31, 2001 was approximately $42.20. Homes passed refers to our estimates of the approximate number of dwelling units in a particular community that can be connected to our cable systems without any further extension of principal transmission lines. Estimates are based upon a variety of sources, including billing records, house counts, city directories and other local sources. Basic penetration represents basic customers as a percentage of homes passed by cable transmission lines. 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. Premium penetration represents premium service units as a percentage of homes subscribing to cable service. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes for more than one premium service. Average monthly revenue per basic customer has been computed based on revenue for the year ended December 31, 2001, divided by twelve months, divided by the actual number of basic customers at the end of the year. Services, Marketing and Prices Our cable television systems offer customers various levels of cable services consisting of: o broadcast television signals of local network, independent and educational stations; o a limited number of television signals originating from distant cities, such as WGN; o various satellite delivered, non-broadcast channels, such as CNN, MTV, The USA Network, ESPN, TNT, and The Disney Channel; o programming originated locally by the cable television system, such as public, educational and government access programs; and o digital services delivered over a hybrid fiber and satellite delivered system. For an extra monthly charge, our cable television systems also offer premium television services to their customers. These services, such as HBO and Showtime, are satellite channels that consist principally of feature films, live sporting events, concerts and other special entertainment features, usually presented without commercial interruption. See "Regulation and Legislation." In October 2001, we began offering customers digital services through a hybrid system that delivers traditional cable television services through the terrestrial cable plant and digital service through a satellite dish mounted at the customer's home. This hybrid digital package includes a digital set top terminal, an interactive electronic programming guide, 45 channels of CD quality digital music, a menu of pay per view channels and at least thirty additional digital channels. Certain digital packages also offer customers one or more premium channels with "multiplexes." Multiplexes give customers access to several different versions of the same premium channels which are varied as to time of broadcast (such as east and west coast time slots) or programming content and theme (such as westerns and romance). A customer generally pays an initial installation charge and fixed monthly fees for basic, expanded basic, other tiers of satellite services and premium programming services. Such monthly service fees constitute the primary source of revenues for our cable television systems. In addition to customer revenues, our cable television systems receive revenues 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. -5- 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. Our service options vary from system to system, depending upon a cable system's channel capacity and viewer interests. We employ radio and local newspaper advertising to market our services. 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. Rates for services also vary from market to market and according to the type of services selected. Under the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), most cable television systems are subject to rate regulation of the basic service tier, the charges for installation of cable service, and the rental rates for customer premises equipment such as converter boxes and remote control devices. These rate regulation provisions affect all of our cable television systems not deemed to be subject to effective competition under the Federal Communications Commission's ("FCC") definition. Currently, none of our cable television systems are subject to effective competition. See "Regulation and Legislation." At December 31, 2001, our monthly rates for basic cable service for residential customers, including certain discounted rates, ranged from $24.50 to $25.51 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 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. Programming We purchase basic and premium programming for our systems from Charter based on Charter's actual cost. Charter's programming costs are generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Charter's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. Accordingly, no assurances can be given that Charter's, and correspondingly our, programming costs will not continue to increase substantially in the near future, or that other materially adverse terms will not be added to Charter's programming contracts. Management believes, however, that Charter's relations with its programming suppliers generally are good. Our cable programming costs have increased in recent years due to additional programming being provided to basic customers. In addition we are facing higher costs to carry local broadcast channels who elect retransmission carriage agreements. Programming costs have increased in the past, and are expected to continue to increase due to increased costs to produce or purchase cable programming (generally with particularly significant increases with respect to sports programming), inflationary increases and other factors. Cable System and Technology 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. 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 -6- systems. Fiber optic cable is capable of carrying hundreds of video, data and voice channels and, accordingly, its utilization is essential to the enhancement of a cable television system's technical capabilities. The Partnership completed the upgrade of its cable system served by the Taylorville and Litchfield headends (88% of the Partnership's cable plant) to 750 megahertz or above, which allows for offering up to 110 channels. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The technical standard for this upgrade incorporates the use of fiber optic technology to enable future channels of analog service as well as new digital services, although additional electronics and equipment are necessary at the headends to activate two-way capability. The system architecture permits the introduction of high-speed data transmission/Internet access and telephony services in the future after incurring incremental capital expenditures related to these services. This upgrade was financed with available funds and enabled the Partnership to enhance the economic value of these systems. The Gillespie franchise area, which operates from the Litchfield headend, covering approximately 12% of the Partnership's cable plant, operates at 330 megahertz and is limited to 40 channels. Gillespie has no available channel capacity to accommodate the addition of new channels or to provide pay-per-view offerings to customers. There is a current plan to upgrade Gillespie to small system digital in 2002 in order to increase available channel capacity, improve quality of service and facilitate the expansion of new services such as advertising, pay-per-view, new unregulated tiers of satellite-delivered services and home shopping. Significant additional capital would be required to complete a comprehensive plant and headend upgrade. The estimated cost of making additional upgrades to the Taylorville and Litchfield headends, including the electronics to activate two-way capability in order to be able to offer high-speed internet service from both headends, as well as to increase channel capacity and allow additional video, would be an aggregate of approximately $2.7 million (for an upgrade to 550 megahertz (MHz) capacity) to $3.1 million (for an upgrade to 870 MHz capacity). However, given the proposed sale of all of the Partnership's systems and for the reasons previously stated in the section entitled "Proposed Sale of Assets," the Corporate General Partner does not plan to proceed with these additional upgrades. 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 internal training programs for employees, including our regional managers, that focus on our operations and employee interaction with customers. The effectiveness of our training programs relating to 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 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. Franchises As of December 31, 2001, we operated cable systems in six franchise areas, pursuant to permits and similar authorizations issued by local and state governmental authorities. Each franchise is awarded by a governmental authority and may not be transferable unless the granting governmental authority consents. Most franchises are subject to termination proceedings in the event of a material breach. In addition, franchises can require us to pay the granting authority a franchise fee of up to 5% of gross revenues as defined by the franchise agreements, which is the maximum amount that may be charged under the applicable law. -7- Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the granting authorities. The Cable Communications Policy Act of 1984 (the "1984 Cable Act") provides for, among other things, an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied the franchising authority may acquire ownership of the system or effect a transfer of the system to another person, the operator generally is entitled to the fair market value for the system covered by such franchise, but no value may be attributed to the franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes comprehensive renewal procedures which require that an incumbent franchisee's renewal application be assessed on its own merit and not as part of a comparative process with competing applications. See "Regulation and Legislation." In connection with the franchise renewal process, many governmental authorities require the cable operator to make certain commitments, such as technological upgrades to the system. Although historically we have been able to renew our franchises without incurring significant costs, we cannot assure you that any particular franchise will be renewed or that it can be renewed on commercially favorable terms. Our failure to obtain renewals of our franchises, especially those areas where we have the most customers, would have a material adverse effect on our business, results of operations and financial condition. Under the 1996 Telecommunications Act ("1996 Telecom Act"), state and local authorities are prohibited from limiting, restricting or conditioning the provision of telecommunications services. They may, however, impose "competitively neutral" requirements and manage the public rights-of-way. Granting authorities may not require a cable operator to provide telecommunications services or facilities, other than institutional networks, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits franchise fees to an operator's cable-related revenues and clarifies that they do not apply to revenues that a cable operator derives from providing new telecommunications services. We believe our relations with the franchising authorities under which our systems are operated are generally good. Substantially all of the material franchises relating to our systems which are eligible for renewal have been renewed or extended at or prior to their stated expiration dates. 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 customers for each group as of December 31, 2001:
Number of Percentage of Year of Number of Basic Basic Franchise Expiration Franchises Customers Customers -------------------- ---------- --------- --------- Prior to 2003 -- -- -- 2003 - 2007 1 18 0.3% 2008 and after 5 6,249 99.7% ---- ----- ----- Total 6 6,267 100.0% ==== ===== =====
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 160 customers, representing approximately 2.5% of our customers, are served by unfranchised portions of such systems. 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. -8- Competition We face competition in the areas of price, products and services, and service reliability. We compete with other providers of television signals and other sources of home entertainment. We operate in a very competitive business environment which can adversely affect our business and operations. Through business developments such as the merger of Tele-Communications, Inc. and AT&T and the merger of America Online, Inc. (AOL) and Time Warner Inc., customers have come to expect a variety of services from a single provider. While these mergers are not expected to have a direct or immediate impact on our business, they encourage providers of cable and telecommunications services to expand their service offerings. They also encourage consolidation in the cable industry, such as the proposed merger of AT&T Broadband with Comcast Corp., the largest and third largest cable providers in the country, as cable operators recognize the competitive benefits of a large customer base and expanded financial resources. Our key competitors include: DBS. Direct broadcast satellite, known as DBS, is a significant competitor to cable systems. The DBS industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves more than 17 million subscribers nationwide. DBS service allows the subscriber to receive video and high-speed Internet access services directly via satellite using a relatively small dish antenna. 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. However, a change to the copyright laws in 1999 eliminated this legal impediment. As a result, DBS companies now may retransmit such programming, once they have secured retransmission consent from the popular broadcast stations they wish to carry, and they faced mandatory carriage obligations of less popular broadcast stations as of January 2002. In response to the legislation, DirecTV, Inc. and EchoStar Communications Corporation have begun carrying the major network stations in the nation's top television markets. DBS, however, is limited in the local programming it can provide because of the current capacity limitations of satellite technology, and the DBS companies currently offer local broadcast programming only in the larger U.S. markets. The DBS industry initiated a judicial challenge to the 2002 requirement mandating carriage of less popular broadcast stations. This lawsuit alleges that the requirement (similar to the one applicable to cable systems) is unconstitutional. The federal district court and circuit court both rejected the DBS industry's constitutional challenge, but the industry is now seeking review by the U.S. Supreme Court. In October 2001, EchoStar and DirecTV, the two largest DBS providers in the country, announced EchoStar's planned merger with DirecTV, subject to, among other things, regulatory approval. If approved by regulators and consummated, the proposed merger would provide expanded transmission capacity for a single company serving more than 17 million customers. It is unclear what impact the consolidation of these two companies will have on the competition we face from the DBS industry. EchoStar and DirecTV have announced, however, that the merger would afford the surviving entity sufficient capacity to expand the carriage of local broadcast programming to every U.S. television market. DSL. The deployment of digital subscriber line technology, known as DSL, allows Internet access to subscribers at data transmission speeds greater than available over conventional telephone lines. DSL service therefore is competitive with high-speed Internet access over cable systems. Several telephone companies and other companies offer DSL service. There are bills now before Congress that would reduce regulation of Internet services offered by incumbent telephone companies, and the FCC recently initiated a rulemaking proceeding that could materially reduce existing regulation of DSL service, essentially freeing such service from traditional telecommunications regulation. The FCC's decisions and policies in this area are -9- subject to change. We cannot predict the likelihood of success of the Internet access services offered by our competitors, or the impact on our business and operations of these competitive ventures. DSL and other forms of high-speed Internet access provide competition to our own provision of Internet access. For example, EchoStar and DirecTV have both begun the provision of high-speed Internet access to residential consumers. High-speed Internet access also facilitates the streaming of video into homes and businesses. As the quality and availability of video streaming over the Internet improve, video streaming may compete with the traditional delivery of video programming services over cable systems. It is possible that programming suppliers will consider bypassing cable operators and market their services directly to the consumer through video streaming over the Internet. Broadcast Television. Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception compared to the services provided by the local cable system. 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 and data transmission. Traditional Overbuilds. Cable television systems are operated under non-exclusive franchises granted by local authorities. More than one cable system may legally be built in the same area. It is possible that a franchising authority might grant a second franchise to another cable operator and that such a franchise might contain terms and conditions more favorable than those afforded us. In addition, entities willing to establish an open video system, under which they offer unaffiliated programmers non-discriminatory access to a portion of the system's cable system, may be able to avoid local franchising requirements. Well-financed businesses from outside the cable industry, such as public utilities that already possess fiber optic and other transmission lines in the areas they serve, may over time become competitors. There are a number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. There also has been interest in traditional overbuilds by private companies. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area on a more cost-effective basis than us. Any such overbuild operation would require either significant access to capital or access to facilities already in place that are capable of delivering cable television programming. As of December 31, 2001, the Partnership is unaware of any overbuild situations in its cable systems. Telephone Companies and Utilities. The competitive environment has been significantly affected by technological developments and regulatory changes enacted under the 1996 Telecommunications Act ("1996 Telecom Act"), which was designed to enhance competition in the cable television and local telephone markets. Federal cross-ownership restrictions historically limited entry by local telephone companies into the cable business. The 1996 Telecom Act modified this cross-ownership restriction, making it possible for local exchange carriers, who have considerable resources, to provide a wide variety of video services competitive with services offered by cable systems. Several telephone companies have obtained or are seeking cable franchises from local governmental authorities and are constructing cable systems. Some local exchange carriers may choose to make broadband services available under the open video regulatory framework of the FCC or through wireless technology. We cannot predict the likelihood of success of the broadband services offered by our competitors or the impact on us of such competitive ventures. Although enthusiasm on the part of local exchange carriers appears to have waned in recent months, the entry of telephone companies as direct competitors in the video marketplace may become more widespread and could adversely affect the profitability and valuation of established cable systems. -10- 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 and customers. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable operators, local exchange carriers and others may result in providers capable of offering cable television, Internet, and telecommunications services in direct competition with us. Additionally, we are subject to competition from utilities which possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. Private Cable. Additional competition is posed by satellite master antenna television systems known as "SMATV systems" serving multiple dwelling units, referred to in the cable industry as "MDUs", such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with such MDUs, which may preclude operators of franchise systems from serving residents of such private complexes. Private cable systems can offer both improved reception of local television stations and many of the same satellite-delivered program services 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. The FCC ruled in 1998 that private cable operators can lease video distribution capacity from local telephone companies and distribute cable programming services over public rights-of-way without obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeals upheld this FCC policy. Wireless Distribution. Cable television systems also compete with wireless program distribution services such as multi-channel multipoint distribution systems or "wireless cable," known as MMDS. MMDS uses low-power microwave frequencies to transmit television programming over-the-air to paying customers. Wireless distribution services generally provide many of the programming services provided by cable systems, and digital compression technology is likely to increase significantly the channel capacity of their systems. Both analog and digital MMDS services require unobstructed "line of sight" transmission paths. Regulation and Legislation The following summary addresses the key regulatory developments and legislation affecting the cable industry. The operation of a cable system is extensively regulated by the FCC, some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The 1996 Telecom Act altered the regulatory structure governing the nation's communications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing local telephone companies to provide video programming in their own telephone service areas. The 1996 Telecom Act required the FCC to undertake a host of implementing rulemakings. Moreover, Congress and the FCC have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect our operations. -11- Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they faced "effective competition" in their local franchise area. Federal law defines "effective competition" on a community-specific basis as requiring satisfaction of certain conditions. These conditions are not typically satisfied in the current marketplace; hence, most cable systems potentially are subject to rate regulation. However, with the rapid growth of DBS, it is likely that additional cable systems will soon qualify for "effective competition" and thereby avoid further rate regulation. Although the FCC established the underlying regulatory scheme, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service - the basic service tier, which typically contains local broadcast stations and public, educational, and government access channels. Before a local franchising authority begins basic 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, 2001, none of our local franchising authorities were certified to regulate basic tier rates. Because the 1992 Cable Act permits communities to certify and regulate prices at any time, it is possible that additional localities served by the systems may choose to certify and regulate basic prices in the future. For regulated cable systems, the basic service tier rate increases are governed by a complicated price cap scheme devised by the FCC that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for system upgrades. Operators also have the opportunity to bypass this "benchmark" regulatory scheme in favor of traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. Cost of service regulation is a traditional form of rate regulation, under which a utility is allowed to recover its costs of providing the regulated service, plus a reasonable profit. With regard to cable programming service tiers, which are the expanded basic programming packages that offer services other than basic programming and which typically contain satellite-delivered programming, the FCC historically administered rate regulation of these tiers. Under the 1996 Telecom Act, however, the FCC's authority to regulate cable programming service tier rates expired on March 31, 1999. The FCC still adjudicates cable programming service tier complaints filed prior to that date, but strictly limits its review, and possible refund orders, to the time period prior to March 31, 1999. As of December 31, 2001, we had no cable programming service tier rate complaints pending at the FCC. The elimination of cable programming service tier regulation affords us substantially greater pricing flexibility. Premium cable services offered on a per-channel or per-program basis remain unregulated under both the 1992 Cable Act and the 1996 Telecom Act. However, federal law requires that the basic service tier be offered to all cable subscribers and limits the ability of operators to require purchase of any cable programming service tier if a customer seeks to purchase premium services offered on a per-channel or per-program basis, subject to a technology exception which expires in October 2002. The 1996 Telecom Act also relaxes existing "uniform rate" requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC. Cable Entry into Telecommunications and Pole Attachment Rates. The 1996 Telecom Act creates a more favorable environment for us to provide telecommunications services beyond traditional video -12- 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 Telecom 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 if the operator provides telecommunications service, as well as cable service, over its plant. The FCC clarified that a cable operator's favorable pole rates are not endangered by the provision of Internet access, and that approach ultimately was upheld by the United States Supreme Court. Cable entry into telecommunications will be affected by the rulings and regulations implementing the 1996 Telecom Act, including the rules governing interconnection. A cable operator offering telecommunications services generally needs efficient interconnection with other telephone companies to provide a viable service. A number of details designed to facilitate interconnection are subject to ongoing regulatory and judicial review, but the basic obligation of incumbent telephone companies to interconnect with competitors, such as cable companies offering telephone service, is well established. Even so, the economic viability of different interconnection arrangements can be greatly affected by regulatory changes. Consequently, we cannot predict whether reasonable interconnection terms will be available in any particular market we may choose to enter. Internet Service. Over the past several years, proposals have been advanced at the FCC and Congress that would require cable operators to provide non-discriminatory access to unaffiliated Internet service providers and online service providers. Several local franchising authorities actually adopted mandatory "open access" requirements, but various federal courts have rejected each of these actions, relying on different legal theories. In March 2002, the FCC ruled that cable modem service (that is, the provision of high speed internet access over cable system infrastructure) is an interstate information service, rather than a cable or telecommunications service. This classification should leave cable modem service exempt from the burdens associated with traditional cable and telecommunications regulation. Indeed, the FCC tentatively concluded that revenue earned from the provision of cable service is not subject to local cable franchise fee assessments. With regard to the open access question, the FCC specifically held that, regardless of classification, regulatory forbearance should now apply. The full consequences of classifying cable modem service as an interstate information service are not yet fully known. The FCC is already considering whether providers of cable modem service should contribute to the federal government's universal service fund. This contribution could more than offset the savings associated with excluding cable modem service from local franchise fee assessments. The FCC also initiated a rulemaking proceeding to determine whether its jurisdiction over information services still might warrant imposition of open access requirements in the future. Finally, the information services classification itself is likely to be subject to judicial review. If regulators ultimately were allowed to impose Internet access requirements on cable operators, it could burden the capacity of cable systems and complicate our own plans for providing Internet service. Telephone Company Entry into Cable Television. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers can now compete with cable operators both inside and outside their telephone service areas with certain regulatory safeguards. Because of their resources, local exchange carriers could be formidable competitors to traditional cable operators. Various local exchange carriers already are -13- providing video programming services within their telephone service areas through a variety of distribution methods. Under the 1996 Telecom Act, local exchange carriers or any other cable competitor providing video programming to subscribers through broadband wire should be regulated as a traditional cable operator, subject to local franchising and federal regulatory requirements, unless the local exchange carrier or other cable competitor elects to deploy its broadband plant as an open video system. To qualify for favorable open video system status, the competitor must reserve two-thirds of the system's activated channels for unaffiliated entities. Even then, the FCC revised its open video system policy to leave franchising discretion to state and local authorities. It is unclear what effect this ruling will have on the entities pursuing open video system operation. Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on local exchange carrier buyouts of cable systems serving an overlapping territory. Cable operator buyouts of overlapping local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same market, also are prohibited. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed "rural exemption." The 1996 Telecom Act also provides the FCC with the limited authority to grant waivers of the buyout prohibition. Electric Utility Entry into Telecommunications/Cable Television. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. 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 Telecom 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. The District of Columbia Circuit Court of Appeals recently struck down this remaining cross-ownership prohibition, concluding that the FCC had failed to explain why its continuation was "necessary" in the public interest. In the same decision, the Court struck down another FCC regulation precluding any entity from operating broadcast television stations serving more than 35% of the nation. If these rulings withstand further administrative and judicial review, they may trigger additional consolidation among domestic media companies. Pursuant to 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 pursuant to the 1992 Cable Act, the FCC adopted rules that preclude any cable operator from serving more than 30% of all U.S. domestic multichannel video subscribers, including cable and direct broadcast satellite subscribers. The D.C. Circuit Court of Appeals struck down these vertical and horizontal ownership limits as unconstitutional, concluding that the FCC had not adequately justified the specific rules (i.e., the 40% and 30% figures) adopted. As a result, an existing divestiture requirement on AT&T was suspended. The FCC is now considering replacement regulations. These ownership restrictions may be affected by the proposed merger of EchoStar and DirecTV and the proposed merger of AT&T Broadband and Comcast Cable. These recently announced transactions involve the nation's two largest DBS providers and the nation's largest and third largest cable operators. The proposed combinations might prompt additional consolidation in the cable industry and are likely to heighten regulatory concerns regarding industry -14- consolidation. Although any resulting restrictions could be limited to the particular entities involved, it is also possible that the restrictions would apply to other cable operators, including us. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between "must carry" status or "retransmission consent" status. Less popular stations typically elect must carry, which is the broadcast signal carriage 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 simultaneously must carry all analog and digital broadcasts in their entirety. This burden would reduce capacity available for more popular video programming and new Internet and telecommunication offerings. The FCC tentatively decided against imposition of dual digital and analog must carry in a January 2001 ruling. At the same time, however, it initiated further fact-gathering which ultimately could lead to a reconsideration of the tentative conclusion. The FCC is also considering whether it should maintain its initial ruling that, whenever a digital broadcast signal does become eligible for must carry, a cable operator's obligation is limited to carriage of the primary video signal. If the Commission reverses itself, and cable operators are required to carry ancillary digital feeds, the burden associated with digital must carry could be significantly increased. Access Channels. Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The 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. The FCC rejected a request that unaffiliated Internet service providers be found eligible for commercial leased access. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business position, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring their cable operators over new competitors and requires such programmers to sell their satellite-delivered programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. This prohibition is scheduled to expire in October 2002, unless the FCC determines in a pending proceeding that an extension is necessary to protect competition and diversity. 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 (especially regional sports networks) to the program access requirements. Terrestrially-delivered programming is programming delivered other than by satellite and is currently exempt from the ban on exclusivity. These changes should not have a dramatic impact on us, but would limit potential competitive advantages we now enjoy. DBS providers have no similar restrictions on exclusive programming contracts. Pursuant to the Satellite Home Viewer Improvement Act, the FCC has adopted regulations governing -15- retransmission consent negotiations between broadcasters and all multichannel video programming distributors, including cable and DBS. 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 terminating 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 antennae on property within the exclusive use of a condominium owner or 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. Other Regulations of the Federal Communications Commission. In addition to the FCC regulations noted above, there are other regulations of the FCC covering such areas as: o subscriber privacy, o programming practices, including, among other things, (1) blackouts of programming offered by a distant broadcast signal carried on a cable system which duplicates the programming for which a local broadcast station has secured exclusive distribution rights, (2) local sports blackouts, (3) indecent programming, (4) lottery programming, (5) political programming, (6) sponsorship identification, (7) children's programming advertisements, and (8) closed captioning, o registration of cable systems and facilities licensing, o maintenance of various records and public inspection files, o aeronautical frequency usage, o lockbox availability, o antenna structure notification, o tower marking and lighting, o consumer protection and customer service standards, o technical standards, o equal employment opportunity, o consumer electronics equipment compatibility, and o emergency alert systems. The FCC ruled that cable customers must be allowed to purchase set-top terminals from third parties and established a multi-year phase-in during which security functions (which would remain in the operator's exclusive control) would be unbundled from basic converter functions, which could then be provided by third party vendors. The first phase implementation date was July 1, 2000. Additional Regulatory Policies May Be Added in the Future. The FCC recently initiated an inquiry to determine whether the cable industry's future provision of interactive services should be subject to -16- regulations ensuring equal access and competition among service vendors. The inquiry, which grew out of the Commission's review of the AOL-Time Warner merger, is in its earliest stages, but is yet another expression of regulatory concern regarding control over cable capacity. Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool that varies depending on the size of the system, the number of distant broadcast television signals carried, and the location of the cable system, cable operators can obtain blanket permission to retransmit copyrighted material included in broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect our ability to obtain desired broadcast programming. We cannot predict the outcome of this legislative activity. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. Cable operators distribute locally originated programming and advertising that use music controlled by the two principal major music performing rights organizations, the American Society of Composers, Authors and Publishers and Broadcast Music, Inc. The cable industry has had a long series of negotiations and adjudications with both organizations. Although we cannot predict the ultimate outcome of these industry proceedings or the amount of any license fees we may be required to pay for past and future use of association-controlled music, we do not believe such license fees will be significant to our business and operations. State and Local Regulation. Cable systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises. Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for non-compliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states, including Connecticut, subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system's gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Certain states are considering the imposition of new broadly applied telecommunications taxes. 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 Telecom Act, states and local franchising authorities are prohibited from limiting, restricting, or conditioning the provision of competitive telecommunications services, except for -17- certain "competitively neutral" requirements and as necessary to manage the public rights-of-way. This law should facilitate entry into competitive telecommunications services, although certain jurisdictions still may attempt to impose rigorous entry requirements. In addition, local franchising authorities may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks under certain circumstances, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also provides that franchising fees are limited to an operator's cable-related revenues and do not apply to revenues that a cable operator derives from providing new telecommunications services. In a March 2002 decision, the FCC tentatively held that a cable operator's provision of Internet access service should not subject the operator to additional franchising requirements nor should the revenue derived from such service be subject to local franchise fee assessments. Employees The various operating personnel required to operate our business are employed by the Corporate General Partner's subsidiary and by a Charter subsidiary. As of December 31, 2001, the cost of 28 employees was charged directly to the Partnership. Neither the Corporate General Partner nor the Partnership is the employer of management personnel, and the persons performing these services are employees of affiliates of the Corporate General Partner. Accordingly, management fees are payable for supervisory and administrative services provided by the Corporate General Partner's affiliates. See Item 10. "Directors and Officers of the Registrant" and Item 11. "Executive Compensation." 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 involved from time to time in routine legal matters and other claims incidental to our business. We believe that the resolution of such matters will not have a material adverse impact on our financial position or results of operations. 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 923 as of December 31, 2001. In addition to restrictions on the transferability of units described in our partnership agreement, the transferability of units may be affected by restrictions on resales imposed by federal or state law. Distributions The amended partnership agreement generally provides that all cash distributions (as defined) be allocated 1% to the General Partners and 99% to the Limited Partners until the Limited Partners have received aggregate cash distributions equal to their original capital contributions ("Capital Payback"). The partnership agreement also provides that all partnership profits, gains, operational losses, and credits (all as defined) be allocated 1% to the General Partners and 99% to the Limited Partners until the Limited Partners have been allocated net profits equal to the amount of cash flow required for Capital Payback. After the Limited Partners have received cash flow equal to their initial investments, the General Partners will receive a 1% allocation of cash flow from sale or liquidation of a system until the Limited Partners have received an annual simple interest return of at least 18% of their initial investments less any distributions from previous system sales and cash distributions from operations after Capital Payback. Thereafter, the respective allocations will be made 15% to the General Partners and 85% to the Limited Partners. Any losses from system sales or exchanges shall be allocated first to all partners having positive capital account balances (based on their respective capital accounts) until all such accounts are reduced to zero and thereafter to the Corporate General Partner. All allocations to individual Limited Partners will be based on their respective Limited Partnership ownership interests. Upon the disposition of substantially all of the Partnership's assets, gains shall be allocated first to the Limited Partners having negative capital account balances until their capital accounts are increased to zero, next equally among the General Partners until their capital accounts are increased to zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of the Partnership, any negative capital account balances remaining after all allocations and distributions are made must be funded by the respective partners. The policy of the Corporate General Partner, not recognized by the terms of the partnership agreement, is to cause the Partnership to make cash distributions on a quarterly basis throughout the operational life of the Partnership, assuming the availability of sufficient cash flow from Partnership operations. The amount of such distributions, if any, will vary from quarter to quarter depending upon our results of operations and the Corporate General Partner's determination of whether otherwise available funds are needed for the Partnership's ongoing working capital and other liquidity requirements. We began making periodic cash distributions to Limited Partners from operations during 1986, and distributed an aggregate of $374,200 ($12.50 per unit) to Limited Partners in each year during 1999, 2000 and 2001. The Partnership will continue to determine the Partnership's ability to pay distributions on a quarter-by-quarter basis. Our ability to pay distributions, the actual amount of distributions and the continuance of distributions will depend on a number of factors, including the amount of cash flow from operations, projected capital expenditures, provision for contingent liabilities, regulatory or legislative developments -19- governing the cable television industry, sale of cable system assets and growth in customers. Some of these factors are beyond our control and consequently, we cannot make assurances regarding the level or timing of future distributions. Item 6. SELECTED FINANCIAL DATA Set forth below is selected financial data of the Partnership for the five years ended December 31, 2001. This data should be read in conjunction with the Partnership's financial statements and related notes thereto included in Item 8. "Financial Statements and Supplementary Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7.
Year Ended December 31, --------------------------------------------------------------------------- OPERATIONS STATEMENT DATA 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Revenues $ 3,173,700 $ 3,247,600 $ 3,200,400 $ 3,158,400 $ 2,994,500 Operating expenses (1,683,700) (1,807,800) (1,842,500) (1,743,300) (1,567,100) Depreciation and amortization (801,400) (612,600) (472,400) (466,700) (326,000) ----------- ----------- ----------- ----------- ----------- Operating income 688,600 827,200 885,500 948,400 1,101,400 Interest income 38,900 129,400 93,900 81,900 128,800 Interest expense -- -- (19,400) (15,100) (1,600) Other expense (28,800) (39,200) -- -- -- ----------- ----------- ----------- ----------- ----------- Net income $ 698,700 $ 917,400 $ 960,000 $ 1,015,200 $ 1,228,600 =========== =========== =========== =========== =========== Distributions to partners $ 378,000 $ 378,000 $ 378,000 $ 378,000 $ 378,000 =========== =========== =========== =========== =========== Per unit of limited partnership interest: Net income $ 23.11 $ 30.34 $ 31.75 $ 33.57 $ 40.63 =========== =========== =========== =========== =========== Distributions $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50 =========== =========== =========== =========== =========== OTHER OPERATING DATA Net cash from operating activities $ 782,900 $ 1,993,500 $ 1,339,700 $ 1,397,200 $ 1,505,100 Net cash from investing activities (1,183,000) (2,062,900) (643,000) (806,800) (2,198,400) Net cash from financing activities (378,000) (378,000) (378,000) (378,000) (378,000) EBITDA(1) (Unaudited) 1,461,200 1,400,600 1,357,900 1,415,100 1,427,400 EBITDA as a percentage of revenues (Unaudited) 46.0% 43.1% 42.4% 44.8% 47.7% Capital expenditures $ 1,175,700 $ 2,060,900 $ 627,900 $ 794,100 $ 2,182,700 BALANCE SHEET DATA Total assets $ 7,903,100 $ 8,161,700 $ 7,096,500 $ 6,555,700 $ 6,015,100 General Partners' capital (deficit) 500 (2,700) (8,100) (13,900) (20,300) Limited Partners' capital $ 7,444,100 $ 7,126,600 $ 6,592,600 $ 6,016,400 $ 5,385,600
- ------------------------ (1) EBITDA represents earnings before interest, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles (GAAP). EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because EBITDA may not be calculated consistently by all companies, the presentation here in may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. -20- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The 1992 Cable Act required the FCC to, among other things, implement extensive regulation of the prices charged by cable television systems for basic and premium service tiers, installation, and equipment leased by customers. Compliance with those price regulations has had a negative impact on our revenues and cash flow. The 1996 Telecommunications Act substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the 1996 Telecommunications Act ended the regulation of cable programming service tier rates on March 31, 1999. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or their effect on our business. Accordingly, our historical financial results as described below are not necessarily indicative of future performance. This annual report includes certain forward-looking statements regarding, among other things, our future results of operations, regulatory requirements, competition, capital needs and general business conditions applicable to the Partnership. Such forward-looking statements involve risks and uncertainties including, without limitation, the uncertainty of legislative and regulatory changes and the rapid developments in the competitive environment facing cable television operators such as the Partnership, as discussed more fully elsewhere in this Report. RESULTS OF OPERATIONS Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenues decreased $73,900 from $3,247,600 to $3,173,700, or 2.3%, for the year ended December 31, 2001 compared to 2000. The decrease was due to decline in basic and premium service customers. As of December 31, 2001 and 2000, we had approximately 6,300 and 6,600 basic customers, respectively, and 1,100 and 1,500 premium service units, respectively. The Partnership reimburses the Corporate General Partner and its affiliates for service costs and general and administrative expenses based on actual costs incurred on behalf of the Partnership. These reimbursed costs are included in general partner management fees and reimbursed expenses on the Partnership's statements of operations. The total of service costs, general and administrative expenses and -21- general partner management fees and reimbursed expenses decreased $124,100, or 6.9%, from $1,807,800 to $1,683,700 for the year ended December 31, 2001 as compared to 2000. Service costs decreased $43,200 from $930,100 to $886,900, or 4.6%, for the year ended December 31, 2001 compared to 2000. Service costs represent costs directly attributable to providing cable services to customers. The decrease is primarily due to the decline in customers as compared to 2000. General and administrative expenses decreased $70,800 from $361,700 to $290,900, or 19.5%, for the year ended December 31, 2001 compared to 2000, primarily due to an increase in capitalized labor as a result of rebuild activity. General partner management fees and reimbursed expenses decreased $10,100 from $516,000 to $505,900, or 2.0%, for the year ended December 31, 2001 compared to 2000. The decrease is primarily due to a decrease in management fees as a result of a decrease in customers. Depreciation and amortization expense increased $188,800 from $612,600 to $801,400, or 30.8%, for the year ended December 31, 2001 compared to 2000. The increase is due to asset additions for cable system upgrades in 2001 and throughout 2000. Due to the factors described above, operating income decreased $138,600 from $827,200 to $688,600, or 16.8%, for the year ended December 31, 2001 compared to 2000. Interest income decreased $90,500 from $129,400 to $38,900, or 69.9%, for the year ended December 31, 2001 compared to 2000, primarily due to lower average cash balances available for investment. Other expense of $28,800 and $39,200 for the years ended December 31, 2001 and 2000, respectively, represent legal and proxy costs associated with the proposed sales of the Partnership's assets. Due to the factors described above, net income decreased $218,700 from $917,400 to $698,700, or 23.8%, for the year ended December 31, 2001 compared to 2000. Based on our experience in the cable television industry, we believe that earnings before interest, income taxes, depreciation and amortization, or 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. EBITDA is not a measurement determined under GAAP and does not represent cash generated from operating activities in accordance with GAAP. EBITDA should not be considered by the reader as an alternative to net income as an indicator of financial performance or as an alternative to cash flows as a measure of liquidity. In addition, the definition of EBITDA may not be identical to similarly titled measures used by other companies. EBITDA increased $60,600 from $1,400,600 to $1,461,200, or 4.3%, for the year ended December 31, 2001 as compared to 2000. EBITDA as a percentage of revenues increased 2.9% from 43.1% to 46.0%, during the year ended December 31, 2001 as compared to 2000. The increase was related to the changes in revenues and expenses as described above. Operating activities provided $1,210,600 less cash in 2001 than in 2000. Changes in receivables, prepaid expenses, other assets and due from affiliates used $169,200 less cash in 2001 due to differences in the timing of receivable collections and in the payment of prepaid expenses. We used $1,349,900 more cash to pay liabilities owed to third party creditors in 2001 than in 2000 due to differences in the timing of payments. We used $879,900 less cash in investing activities during 2001 than in 2000, due to a $885,200 decrease in capital expenditures partially offset by a $5,300 increase in spending for intangible assets. -22- Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenues increased $47,200 from $3,200,400 to $3,247,600, or 1.5%, for the year ended December 31, 2000 compared to 1999. Of the increase, $92,500 was due to increases in regulated prices we implemented in 2000 and $17,800 was due to an increase in other revenue producing items. The increases were partially offset by a $63,100 decrease due to decreases in the number of subscriptions for basic service. As of December 31, 2000 and 1999, we had approximately 6,600 and 7,100 basic customers and 1,500 and 1,400 premium service units, respectively. Effective with the acquisition of the Corporate General Partner and certain affiliates by Charter on November 12, 1999, certain activities previously performed by the Partnership and expensed through service cost and general and administrative expenses have been either eliminated by Charter, or have been performed by Charter and then been reimbursed by the Partnership based on Charter's costs incurred. These reimbursed costs are included in general partner management fees and reimbursed expenses on the Partnership's statements of operations. The total of service costs, general and administrative expenses and general partner management fees and reimbursed expenses decreased $34,700, or 1.9%, from $1,842,500 to $1,807,800 for the year ended December 31, 2000 as compared to 1999. Service costs decreased $57,000 from $987,100 to $930,100, or 5.8%, for the year ended December 31, 2000 compared to 1999. Service costs represent costs directly attributable to providing cable services to customers. The decrease is primarily due to decreases in programming fees, personnel costs and certain costs incurred by the Partnership prior to the Charter acquisition that are now incurred by Charter and reimbursed by the Partnership, as described above. Programming fees decreased as a result of lower prices that Charter has extended to us and a decrease in customers. General and administrative expenses increased $2,000 from $359,700 to $361,700, or less than 1.0%, for the year ended December 31, 2000 compared to 1999, primarily due to an increase in bad debt expense. General partner management fees and reimbursed expenses increased $20,300 from $495,700 to $516,000, or 4.1%, for the year ended December 31, 2000 compared to 1999. General partner management fees increased in direct relation to increased revenues as described above. As described above, Charter now performs certain management and operational functions formerly performed by the Partnership. This has resulted in more reimbursable costs and lower service costs and general and administrative expenses. Depreciation and amortization expense increased $140,200 from $472,400 to $612,600, or 29.7%, for the year ended December 31, 2000 compared to 1999, primarily due to the rebuild of our plant in Taylorville, Illinois. Depreciation expense increased as portions of the system rebuild were placed into service. Due to the factors described above, operating income decreased $58,300 from $885,500 to $827,200, or 6.6%, for the year ended December 31, 2000 compared to 1999. Interest income, net of interest expense, increased $54,900 from $74,500 to $129,400, or 73.7%, for the year ended December 31, 2000 compared to 1999, primarily due to higher average cash balances available for investment, and the reclassification of certain bank charges from interest expense to general and administrative expenses. Other expense of $39,200 for the year ended December 31, 2000 consisted of legal and proxy costs associated with the proposed sale of our partnership assets. Due to the factors described above, net income decreased $42,600 from $960,000 to $917,400, or 4.4%, for the year ended December 31, 2000 compared to 1999. -23- Based on our experience in the cable television industry, we believe that earnings before interest, income taxes, depreciation and amortization, or 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. EBITDA is not a measurement determined under GAAP and does not represent cash generated from operating activities in accordance with GAAP. EBITDA should not be considered by the reader as an alternative to net income as an indicator of financial performance or as an alternative to cash flows as a measure of liquidity. In addition, the definition of EBITDA may not be identical to similarly titled measures used by other companies. EBITDA increased $42,700 from $1,357,900 to $1,400,600, or 3.1%, for the year ended December 31, 2001 as compared to 2000. EBITDA as a percentage of revenues increased less than 1% from 42.4% to 43.1%, during the year ended December 31, 2001 as compared to 2000. The decrease was related to the changes in revenues and expenses as described above. Operating activities provided $653,800 more cash in 2000 than in 1999. Changes in receivables, prepaid expenses and other assets used $30,600 less cash in 2000 due to differences in the timing of receivable collections and in the payment of prepaid expenses. We used $525,600 less cash to pay liabilities owed to affiliates and third party creditors in 2000 than in 1999 due to differences in the timing of payments. We used $1,419,500 more cash in investing activities during 2000 than in 1999, due to a $1,433,000 increase in capital expenditures partially offset by a $13,500 decrease in spending for intangible assets. Distributions to Partners Partnership operations generated income exclusive of depreciation and amortization of $1,501,100, $1,530,000 and $1,432,400 in 2001, 2000, and 1999, respectively. As provided in the Partnership Agreement, distributions to partners are funded from such amounts after providing for working capital and other liquidity requirements, including debt service costs and capital expenditures not otherwise funded by borrowings. In each of 2001, 2000 and 1999, the Partnership paid distributions of $378,000 to its partners. 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 and any planned capital requirements relating to the expansion, improvement and upgrade of its cable systems. We believe that cash generated by operations, will be adequate to fund capital expenditures, debt service and other liquidity requirements in 2002 and beyond. See "Results of Operations" for discussion regarding cash from operating, investing and financing activities. PROPOSED SALE OF ASSETS On August 29, 2001, the Partnership entered into an asset purchase agreement providing for the sale of all of the Partnership's cable television systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate of the Corporate General Partner and an indirect subsidiary of Charter, for a total sale price of approximately $14,706,800 in cash ($2,258 per customer acquired), anticipated to result in a post-closing distribution of approximately $510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The Charter Sale is part of a larger transaction in which the Partnership and five other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their assets used in the operation of their respective Illinois cable television systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash sale price of $63,000,000. The -24- total sale price has been allocated among the Selling Partnerships based on the number of customers served by each of the Selling Partnerships' respective Illinois cable systems as of June 30, 2001. Each Selling Partnership will receive the same value per customer. Closing of the Charter Sale is subject to closing sale price adjustments, regulatory approvals, customary closing conditions and the approval by the limited partners of the five other affiliated Selling Partnerships of the sale of their respective Illinois cable systems. In addition, unless waived by the Purchasers, the limited partners of each of the Selling Partnerships must approve an amendment to their respective partnership agreement to allow the sale of assets to an affiliate of such partnership's general partner. The Purchasers are each indirect subsidiaries of the Corporate General Partner's ultimate parent company, Charter, and, therefore, are affiliates of the Partnership and each of the other Selling Partnerships. The Purchasers have indicated that they may waive the requirement of limited partner approval by all six Selling Partnerships. If the Purchasers do waive this requirement, then they might purchase the Illinois systems in more than one closing, and only with respect to those Selling Partnerships that have received the approval of their limited partners. Although it is presently expected that the sale of the Partnership's Illinois systems will be consummated in the second quarter of 2002, there is no assurance regarding completion of the transaction. The financial statements continue to be presented on a going concern basis. If the sale is approved in accordance with the terms of the purchase agreement, the Partnership will immediately change to a liquidation basis of accounting. The proposed Charter Sale resulted from a sale process actively pursued since 1999, when the Corporate General Partner sought purchasers for all of the cable television systems of the Selling Partnerships, as well as eight other, affiliated limited partnership cable operators of which the Corporate General Partner is also the general partner. This effort was undertaken primarily because, based on the Corporate General Partner's experience in the cable television industry, it was concluded that generally applicable market conditions and competitive factors were making (and would increasingly make) it extremely difficult for smaller operators of rural cable systems (such as the Partnership and the other affiliated Enstar partnerships) to effectively compete and be financially successful. This determination was based on the anticipated cost of electronics and additional equipment to enable the Partnership's systems to operate on a two-way basis with improved technical capacity, insufficiency of Partnership cash reserves and cash flows from operations to finance such expenditures, limited customer growth potential due to the Partnership's systems' rural location, and a general inability of a small cable system operator such as the Partnership to benefit from economies of scale and the ability to combine and integrate systems that large cable operators have. Although significant plant upgrades have been made to increase channel capacity and enhance the value of the Partnership's systems, the Corporate General Partner projected that if the Partnership made the comprehensive additional upgrades deemed necessary to enable enhanced and competitive services, particularly activation of two-way capability, the Partnership would not recoup the costs or regain its ability to operate profitably within the remaining term of its franchises, and as a result, making these upgrades would not be economically prudent. As a result of marketing efforts using an independent broker experienced in the sale of cable systems, the Partnership, together with certain affiliated partnerships for which the Corporate General partner also served as a general partner (collectively, the "Gans Selling Partnerships"), entered into a purchase and sale agreement, dated as of August 8, 2000, as amended as of September 29, 2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to acquire the assets comprising the Partnership's system, as well as certain assets of the other Gans Selling Partnerships. Following a series of discussions and meetings, the Partnership and Gans determined that they were not able to agree on certain further amendments to the Gans Agreement required to satisfy conditions precedent to close the transactions. In light of these conditions and existing economic and financial market conditions, and their impact on Gans' inability to arrange financing in order to close the acquisitions, on April 18, 2001, the parties agreed to terminate the Gans Agreement. Following termination of the Gans Agreement, the broker once again attempted to market the various Illinois systems of the affiliated partnerships, including the Partnership's system. As a result of a "sealed-bid" auction process, six bids were received and the bid submitted by certain affiliates of the -25- Corporate General Partner was the highest, and exceeded the next highest bid by 25%. Following this second sale process, the Partnership entered into the asset purchase agreement for the Charter Sale. After paying its debts and obligations and paying or providing for the payment of the expenses of the Charter Sale, the Partnership will terminate and dissolve, and the General Partner will make one or more liquidating distributions to itself and the Unitholders of the Partnership's remaining assets, in accordance with the Partnership Agreement. We currently estimate that pre-tax liquidating distributions to the Unitholders from the Charter Sale will total approximately $510 per Unit, after estimated closing adjustments and closing and liquidation expenses. As the holder of a 1% interest in Enstar II-1, the Corporate General Partner will receive a liquidating distribution of approximately $154,300. INVESTING ACTIVITIES Significant additional capital would be required to complete a comprehensive plant and headend upgrade. The estimated cost of making additional upgrades to the Taylorville and Litchfield headends, including the electronics to activate two-way capability in order to be able to offer high-speed internet service from both headends, as well as to increase channel capacity and allow additional video, would be an aggregate of approximately $2.7 million (for an upgrade to 550 megahertz (MHz) capacity) to $3.1 million (for an upgrade to 870 MHz capacity). However, given the proposed sale of all of the Partnership's systems and for the reasons previously stated in the section entitled "Proposed Sale of Assets," the Corporate General Partner does not plan to proceed with these additional upgrades. FINANCING ACTIVITIES At December 31, 2001, the Partnership had no debt outstanding. The Partnership relies upon cash flows from operations to meet operating requirements and fund necessary capital expenditures. Although the Partnership currently has a significant cash balance, there can be no assurance that the Partnership's cash flow will be adequate to meet its future liquidity requirements. We paid distributions totaling $378,000 during the year ended December 31, 2001. There can be no assurances regarding the level, timing or continuation of future distributions. CERTAIN TRENDS AND UNCERTAINTIES Insurance coverage is maintained for all of the cable television properties owned or managed by Charter to cover damage to cable distribution system, customer connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties owned or managed by Charter, including those of the Partnership. All of our customers are served by our system in Taylorville and Litchfield, Illinois, and neighboring communities. Significant damage to the system due to seasonal weather conditions or other events could have a material adverse effect on our liquidity and cash flows. We continue to purchase insurance coverage in amounts our management views as appropriate for all other property, liability, automobile, workers' compensation and other insurable risks. Although we do not believe that the terrorist attacks on September 11, 2001 and the related events have resulted in any material changes to its business and operations to date, it is difficult to assess the impact that these events, combined with the general economic slowdown, will have on future operations. These events could result in reduced spending by customers and advertisers, which could reduce the Partnership's revenues and operating cash flow, as well as the collectibility of accounts receivable. -26- RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", No. 142, "Goodwill and Other Intangible Assets" and No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and was adopted by the Partnership on July 1, 2001. Management believes that adoption of SFAS No. 141 did not have an impact on the financial statements of the Partnership. Under SFAS No. 142, goodwill and other indefinite lived intangible assets are no longer subject to amortization over their useful lives, rather, they are subject to at least annual assessments for impairment. Also, under SFAS No. 142, an intangible asset should be recognized if the benefit of the intangible asset is obtained through contractual or other legal rights or if the intangible asset can be sold, transferred, licensed, rented or exchanged. Such intangibles continue to be amortized over their useful lives. SFAS 142 was implemented by the Partnership on January 1, 2002. Management believes that adoption of SFAS No. 142 did not have a material impact on the financial statements of the Partnership. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was implemented by the Partnership on January 1, 2002. Management believes that adoption of SFAS No. 143 did not have a material impact on the financial statements of the Partnership. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by the Partnership on January 1, 2002. The Partnership is currently in process of assessing the impact of adoption of SFAS No. 144. See "Proposed Sale of Assets." 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 prices periodically, of which there can be no assurance. See "Regulation and Legislation." Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not exposed to material market risks associated with financial instruments. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to the financial statements and related financial information required to be filed hereunder is located on Page F-1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Previously reported in Current Report on Form 8-K dated July 18, 2000. -27- 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 had been previously 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 14 limited partnerships formed to own and operate cable television systems and through a wholly-owned operating subsidiary. The directors and executive officers of the Corporate General Partner as of March 15, 2002, all of whom have their principal employment in a comparable position with Charter, are named below:
NAME POSITION Carl E. Vogel President and Chief Executive Officer David G. Barford Executive Vice President and Chief Operating Officer Kent D. Kalkwarf Executive Vice President and Chief Financial Officer Steven A. Schumm Director of the Corporate General Partner, Executive Vice President and Assistant to the President Steven E. Silva Executive Vice President - Corporate Development and Chief Technology Officer David C. Andersen Senior Vice President - Communications J. Christian Fenger Senior Vice President of Operations - Western Division Eric A. Freesmeier Senior Vice President - Administration Thomas R. Jokerst Senior Vice President - Advanced Technology Development Ralph G. Kelly Senior Vice President - Treasurer David L. McCall Senior Vice President of Operations - Eastern Division Majid R. Mir Senior Vice President - Telephony and Advanced Services John C. Pietri Senior Vice President - Engineering Michael E. Riddle Senior Vice President and Chief Information Officer William J. Schreffler Senior Vice President of Operations - Midwest Division Curtis S. Shaw Senior Vice President, General Counsel and Secretary Paul E. Martin Vice President, Corporate Controller and Principal Financial Officer for Partnership Matters
Except for above-named executive officers who joined Charter after November 1999, such officers were appointed to their position with the Corporate General Partner following Charter's acquisition of -28- control in November 1999, have been employees of Charter since November 1999, and immediately prior to November 1999, were employees of Charter Investment, Inc., an affiliate of Charter and the Corporate General Partner. Carl E. Vogel, 44, President and Chief Executive Officer. Mr. Vogel has more than 20 years of experience in telecommunications and the subscription television business. Prior to joining Charter in October 2001, he was a Senior Vice President of Liberty Media Corp., from November 1999 to October 2001, and Chief Executive Officer of Liberty Satellite and Technology, from April 2000 to October 2000. Prior to joining Liberty, Mr. Vogel was an Executive Vice President and Chief Operating Officer of Field Operations for AT&T Broadband and Internet Services, with responsibility of managing operations of all of AT&T's cable broadband properties, from June 1999 to November 1999. From June 1998 to June 1999, Mr. Vogel served as Chief Executive Officer of Primestar, Inc., a national provider of subscription television services, and from 1997 to 1998, he served as Chief Executive Officer of Star Choice Communications. From 1994 through 1997, Mr. Vogel served as the President and Chief Operating Officer of EchoStar Communications. He began his career at Jones Intercable in 1983. Mr. Vogel serves as a director of OnCommand Corporation, and holds a B.S. degree in finance and accounting from St. Norbert College. David G. Barford, 43 Executive Vice President and Chief Operating Officer. Mr. Barford was promoted to his current position in July 2000, having previously served as Senior Vice President of Operations-Western Division from June 1997 to July 2000. Prior to joining Charter Investment (an affiliate of Charter) in 1995, Mr. Barford held various senior marketing and operating roles during nine years at Comcast Cable Communications, Inc. He received a B.A. degree from California State University, Fullerton, and an M.B.A. from National University. Kent D. Kalkwarf, 42 Executive Vice President and Chief Financial Officer. Mr. Kalkwarf was promoted to the position of Executive Vice President in July 2000, having previously served as Senior Vice President. Prior to joining Charter Investment 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. degree from Illinois Wesleyan University and is a certified public accountant. Steven A. Schumm, 49 Director of the Corporate General Partner, Executive Vice President and Assistant to the President. Prior to joining Charter Investment in 1998, Mr. Schumm was Managing Partner of the St. Louis office of Ernst & Young LLP for 14 years. He had joined Ernst & Young in 1974. 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. Steven E. Silva, 42 Executive Vice President - Corporate Development and Chief Technology Officer. Mr. Silva joined Charter Investment in 1995. Prior to his promotion to Executive Vice President and Chief Technology Officer in October 2001, he was Senior Vice President - Corporate Development and Technology since September 1999. Mr. Silva previously served in various management positions at U.S. Computer Services, Inc., a billing service provider specializing in the cable industry. He is a member of the board of directors of Diva Systems Corporation. David C. Andersen, 53 Senior Vice President - Communications. Mr. Andersen was named to his current position in May 2000. Prior to this, he was Vice President of Global Communications for CNBC, the worldwide cable and satellite business news network subsidiary of NBC, from September 1999 through April 2000. He worked for Cox communications, Inc. from 1982 to 1999, establishing their communications department and advancing to Vice President of Public Affairs. He held various management positions in communications with the General Motors Corporation from 1971 to 1982. Mr. Andersen is a past recipient of the cable industry's highest honor - the Vanguard Award. He serves on the Board of KIDSNET, the educational non-profit clearinghouse of children's programming, and is a former Chairman of the National Captioning Institute's Cable Advisory Board. -29- J. Christian Fenger, 46 Senior Vice President of Operations - Western Division. Mr. Fenger was promoted to his current position in January 2002, having served as Vice President and Senior Vice President of Operations for our North Central Region since 1998. From 1992 until joining us in 1998, Mr Fenger served as the Vice President of Operations for Marcus Cable, and, prior to that, as Regional Manager of Simmons Cable TV since 1986. Mr. Fenger received his bachelor's degree and his master's degrees in communications management from Syracuse University's Newhouse School of Public Communications. Eric A. Freesmeier, 49 Senior Vice President - Administration. From 1986 until joining Charter Investment 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 a bachelor's degree from the University of Iowa and a master's degree from Northwestern University's Kellogg Graduate School of Management. Thomas R. Jokerst, 52 Senior Vice President - Advanced Technology Development. Mr. Jokerst joined Charter Investment 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. Ralph G. Kelly, 44 Senior Vice President - Treasurer. Prior to joining Charter Investment in 1993, Mr. Kelly was controller and then treasurer of Cencom Cable Associates between 1984 and 1992. He left Charter Investment 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. Mr. Kelly is a certified public accountant. David L. McCall, 46 Senior Vice President of Operations - Eastern Division. Prior to joining Charter Investment in 1995, Mr. McCall was associated with Crown Cable and its predecessor company, Cencom Cable Associates, Inc., from 1983 to 1994. Mr. McCall is a member of the Southern Cable Association's Tower Club. Majid R. Mir, 51 Senior Vice President - Telephony and Advanced Services. Prior to joining Charter in April 2001, Mr. Mir worked with GENUITY Networks, Inc. as Vice President, Metro Network Engineering in Irving, Texas from June 2000 to April 2001. Prior to that, Mr. Mir worked with GTE from 1979 to June 2000 in various capacities of increasing responsibility, most recently as Assistant Vice President of Core Network Engineering. Mr. Mir served as director, Business Development for GTE, from 1996 to 1997. Mr. Mir earned a bachelor's of science in systems science from the University of West Florida and holds a master's degree in business administration from the University of South Florida. John C. Pietri, 52 Senior Vice President - Engineering. Prior to joining Charter Investment in 1998, Mr. Pietri was with Marcus Cable for nine 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, 43 Senior Vice President and Chief Information Officer. Prior to joining Charter in December 1999, Mr. Riddle was Director, Applied Technologies of Cox Communications for four years. Prior to that, he held technical and management positions during 17 years at Southwestern Bell and its subsidiaries. Mr. Riddle attended Fort Hays State University. William J. Schreffler, 48 Senior Vice President of Operations - Midwest Division. Mr Shreffler was promoted to his current position in January 2002, having previously served as Vice President of Operations for the Michigan region. Prior to joining Charter in 1999, Mr. Shreffler acted as a Managing Director of Cablevision. Between 1995 and 1999, he held various positions with Century Communications, mot recently as its Group Vice President. From 1985 to 1995, Mr. Shreffler acted as the Regional Controller for American Cable Systems -30- and following the acquisition of American by Continental Cablevision, as its General Manager in its Chicago region. Mr. Shreffler holds degrees from Robert Morris College and Duquesne University and is obtaining a master's degree in business from Lewis University in Chicago. Curtis S. Shaw, 53 Senior Vice President, General Counsel and Secretary. From 1988 until he joined Charter Investment in 1997, Mr. Shaw served as corporate counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a corporate lawyer, specializing in mergers and acquisitions, joint ventures, public offerings, financings, and federal securities and antitrust law. Mr. Shaw received a B.A. degree from Trinity College and a J.D. degree from Columbia University School of Law. Paul E. Martin, 41 Vice President, Corporate Controller and Principal Financial Officer for Partnership Matters. Mr. Martin has been Vice President and Corporate Controller with Enstar Communications since March 2000, and became Principal Financial Officer for Partnership Matters in July 2001. Prior to joining Charter in March 2000, Mr. Martin was Vice President and Controller for Operations and Logistics for Fort James Corporation, a manufacturer of paper products. From 1995 to February 1999, Mr. Martin was Chief Financial Officer of Rawlings Sporting Goods Company, Inc. Mr. Martin is a certified public accountant, having been with Arthur Andersen LLP for nine years. Mr. Martin received a B.S. degree in accounting from University of Missouri- St. Louis. The sole director of the Corporate General Partner is elected to a one-year term at the annual shareholder meeting to serve until the next annual shareholder meeting and thereafter until his respective successor is elected and qualified. Upon his resignation in September 2001, Jerald L. Kent resigned as the sole director of Enstar Communications Corporation and was succeeded by Mr. Schumm. Officers are appointed by and serve at the discretion of the directors of the Corporate General Partner. Item 11. EXECUTIVE COMPENSATION Management Fee The Partnership has a management agreement (the "Management Agreement") with Enstar Cable Corporation ("Enstar Cable"), 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, which is calculated and paid monthly. In addition, we reimburse Enstar Cable for operating expenses incurred by Enstar Cable in the daily 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. ("Falcon") to provide management services for us and paid Falcon a portion of the management fees it received in consideration of such services and reimbursed Falcon for expenses incurred by Falcon on its behalf. Subsequent to November 12, 1999, Charter, as successor-by-merger to Falcon, 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, 2001, Enstar Cable charged us management fees of approximately $158,700. The Partnership also reimbursed Enstar Cable, Charter and its affiliates approximately $347,200 or system operating management services. In addition, programming services were purchased through Charter. The Partnership was charged approximately $689,300 for these programming services for fiscal year 2001. -31- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of January 25, 2002, the only persons known by us to own beneficially or that may be deemed to own beneficially more than 5% of the units were:
Amount and Nature of Beneficial Percent Title of Class Name and Address of Beneficial Owner Ownership of Class - ------------------------ -------------------------------------------------------------------------------- Units of limited Affiliated Madison Investor Unitholders 1,526 5.1% partnership interest Madison/OHI Liquidity Investors, LLC 20 Madison Liquidity Investors 110, LLC 20 Madison Liquidity Investors 103, LLC 24 Madison Liquidity Investors 104, LLC 412 Madison Liquidity Investors 111, LLC 412 Madison Liquidity Investors 100, LLC 32 Madison Value Fund, LLC 1,038 Madison/WP Value Fund IV, LLC 24 Madison/WP Value Fund V, LLC 412 Madison Liquidity Investors 11, LLC Madison Avenue 1,038 Investment Partners, LLC 1,506 The Harmony Group II, LLC 1,506 Bryan E. Gordon 1,506 P.O. Box 7533 Incline Village, Nevada 89452 First Equity Realty, LLC 1,506 Ronald M. Dickerman 1,506 555 Fifth Avenue, 9th Floor New York, New York 10017
(1) As stated in Schedule 13G, as filed with the Securities and Exchange Commission, all units are subject to shared power to vote and invest. The Corporate General Partner is a wholly-owned subsidiary of Charter Communications Holding Company, LLC. As of February 28, 2002, the common membership units of Charter Communications Holding Company, LLC are owned 51.2% by Charter, 16.7% by Vulcan Cable III Inc., and 32.1% by Charter Investment, Inc. (assuming conversion of all convertible securities). Charter controls 100% of the voting power of Charter Communications Holding Company. Paul G. Allen owns approximately 3.7% of the outstanding common stock of Charter and controls approximately 92.3% of the voting power of Charter's capital stock, and he is the sole equity owner of Charter Investment, Inc. and Vulcan Cable III Inc. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Services On November 12, 1999, Charter acquired ownership of Enstar Communications Corporation from Falcon Holding Group, L.P. and assumed the management services operations previously provided by affiliates 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. -32- Commencing November 13, 1999, Charter began receiving management fees and reimbursed expenses which had previously been paid by the Corporate General Partner to Falcon. Pursuant to the Management Agreement dated November 26, 1985 between the Partnership and Enstar Cable Corporation ("Enstar Cable"), a subsidiary of the Corporate General Partner, Enstar Cable provides financial, management, supervisory and marketing services, as necessary to the Partnership's operations. This Management Agreement provides that the Partnership shall pay management fees equal to 5% of the Partnership's gross receipts from customers. In addition, Enstar Cable is to be reimbursed for amounts paid to third parties, the cost of administrative services in an amount equal to the lower of actual cost or the amount the Partnership would be required to pay to independent parties for comparable administrative services, salaries and benefits of employees necessary for day-to-day operation of the Partnership's systems, and an allocable shares of costs associated with facilities required to manage the Partnership's systems. To provide these management services, Enstar Cable has engaged Charter Communications Holding Company, an affiliate of the Corporate General Partner and Charter, to provide management, consulting, programming and billing services for the Partnership. Since November 12, 1999, when Charter acquired control of the Corporate General Partner and its subsidiary, Enstar Cable, as well as Falcon Communications, L.P., the management fees payable have been limited to reimbursement of an allocable share of Charter's management costs, which is less than the fee permitted by the existing agreement. For the year ended December 31, 2001, accrued and unpaid management fees to Charter Communications Holding Company LLC. were $169,700. In addition, the Partnership was charged directly for the salaries and benefits of employees for daily operations, and where shared by other Charter systems, an allocable share of facilities costs, with programming and billing being charged to the Partnership at Charter's actual cost. For the year ended December 31, 2001, service costs directly attributable to providing cable services to customers which were incurred by Charter and charged to the Partnership were $347,200. Conflicts of Interest The Partnership relies upon the Corporate General Partner and certain of its affiliates to provide general management services, system operating services, supervisory and administrative services and programming. See Item 11. "Executive Compensation." The executive officers of the Corporate General Partner have their personal employment with Charter, and, as a result, are involved in the management of other cable ventures. Charter expects to continue to enter into other cable ventures. These affiliations subject Charter and the Corporate General Partner and their management to conflicts of interest. These conflicts of interest relate to the time and services that management will devote to the Partnership's affairs. Proposed Sale of Assets On August 29, 2001, the Partnership entered into an asset purchase agreement providing for the sale of all of the Partnership's cable television systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate of the Corporate General Partner and an indirect subsidiary of Charter, for a total sale price of approximately $14,706,800 in cash ($2,258 per customer acquired), anticipated to result in a post-closing distribution of approximately $510 per partnership unit, prior to applicable taxes (the "Charter Sale"). The Charter Sale is part of a larger transaction in which the Partnership and five other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their assets used in the operation of their respective Illinois cable television systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash sale price of $63,000,000. The total sale price has been allocated among the Selling Partnerships based on the number of customers served by each of the Selling Partnerships' respective Illinois cable systems as of June 30, 2001. Each Selling Partnership will receive the same value per customer. Closing of the Charter Sale is subject to closing sale price adjustments, regulatory approvals, customary closing conditions and the approval by the limited partners of the five other affiliated Selling Partnerships of the sale of their respective Illinois cable systems. In -33- addition, unless waived by the Purchasers, the limited partners of each of the Selling Partnerships must approve an amendment to their respective partnership agreement to allow the sale of assets to an affiliate of such partnership's general partner. The Purchasers are each indirect subsidiaries of the Corporate General Partner's ultimate parent company, Charter, and, therefore, are affiliates of the Partnership and each of the other Selling Partnerships. The Purchasers have indicated that they may waive the requirement of limited partner approval by all six Selling Partnerships. If the Purchasers do waive this requirement, then they might purchase the Illinois systems in more than one closing, and only with respect to those Selling Partnerships that have received the approval of their limited partners. Although it is presently expected that the sale of the Partnership's Illinois systems will be consummated in the second quarter of 2002, there is no assurance regarding completion of the transaction. The financial statements continue to be presented on a going concern basis. If the sale is approved in accordance with the terms of the purchase agreement, the Partnership will immediately change to a liquidation basis of accounting. 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, we maintain, at our expense and in such reasonable amounts as the Corporate General Partner determines, a liability insurance policy which insures the Corporate General Partner, Charter and its affiliates, officers and directors and persons determined by the Corporate General Partner, against liabilities which they may incur with respect to claims made against them for wrongful or allegedly wrongful acts, including certain errors, misstatements, misleading statements, omissions, neglect or breaches of duty. -34- 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. 2. Financial Statement Schedules Reference is made to the Index to Financial Statements on page F-1. 3. Exhibits Reference is made to the Exhibits Index on Page E-1. (b) Reports on Form 8-K On October 9, 2001, the registrant filed a current report on Form 8-K announcing the resignation of Jerald L. Kent, Charter's former President and Chief Executive Officer and the appointment of Steven A. Schumm, Executive Vice President and Assistant to the President of Charter as sole director of Enstar Communications Corporation, the Partnership's Corporate General Partner. -35- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENSTAR INCOME PROGRAM II-1, L.P. By: Enstar Communications Corporation, Corporate General Partner Dated: March 29, 2002 By: /s/ Steven A. Schumm Steven A. Schumm Director, Executive Vice President and Assistant to the President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated below. Dated: March 29, 2002 By: /s/ Steven A. Schumm Steven A. Schumm Director, Executive Vice President and Assistant to the President (Principal Executive Officer) * Dated: March 29, 2002 By: /s/ Paul E. Martin Paul E. Martin Vice President and Corporate Controller (Principal Financial Officer and Principal Accounting Officer) * * Indicates position held with Enstar Communications Corporation, the Corporate General Partner of the registrant. -36- INDEX TO FINANCIAL STATEMENTS
PAGE Report of Independent Public Accountants F-2 Balance Sheets as of December 31, 2001 and 2000 F-3 Statements of Operations for the years ended December 31, 2001 and 2000 F-4 Statements of Partnership Capital (Deficit) for the years ended December 31, 2001 and 2000 F-5 Statements of Cash Flows for the years ended December 31, 2001 and 2000 F-6 Notes to Financial Statements F-7 Report of Independent Auditors F-14 Statement of Operations for the year ended December 31, 1999 F-15 Statement of Partnership Capital (Deficit) for the year ended December 31, 1999 F-16 Statement of Cash Flows for the year ended December 31, 1999 F-17 Notes to Financial Statements F-18
All financial statement schedules have been omitted because they are either not required, not applicable or the information has otherwise been supplied. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Enstar Income Program II-1, L.P.: We have audited the accompanying balance sheets of Enstar Income Program II-1, L.P. (a Georgia limited partnership) as of December 31, 2001 and 2000, and the related statements of operations, partnership capital (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enstar Income Program II-1, L.P. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 29, 2002 F-2 ENSTAR INCOME PROGRAM II-1, L.P. BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
2001 2000 ---------- ---------- ASSETS ASSETS: Cash $1,083,500 $1,861,600 Accounts receivable 82,800 119,300 Due from affiliates 241,500 41,400 Prepaid expenses and other assets 11,300 37,000 Property, plant and equipment, net of accumulated depreciation of $4,721,900 and $3,933,900, respectively 6,434,000 6,046,300 Franchise cost, less accumulated amortization of $72,500 and $59,700, respectively 50,000 56,100 ---------- ---------- Total assets $7,903,100 $8,161,700 ========== ========== LIABILITIES AND PARTNERSHIP CAPITAL LIABILITIES: Accounts payable $ 90,600 $ 633,100 Accrued liabilities 367,900 404,700 ---------- ---------- Total liabilities 458,500 1,037,800 ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT): General Partners 500 (2,700) Limited Partners 7,444,100 7,126,600 ---------- ---------- Total partnership capital 7,444,600 7,123,900 ---------- ---------- Total liabilities and partnership capital $7,903,100 $8,161,700 ========== ==========
See accompanying notes to financial statements. F-3 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ---------- ---------- REVENUES $3,173,700 $3,247,600 ---------- ---------- OPERATING EXPENSES: Service costs 886,900 930,100 General and administrative expenses 290,900 361,700 General partner management fees and reimbursed expenses 505,900 516,000 Depreciation and amortization 801,400 612,600 ---------- ---------- 2,485,100 2,420,400 ---------- ---------- Operating income 688,600 827,200 ---------- ---------- OTHER INCOME (EXPENSE): Interest income 38,900 129,400 Other expense (28,800) (39,200) ---------- ---------- 10,100 90,200 ---------- ---------- Net income $ 698,700 $ 917,400 ========== ========== NET INCOME ALLOCATED TO GENERAL PARTNERS $ 7,000 $ 9,200 ========== ========== NET INCOME ALLOCATED TO LIMITED PARTNERS $ 691,700 $ 908,200 ========== ========== NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 23.11 $ 30.34 ========== ========== WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,936 29,936 ========== ==========
See accompanying notes to financial statements. F-4 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General Limited Partners Partners Total -------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), January 1, 2000 $(8,100) $6,592,600 $6,584,500 Distributions to partners (3,800) (374,200) (378,000) Net income 9,200 908,200 917,400 ------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), December 31, 2000 (2,700) 7,126,600 7,123,900 Distributions to partners (3,800) (374,200) (378,000) Net income 7,000 691,700 698,700 ------- ---------- ---------- PARTNERSHIP CAPITAL, December 31, 2001 $ 500 $7,444,100 $7,444,600 ======= ========== ==========
See accompanying notes to financial statements. F-5 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 698,700 $ 917,400 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 801,400 612,600 Changes in: Accounts receivable, prepaid expenses, other assets and due to/from affiliates (137,900) (307,100) Accounts payable and accrued liabilities (579,300) 770,600 ---------- ---------- Net cash from operating activities 782,900 1,993,500 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,175,700) (2,060,900) Change in intangible assets (7,300) (2,000) ---------- ---------- Net cash from investing activities (1,183,000) (2,062,900) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (378,000) (378,000) ---------- ---------- Net decrease in cash (778,100) (447,400) CASH, beginning of year 1,861,600 2,309,000 ---------- ---------- CASH, end of year $1,083,500 $1,861,600 ========== ==========
See accompanying notes to financial statements. F-6 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Enstar Income Program II-1, L.P., a Georgia limited partnership (the "Partnership"), owns and operates cable television systems in small to medium sized communities in Illinois. The financial statements do not give effect to any assets that the partners may have outside of their interest in the Partnership, nor to any obligations of the partners, including income taxes. Property, Plant and Equipment Property, plant and equipment are reported at cost. Direct costs associated with installations in homes not previously served by cable are capitalized as part of the cable distribution system, and reconnects are expensed as incurred. For financial reporting, depreciation is computed using the straight-line method over the following estimated useful lives:
Cable distribution systems 5-15 years Vehicles 3 years Furniture and equipment 5-7 years Leasehold improvements Shorter of life of lease or useful life of asset
Franchise Cost Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. 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. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of up to 15 years. This period represents management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Partnership. Amortization expense related to franchises for the years ended December 31, 2001 and 2000 was $12,900 and $11,800, respectively. Long-Lived Assets The Partnership reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest is less than the carrying amount of the asset, the carrying amount of the asset is reduced to its estimated fair value and an impairment loss is recognized. Revenue Recognition Cable television revenues from basic and premium services are recognized when the related services are provided. Advertising revenues are recognized when commercials are broadcast. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 2001 and 2000, no installation revenues have been deferred, as direct selling costs have exceeded installation revenues. Local governmental authorities impose franchise fees on the Partnership ranging up to a federally mandated maximum of 5% of gross revenues. Such fees are collected on a monthly basis from the F-7 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 Partnership's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. Income Taxes As a partnership, Enstar Income Program II-1, 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. As of December 31, 2001 and 2000, the book basis of the Partnership's net assets exceeded its tax basis by approximately $2,683,700 and $2,187,300, respectively. The accompanying financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, differ from the financial statements prepared for tax purposes due to the different treatment of various items as specified in the Internal Revenue Code. The net effect of these accounting differences is that net income for the years ended December 31, 2001 and 2000, in the financial statements is $583,300 and $309,600 more than tax income of the Partnership for the same period, respectively, caused principally by timing differences in depreciation expense. Net Income per Unit of Limited Partnership Interest Net income has been allocated 99% to the Limited Partners and 1% to the General Partners. Net income per unit of limited partnership interest is based on the weighted average number of units outstanding during the year. The General Partners do not own units of partnership interest in the Partnership, but rather hold a participation interest in the income, losses and distributions of the Partnership. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications were made to prior year amounts to conform to current year presentation. (2) PARTNERSHIP MATTERS The Partnership was formed on July 3, 1984 by a partnership agreement, as amended (the "Partnership Agreement"), to acquire, construct, improve, develop and operate cable television systems. 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. The Partnership continued to raise capital until $7,500,000 (the maximum) was raised during 1985. On November 12, 1999, Charter Communications Holdings Company, LLC, an entity controlled by Charter Communications, Inc. ("Charter"), acquired both the Corporate General Partner, as well as Falcon Communications, L.P. ("Falcon"), the entity that provided management and certain other services to the Partnership. Charter is the nation's fourth largest cable operator, serving approximately seven million customers and files periodic reports with the Securities and Exchange Commission. Charter and its affiliates (principally CC VII Holdings, LLC, the successor-by-merger to Falcon) provide management and other services to the Partnership. Charter receives a management fee and reimbursement of expenses from the Corporate General Partner for managing the Partnership's cable television operations. See Item 11. F-8 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 "Executive Compensation," Item 13. "Certain Relationships and Related Transactions," and "Employees." The Corporate General Partner, Charter and affiliated companies are responsible for the management of the Partnership and its operations. The amended Partnership Agreement generally provides that cash distributions, all as defined, be allocated 1% to the General Partners and 99% to the Limited Partners until the Limited Partners have received aggregate cash distributions equal to their original capital contributions ("Capital Payback"). The Partnership Agreement also provides that all partnership profits, gains, operational losses and credits, all as defined, be allocated 1% to the General Partners and 99% to the Limited Partners until the Limited Partners have been allocated net profits equal to the amount of cash flow required for Capital Payback. After the Limited Partners have received cash flow equal to their initial investments, the General Partners will receive a 1% allocation of cash flow from sale or liquidation of a system until the Limited Partners have received an annual simple interest return of at least 18% of their initial investments less any distributions from previous system sales and cash distributions from operations. Thereafter, the respective allocations will be made 15% to the General Partners and 85% to the Limited Partners. Any losses from system sales or exchanges shall be allocated first to all partners having positive capital account balances (based on their respective capital accounts) until all such accounts are reduced to zero and thereafter to the Corporate General Partner. All allocations to individual Limited Partners will be based on their respective limited partnership ownership interests. Upon the disposition of substantially all of the Partnership's assets, gains shall be allocated first to the Limited Partners having negative capital account balances until their capital accounts are increased to zero, next equally among the General Partners until their capital accounts are increased to zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of the Partnership, any negative capital account balances remaining after all allocations and distributions are made must be funded by the respective partners. The Partnership Agreement limits the amount of debt the Partnership may incur. (3) PROPOSED SALE OF ASSETS On August 29, 2001, the Partnership entered into an asset purchase agreement providing for the sale of all of the Partnership's cable television systems to Charter Communications Entertainment I, LLC ("CCE-1"), an affiliate of the Corporate General Partner and an indirect subsidiary of Charter, for a total sale price of approximately $14,706,800 in cash ($2,258 per customer acquired) (the "Charter Sale"). The Charter Sale is part of a larger transaction in which the Partnership and five other affiliated partnerships (which, together with the Partnership are collectively referred to as the "Selling Partnerships") would sell all of their assets used in the operation of their respective Illinois cable television systems to CCE-1 and two of its affiliates (also referred to, with CCE-1, as the "Purchasers") for a total cash sale price of $63,000,000. The total sale price has been allocated among the Selling Partnerships based on the number of customers served by each of the Selling Partnerships' respective Illinois cable systems as of June 30, 2001. Each Selling Partnership will receive the same value per customer. Closing of the Charter Sale is subject to closing sale price adjustments, regulatory approvals, customary closing conditions and the approval by the limited partners of the five other affiliated Selling Partnerships of the sale of their respective Illinois cable systems. In addition, unless waived by the Purchasers, the limited partners of each of the Selling Partnerships must approve an amendment to their respective partnership agreement to allow the sale of assets to an affiliate of such partnership's general partner. The Purchasers are each indirect subsidiaries of the Corporate General Partner's ultimate parent company, Charter, and, therefore, are affiliates of the Partnership and each of the other Selling Partnerships. The Purchasers have indicated that they may waive the requirement of limited partner approval by all six Selling Partnerships. If the Purchasers do waive this requirement, then they might purchase the Illinois systems in more than one closing, and only with respect to those Selling Partnerships that have received the approval of their limited partners. Although it is presently expected that the sale of the Partnership's Illinois systems will be consummated in the second quarter of 2002, there is no assurance regarding completion of the transaction. The financial statements continue to be presented on a going concern F-9 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 basis. If the sale is approved in accordance with the terms of the purchase agreement, the Partnership will immediately change to a liquidation basis of accounting. The proposed Charter Sale resulted from a sale process actively pursued since 1999, when the Corporate General Partner sought purchasers for all of the cable television systems of the Selling Partnerships, as well as eight other, affiliated limited partnership cable operators of which the Corporate General Partner is also the general partner. This effort was undertaken primarily because, based on the Corporate General Partner's experience in the cable television industry, it was concluded that generally applicable market conditions and competitive factors were making (and would increasingly make) it extremely difficult for smaller operators of rural cable systems (such as the Partnership and the other affiliated Enstar partnerships) to effectively compete and be financially successful. This determination was based on the anticipated cost of electronics and additional equipment to enable the Partnership's systems to operate on a two-way basis with improved technical capacity, insufficiency of Partnership cash reserves and cash flows from operations to finance such expenditures, limited customer growth potential due to the Partnership's systems' rural location, and a general inability of a small cable system operator such as the Partnership to benefit from economies of scale and the ability to combine and integrate systems that large cable operators have. Although significant plant upgrades have been made to increase channel capacity and enhance the value of the Partnership's systems, the Corporate General Partner projected that if the Partnership made the comprehensive additional upgrades deemed necessary to enable enhanced and competitive services, particularly activation of two-way capability, the Partnership would not recoup the costs or regain its ability to operate profitably within the remaining term of its franchises, and as a result, making these upgrades would not be economically prudent. As a result of marketing efforts using an independent broker experienced in the sale of cable systems, the Partnership, together with certain affiliated partnerships for which the Corporate General partner also served as a general partner (collectively, the "Gans Selling Partnerships"), entered into a purchase and sale agreement, dated as of August 8, 2000, as amended as of September 29, 2000 (the "Gans Agreement"), with Multimedia Acquisition Corp., an affiliate of Gans Multimedia Partnership ("Gans"). The Gans Agreement provided for Gans to acquire the assets comprising the Partnership's system, as well as certain assets of the other Gans Selling Partnerships. Following a series of discussions and meetings, the Partnership and Gans determined that they were not able to agree on certain further amendments to the Gans Agreement required to satisfy conditions precedent to close the transactions. In light of these conditions and existing economic and financial market conditions, and their impact on Gans' inability to arrange financing in order to close the acquisitions, on April 18, 2001, the parties agreed to terminate the Gans Agreement. Following termination of the Gans Agreement, the broker once again attempted to market the various Illinois systems of the affiliated partnerships, including the Partnership's system. Following this second sale process, the Partnership entered into the asset purchase agreement for the Charter Sale. After paying its debts and obligations and paying or providing for the payment of the expenses of the Charter Sale, the Partnership will terminate and dissolve, and the General Partner will make one or more liquidating distributions to itself and the Unitholders of the Partnership's remaining assets, in accordance with the Partnership Agreement. Other expense of $28,800 and $39,200 for the years ended December 31, 2001 and 2000, respectively, represents legal and proxy costs associated with the proposed sales of the Partnership's assets. F-10 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following as of the dates presented:
December 31, ----------------------------- 2001 2000 ------------ ----------- Cable distribution systems $ 10,598,600 $ 9,487,600 Land and improvements 32,500 32,500 Vehicles, furniture and equipment 524,800 460,100 ------------ ----------- 11,155,900 9,980,200 Less: accumulated depreciation (4,721,900) (3,933,900) ------------ ----------- $ 6,434,000 $ 6,046,300 ============ ===========
Depreciation expense for the years ended December 31, 2001 and 2000 was $788,000 and $600,100, respectively. (5) COMMITMENTS AND CONTINGENCIES Litigation The Partnership is a party to lawsuits and claims that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits and claims will not have a material adverse effect on the Partnership's financial position or results of operations. Regulation in the Cable Television Industry The operation of a cable system is extensively regulated by the Federal Communications Commission (FCC), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The 1996 Telecommunications Act ("1996 Telecom Act") altered the regulatory structure governing the nation's communications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing local telephone companies to provide video programming in their own telephone service areas. The 1996 Telecom Act required the FCC to undertake a host of implementing rulemakings. Moreover, Congress and the FCC have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect the Partnership's operations. Insurance Insurance coverage is maintained for all of the cable television properties owned or managed by Charter to cover damage to cable distribution systems, customer connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties owned or managed by Charter, including those of the F-11 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 Partnership. All of the Partnership's customers are served by its system in Taylorville, 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 flow. The Partnership continues to maintain insurance coverage in amounts its management views as appropriate for all other property, liability, automobile, workers' compensation and other insurable risks. (6) EMPLOYEE BENEFIT PLAN The Partnership participates in a cash or deferred profit sharing plan (the "Profit Sharing Plan") sponsored by a subsidiary of the Corporate General Partner, which covers substantially all of its employees. The Profit Sharing Plan provides that each participant may elect to make a contribution in an amount up to 15% of the participant's annual compensation which otherwise would have been payable to the participant as salary. Effective January 1, 1999, the Profit Sharing Plan was amended, whereby the Partnership would make an employer contribution equal to 100% of the first 3% and 50% of the next 2% of the participants' contributions. Contributions of $0 and $6,900 were made during 2001 and 2000, respectively. (7) TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES The Partnership has a management and service agreement (the "Management Agreement") with Enstar Cable Corporation (the "Manager"), a wholly owned subsidiary of the Corporate General Partner, for a monthly management fee of 5% of revenues to the Manager, excluding revenues from the sale of cable television systems or franchises. Management fee expense approximated $158,700 and $162,400 for the years ended December 31, 2001 and 2000, respectively. Management fees are non-interest bearing. In addition to the monthly management fee, the Management Agreement also provides that the Partnership reimburse the Manager for direct expenses incurred on behalf of the Partnership and for the Partnership's allocable share of operational costs associated with services provided by the Manager. Additionally, Charter and its affiliates provide other management and operational services for the Partnership. These expenses are charged to the properties served based primarily on the Partnership's allocable share of operational costs associated with the services provided. The total amount charged to the Partnership for these services approximated $347,200 and $353,600 for the years ended December 31, 2001 and 2000, respectively. Substantially all programming services have been purchased through Charter. Charter charges the Partnership for these costs based on its costs. The Partnership recorded programming fee expense of $689,300 and $653,900 for the years ended December 31, 2001 and 2000, respectively. Programming fees are included in service costs in the accompany statements of operations. The Partnership provides cable television signals to certain cable systems in neighboring communities that are owned by other partnerships managed by the Manager. Such services are provided without fee. (8) NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", No. 142, "Goodwill and Other Intangible Assets" and No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and was adopted by the Partnership on July 1, 2001. Adoption of SFAS No. 141 did not have an impact on the financial statements of the Partnership. F-12 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 Under SFAS No. 142, goodwill and other indefinite lived intangible assets are no longer subject to amortization over their useful lives, rather, they are subject to at least annual assessments for impairment. Also, under SFAS No. 142, an intangible asset should be recognized if the benefit of the intangible asset is obtained through contractual or other legal rights or if the intangible asset can be sold, transferred, licensed, rented or exchanged. Such intangibles continue to be amortized over their useful lives. SFAS 142 was implemented by the Partnership on January 1, 2002. Management believes that adoption of SFAS No. 142 did not have a material impact on the financial statements of the Partnership. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was implemented by the Partnership on January 1, 2002. Management believes that adoption of SFAS No. 143 did not have a material impact on the financial statements of the Partnership. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 was implemented by the Partnership on January 1, 2002. The Partnership is currently in process of assessing the impact of adoption of SFAS No. 144. F-13 REPORT OF INDEPENDENT AUDITORS To the Partners of Enstar Income Program II-1, L.P. (a Georgia limited partnership): We have audited the accompanying statements of operations, partnership capital (deficit), and cash flows of Enstar Income Program II-1, L.P. (a Georgia limited partnership) for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Enstar Income Program II-1, L.P. for the year 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-14 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
REVENUES $3,200,400 ---------- OPERATING EXPENSES: Service costs 987,100 General and administrative expenses 359,700 General partner management fees and reimbursed expenses 495,700 Depreciation and amortization 472,400 ---------- 2,314,900 ---------- Operating income 885,500 ---------- OTHER INCOME (EXPENSE): Interest expense (19,400) Interest income 93,900 ---------- 74,500 ---------- Net income $ 960,000 ========== NET INCOME ALLOCATED TO GENERAL PARTNERS $ 9,600 ========== NET INCOME ALLOCATED TO LIMITED PARTNERS $ 950,400 ========== NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 31.75 ========== WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,936 ==========
See accompanying notes to financial statements. F-15 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENT OF PARTNERSHIP CAPITAL (DEFICIT) FOR THE YEAR ENDED DECEMBER 31, 1999
General Limited Partners Partners Total -------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), January 1, 1999 $(13,900) $6,016,400 $6,002,500 Distributions to partners (3,800) (374,200) (378,000) Net income for year 9,600 950,400 960,000 -------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), December 31, 1999 $ (8,100) $6,592,600 $6,584,500 ======== ========== ==========
See accompanying notes to financial statements. F-16 ENSTAR INCOME PROGRAM II-1, L.P. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 960,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 472,400 Increase (decrease) from changes in: Accounts receivable, prepaid expenses and other assets (51,500) Accounts payable and due to affiliates (41,200) ----------- Net cash provided by operating activities 1,339,700 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (627,900) Increase in intangible assets (15,500) ----------- Net cash used in investing activities (643,400) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (378,000) ----------- Net increase in cash 318,300 CASH, BEGINNING OF YEAR 1,990,700 ----------- CASH, END OF YEAR $2,309,000 ===========
See accompanying notes to financial statements. F-17 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1 - SUMMARY OF ACCOUNTING POLICIES FORM OF PRESENTATION Enstar Income Program II-1, L.P., a Georgia limited partnership (the "Partnership"), owns and operates cable television systems in rural areas of Illinois. 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. 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 distribution systems 5-15 years Vehicles 3 years Furniture and equipment 5-7 years Leasehold improvements Shorter of life of lease or useful life of asset
FRANCHISE COST 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. DEFERRED CHARGES 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 intangible assets to determine whether events or circumstances warrant revised estimates of useful lives. F-18 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 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 Program II-1, 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 exceeded its tax basis by $1,766,200. The accompanying financial statements, which are prepared in accordance with generally accepted accounting principles, differ from the financial statements prepared for tax purposes due to the different treatment of various items as specified in the Internal Revenue Code. The net effect of these accounting differences is that net income for 1999 in the financial statements is $468,400 more than tax income of the Partnership for the same period, caused principally by timing differences in 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 is based on the weighted average number of units outstanding during the year. The General Partners do not own units of partnership interest in the Partnership, but rather hold a participation interest in the income, losses and distributions of the Partnership. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 - PARTNERSHIP MATTERS The Partnership was formed in 1984 to acquire, construct, improve, develop and operate cable television systems. 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. The Partnership raised capital of $7,500,000 (the maximum) during 1985. F-19 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 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 Agreement generally provides that all partnership profits, gains, losses, credits, and cash distributions (all as defined) from operations or liquidation be allocated 1% to the General Partner and 99% to the Limited Partners until the Limited Partners have received distributions of cash flow from operations and/or cash flow from sales, refinancing, or liquidation of systems equal to their initial investment. After the Limited Partners have received cash flow equal to their initial investment, the General Partner will only receive a one percent allocation of cash flow from liquidating a system until the Limited Partners have received an annual simple interest return of at least 18% of their initial investment less any distributions from previous system liquidations. Thereafter, allocations will be made 15% to the General Partner and 85% to the Limited Partners. All allocations to individual Limited Partners will be based on their respective capital accounts. Upon dissolution of the Partnership, any negative capital account balances remaining after all allocations and distributions are made must be funded by the respective partners. Upon the disposition of substantially all of the Partnership's assets, gains shall be allocated first to the Limited Partners having negative capital account balances until their capital accounts are increased to zero, next equally among the General Partners until their capital accounts are increased to zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of the Partnership, any negative capital account balances remaining after all allocations and distributions are made must be funded by the respective partners. The Partnership Agreement limits the amount of debt the Partnership may incur. 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 financial statements do not reflect any adjustments that may result from the outcome of this uncertainty. 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 - COMMITMENTS AND CONTINGENCIES Pole rentals amounted to $7,100 in 1999. Rentals, other than pole rentals, charged to operations amounted to $7,100 in 1999. The Partnership is not individually committed under any lease F-20 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 agreement for building space. A wholly-owned subsidiary of the Corporate General Partner (the "Manager") provides management services to the Partnership and has signed lease agreements for regional office space for which the Partnership is charged its allocable portion. Other commitments include approximately $1.0 million at December 31, 1999, to begin an upgrade of the Partnership's Litchfield cable system. The Partnership expects to complete the project by the required deadline of January 1, 2001. 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 prices 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 prices 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 price 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 Customer 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 Customer connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties formerly owned or managed by FCLP through November 12, 1999, and currently managed by Charter. All of the Partnership's customers are served by its system in Taylorville, 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 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. All of the Partnership's basic customers reside in Illinois where the claim has been filed. F-21 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 5 - 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. Contributions of $1,300 were made during 1999. There were no contributions charged against operations for the Profit Sharing Plan in 1998. NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES The Partnership has a management and service agreement with the Manager for a monthly management fee of 5% of gross receipts, as defined, from the operations of the Partnership. Management fee expense was $160,000 during 1999. 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 2, 1999. Corporate office allocations and district office expenses are charged to the properties served based primarily on the respective percentage of basic customers or homes passed (dwelling units within a system) within the designated service areas. The total amount charged to the Partnership for these services was $335,700 during 1999. The Partnership also receives certain system operating management services from an affiliate of the Corporate General Partner in addition to the Manager, due to the fact that there are no such employees directly employed by the Partnership's cable systems. 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 $18,200 in 1999. 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 have 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 cost. The Partnership recorded programming fee expense of $780,800 in 1999. Programming fees are included in service costs in the statements of operations. The Partnership provides cable television signals to certain cable systems in neighboring communities which are owned by other partnerships managed by the Corporate General Partner. Such services are provided without fee. F-22 ENSTAR INCOME PROGRAM II-1, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the year ended December 31, 1999, cash paid for interest amounted to $19,400. F-23 EXHIBIT INDEX
Exhibit Number Description 2.1a Asset Purchase Agreement, dated August 29, 2001, by and between Charter Communications Entertainment I, LLC, Interlink Communications Partners, LLC, and Rifkin Acquisitions Partners, LLC and Enstar Income Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems Venture, and Enstar Cable of Macoupin County. (Incorporated by reference to the exhibits to the Current Report on Form 10-Q of Enstar Income Program IV-1, L.P., File No. 000-15705 for the quarter ended September 30, 2000.) 2.1b Letter of Amendment, dated September 10, 2001, by and between Charter Communications Entertainment I, LLC, Interlink communications Partners, LLC, and Rifkin Acquisitions Partners, LLC and Enstar Income Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems Venture, and Enstar Cable of Macoupin County. (Incorporated by reference to the exhibits to the Current Report on Form 10-Q of Enstar Income Program IV-1, L.P., File No. 000-15705 for the quarter ended September 30, 2000.) 2.1c Letter of Amendment, dated November 30, 2001, by and between Charter Communications Entertainment I, LLC, Interlink Communications Partners, LLC, and Rifkin Acquisitions Partners, LLC and Enstar Income Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD Systems Venture, and Enstar Cable of Macoupin County. (Incorporated by reference to Exhibit C to Enstar Income/Growth program Six-A, File No. 000-17687, Definitive Proxy Statement on Schedule 14A as filed on February 4, 2002). 2.2a Asset Purchase Agreement, dated August 8, 2000, by and among Multimedia Acquisition Corp., as Buyer, and Enstar Income Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IX, Ltd., Enstar XI, Ltd., Enstar IV/PBD Systems Venture, Enstar Cable of Cumberland Valley and Enstar Cable of Macoupin County, as Sellers. (Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 000-14508 dated December 31, 1999.) 2.2b Amendment dated September 29, 2000, of the Asset Purchase Agreement dated August 8, 2000, by and among Multimedia Acquisition Corp., as Buyer, and Enstar Income Program II-1, L.P., Enstar Income Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar Income/Growth Program Six-A, L.P., Enstar IX, Ltd., Enstar XI, Ltd., Enstar IV/PBD Systems Venture, Enstar Cable of Cumberland Valley and Enstar Cable of Macoupin County, as Sellers. (Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 000-14508 for the quarter ended June 30, 2000.) 3 Second Amended and Restated Agreement of Limited Partnership of Enstar Income Program II-1, L.P., dated as of August 1, 1988. (Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 000-14508 for the fiscal year ended December 31, 1988.) 10.1 Management Agreement between Enstar Income Program II-1 and Enstar Cable Corporation. (Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 000-14508 for the fiscal year ended December 31, 1986.) **10.2 Management Services Agreement between Enstar Cable Corporation and Falcon Communications, L.P. dated as of September 30, 1998. **10.3 Service agreement between Enstar Communications Corporation, Enstar Cable Corporation and Falcon Communications, L.P. dated as of September 30, 1998. **10.4 Consulting Agreement between Enstar Communications Corporation and Falcon Communications, L.P. dated as of September 30, 1998. 10.5a Agreement with Respect to Franchise Fees and Reimbursable Fees between Enstar Income Program II-1, L.P. and the City of Taylorville, IL. (Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 000-14508 for the quarter ended September 30, 1995.) **10.5b Franchise Agreement granting a non-exclusive community antenna television franchise for the City of Taylorville, IL. **10.6 Franchise Ordinance granting a non-exclusive community antenna television franchise for the City of Litchfield, IL. 21.1 Subsidiaries: None **99.1 Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X.
** Exhibits attached EX-10.2 3 y58746ex10-2.txt MANAGEMENT SERVICES AGREEMENT Exhibit 10.2 MANAGEMENT SERVICES AGREEMENT This Management ;services Agreement (the "Agreement") is made and entered into as of the 30th day of September, 1998, by and between ENSTAR CABLE CORPORATION, a Georgia corporation ("Cable"), and FALCON COMMUNICATIONS L.P., a California limited partnership ("NewFalcon"), with reference to the following facts: A. Cable manages various cable television systems (the "Systems") owned and operated by certain partnerships affiliated with Cable (the "Affiliated Partnerships") pursuant to a management agreement with each Affiliated Partnership (collectively, the "Management Agreements"). B. Cable previously had contracted with Falcon Holding Group, L.P. ("FHGLP") for the provision of certain managerial services to Cable pursuant to an Amended and Restated Management Services Agreement dated as of April 1, 1993 (the "1993 Management Services Agreement"). C. Pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement") among FHGLP, NewFalcon, FHGI, TCI Falcon Holdings, LLC ("TCI"), Belo Ventures, Inc. and the other Persons signatory thereto, FHGLP on the date hereof assigned the 1993 Management Services Agreement to NewFalcon with the consent of Cable. D. NewFalcon is familiar with the business of owning, operating and constructing cable television systems and employs senior financial, marketing, construction, engineering, and other personnel. E. Following the assignment of the 1993 Management Services Agreement, NewFalcon and Cable terminated the 1993 Management Services Agreement, and Cable desires to contract with NewFalcon to provide for certain managerial services. NOW, THEREFORE, it is agreed as follows: 1. Employment. Cable hereby retains NewFalcon and NewFalcon hereby agrees to provide certain managerial services on the terms described below. 2. Management Services. Where the same would not violate any franchise, license, contract, law or regulation applicable to the Systems or to NewFalcon, NewFalcon hereby agrees to perform the following services involved in the management, supervision and direction of the Systems now or hereafter managed by Cable: (a) The provision of financial, management and supervisory services as Cable deems necessary to enable Cable to perform all of its obligations under the Management Agreements; (b) The hiring and firing of personnel of Cable and maintaining overall supervision of the personnel of Cable required to maintain and operate the Systems; (c) The collection of all fees, charges or other compensation due to Cable; (d) The taking of all necessary actions to comply with the rules and regulations and orders of any federal, state, county or municipal authority having jurisdiction over Cable and/or over the Systems including, where necessary, the preparation of all reports and statements of account for filing with the Federal Communications Commission and the United States Copyright office; (e) The establishment of compensation levels for employees of Cable and/or employees of the Systems; (f) The maintenance of a comprehensive system of records, books and accounts; (g) The preparation of an annual budget with respect to operation of the Systems including, but not limited to, financial planning, establishment of rates and prices, advertising and promotional campaigns, renegotiation or negotiation of franchise, pole and programming and agreements, construction of new cable television plant and upgrading of existing cable television plant and budgeting and planning of capital expenditures; and (h) The provision of long range business and financial planning. 3. Personnel, Offices and Supplies. NewFalcon shall supply itself with suitable offices, equipment and management personnel (either employees or independent contractors) to enable it to provide the management services contemplated by this Agreement. 4. Compensation. Cable shall pay to NewFalcon, not later than the fifteenth day of each month, compensation for services provided. The amount of such compensation per month shall be equal to eighty percent (80%) of all management fees received by Cable with respect to the Management Agreements. 5. Expenses, NewFalcon shall be reimbursed for all of its reasonable expenses incurred in connection with the performance of its duties under this Agreement including: (i) the actual cost of goods, materials and services used for or by Cable and paid to third parties; (ii) the allocable cost of administrative services rendered by NewFalcon hereunder or the amount that Cable would be required to pay to unaffiliated parties for comparable administrative services in the same geographic location; and (iii) Cable's allocable share of costs associated with facilities - 2 - required to provide services under this Agreement, but not including depreciation or amortization. Cable shall reimburse NewFalcon for all such expenses upon presentation by NewFalcon from time to time, of an itemized account of such expenditures or costs. 6. Term. The term of this Agreement shall commence on the date first above written immediately following the assignment by NewFalcon of substantially all of its assets to Falcon Cable Communications, LLC pursuant to the Contribution Agreement, and shall continue with respect to the Partnership until the earlier of: (1) the dissolution of the Affiliated Partnerships; (2) the sale of all of the Systems owned or managed by Cable; (3) termination pursuant to Paragraph 7; (4) the liquidation of NewFalcon in accordance with the provisions of its partnership agreement; (5) the mutual agreement of the parties hereto or (6) the delivery of 180 days written notice by either party to the other party. 7. Events of Default. Each of the following events shall constitute a default by NewFalcon under this Agreement and shall entitle Cable to terminate this Agreement upon written notice to NewFalcon, without any further obligation or liability to NewFalcon (other than unpaid compensation and expenses). (a) The failure by NewFalcon to perform any material duty or obligation imposed under this Agreement, should such failure continue for thirty (30) days after written notice thereof to NewFalcon from Cable; (b) NewFalcon commences a voluntary case under the Federal Bankruptcy Code, or consents to (or fails to controvert in a timely manner) the commencement of an involuntary case against NewFalcon. (c) NewFalcon institutes proceedings for rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, or consents to (or fails to controvert in a timely manner) the institution of any such proceedings against NewFalcon; (d) NewFalcon is unable or admits in writing its inability to pay its debts generally as they come due, or makes an assignment for the benefit of creditors or enters into any arrangement for the adjustment or composition of debts or claims; (e) A court or government having jurisdiction in the premises enters a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of NewFalcon or of any substantial part of the property of NewFalcon, or for the winding-up or liquidation of the affairs of NewFalcon, and such decree or orders remain in force undischarged and unstayed for a period of thirty (30) days, or (ii) for the sequestration or attachment of any substantial part of the property of NewFalcon, without its unconditional return to the possession of NewFalcon, or its unconditional release from such sequestration or attachment, within thirty (30) days thereafter; - 3 - (f) A court having jurisdiction in the premises enters an order for relief in an involuntary case commenced against NewFalcon under the Federal Bankruptcy Code, and such order remains in force undischarged and unstayed for a period of thirty (30) days; (g) A court or government having jurisdiction in the premises enters a decree or order approving or acknowledging as properly filed or commenced against NewFalcon a petition or proceedings for liquidation, rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, and any such decree or order remains in force undischarged and unstayed for a period of thirty (30) days; or (h) NewFalcon takes any action for the purpose or with the effect of authorizing, acknowledging or confirming the taking or existence of any action or condition specified in paragraph (b), (c) or (d). 8. Insurance. Liability and Indemnification of Manager (a) NewFalcon shall not be liable to Cable for any damages, losses, expenses or liabilities arising from any act, or omission to act, under the terms of this Agreement, except where said act, or omission to act, was done or occasioned by fraud, willful misconduct or gross negligence. (b) NewFalcon shall be entitled to recover any damages, losses, expenses or liabilities incurred by it with respect to third persons as a result of any act, or omission to act, believed by it in good faith within the scope of authority conferred upon it by this Agreement, except when said act, or omission to act, was done by fraud, willful misconduct, gross negligence or breach of fiduciary duty. 9. Notices. All notices, demands, and requests required or permitted to be given under the provisions of this Agreement (a) shall be in writing, (b) may be sent by telecopy (with automatic machine confirmation), delivered by personal delivery, or sent by commercial delivery service or certified mail, return receipt requested, (c) shall be deemed to have been given on the date of actual receipt, which may be conclusively evidenced by the date set forth in the records of any commercial delivery service or on the return receipt, and (d) shall be addressed to the recipient at the address specified below, with respect to any party, to any other address that such party may from time to time designate in a writing delivered in accordance with this Section 9. - 4 - If to Cable: Enstar Cable Corporation 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 If to NewFalcon: Falcon Communications, L.P. 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 10. Assignment. This Agreement may not be voluntarily assigned by any party hereto without the prior written consent of the other party, except that NewFalcon can enter into agreements with affiliates pursuant to which such affiliates will provide certain of the services to be provided by NewFalcon to Cable and NewFalcon can assign its rights and obligations under this Agreement to any entity which acquires substantially all of the assets of NewFalcon. NewFalcon shall advise Cable of any assignment of its rights and obligations under thus Agreement, or any agreement with any affiliate as aforesaid within five (5) business days thereof. 11. Other Agreements Notwithstanding any other provision of this Agreement, this Agreement shall not modify or affect the obligations of Cable pursuant to any management agreement of Cable with respect to any System or the limitations upon amounts or rates which may be charged by Cable for its services with respect to any such System. 12. Successors and Assigns. Subject to Paragraph 10, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. 13. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the provision of management services to Cable and supersedes all prior agreements among the parties hereto and FHGI and FHGLP with respect to the subject matter hereof, including the 1988 Management Services Agreement. This Agreement may not be modified or amended except by a writing signed by the parties hereto. 14. Governing Law. This Agreement shall be governed, construed, and enforced in accordance with the laws of the State of California. [THIS SPACE INTENTIONALLY LEFT BLANK] - 5 - IN WITNESS WHEREOF, the parties have executed this Management Services Agreement as of the date first above written. FALCON COMMUNICATIONS, L.P., a California limited partnership By: Falcon Holding Group, L.P., its managing General Partner By: Falcon Holding Group, Inc., its General Partner By: /s/ Stanley S. Itskowitch -------------------------------------- Stanley S. Itskowitch Executive Vice President ENSTAR CABLE CORPORATION, a Georgia corporation By: /s/ Stanley S. Itskowitch -------------------------------------- Stanley S. Itskowitch Executive Vice President EX-10.3 4 y58746ex10-3.txt SERVICE AGREEMENT EXHIBIT 10.3 SERVICES AGREEMENT This Services Agreement (the "Agreement") is made and entered into as of the 30th day of September, 1998, by and among Falcon Communications, L.P. ("NewFalcon"), Enstar Communications Corporation ("Enstar") and Enstar Cable Corporation ("Enstar Cable"). ENSTAR and Enstar Cable are collectively referred to as the "Enstar Group". A. NewFalcon is in the business of operating cable television systems and is a party to various agreements with third parties with respect to cable television programming, billing and other products and services. B. Enstar manages various cable television systems (the "Systems") owned and operated by certain partnerships of which Enstar is the general partner (the "Affiliated Partnerships"). C. The Enstar Group previously had contracted with Falcon Holding Group, Inc. ("FHGI") for the provision of certain services to the Enstar Group pursuant to a Services Agreement dated as of October 1, 1988 (the "1988 Services Agreement"). D. With the consent of the Enstar Group, FHGI previously assigned the 1988 Services Agreement and its rights and obligations thereunder to Falcon Holding Group, L.P. ("FHGLP") on March 29, 1993. E. Pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement") among FHGLP, NewFalcon, FHGI, TCI Falcon Holdings LLC ("TCI"), Belo Ventures, Inc. and the other Persons signatory thereto, FHGLP on the date hereof assigned the 1988 Services Agreement to NewFalcon with the consent of the Enstar Group. F. Following the assignment of the 1988 Services Agreement, NewFalcon and the Enstar Group terminated the 1988 Services Agreement, and NewFalcon desires to make available to the Enstar Group and to the Affiliated Partnerships, certain third parties' services and products as agreed to by NewFalcon and the Enstar Group, including without limitation, programming services and cable billing services. NOW, THEREFORE, it is agreed as follows: 1. Programming Services. Where the same would not violate any franchise, license, contract, law or regulation applicable to the System or to NewFalcon, NewFalcon hereby agrees to make available to the Enstar Group such programming services which are utilized by the Enstar Group or any Affiliated Partnership and for which NewFalcon has entered into or enters into a master contract with such programming suppliers. The Enstar Group shall pay to NewFalcon for each programming service utilized by the Enstar Group an amount per subscriber per month equal to such amount that the Enstar Group would be required to pay as if they contracted directly with such programming supplier and the number of subscribers covered by such contract was equal to the number of subscribers to cable systems which are owned directly or managed by the Enstar Group. The amount of any such programming charges shall be determined in good faith by NewFalcon. The Enstar Group shall pay to NewFalcon such amounts per subscriber per month on a monthly basis unless otherwise agreed to by the parties. 2. Billing Services. Where the same would not violate any franchise, license, contract, law or regulation applicable to the Systems or to NewFalcon, NewFalcon will make available to the Enstar Group third party billing services for its cable system operations and the Enstar Group shall pay to NewFalcon a monthly amount for such services utilized by the Enstar Group equal to the amount they would have paid for such billing services if they had contracted for such billing services directly with a third party and the only cable systems covered by such contract were the systems owned or managed by the Enstar Group. 3. Other Services. Where the same would not violate any franchise, license, contract, law or regulation applicable to the Systems or to NewFalcon, NewFalcon will make available such other third party services to the Enstar Group, as from time to time agreed to by the parties, and the Enstar Group shall pay NewFalcon an amount for such services identical to the amount that the Enstar Group would have paid for such services as if they had directly contracted with a third party. 4. Term. The term of this Agreement shall commence upon the date first above written immediately following the assignment by NewFalcon of substantially all of its assets to Falcon Cable Communications, LLC pursuant to the Contribution Agreement, and shall continue until the earlier of: (1) the dissolution of the Affiliated Partnerships; (2) the sale of all of the Systems owned or managed by Enstar; (3) termination pursuant to Paragraph 5; (4) the liquidation of NewFalcon in accordance with the provisions of its partnership agreement; (5) the mutual agreement of the parties hereto; or (6) the delivery of 180 days written notice by the Enstar Group to NewFalcon or NewFalcon to the Enstar Group. 5. Events of Default. Each of the following events shall constitute a default by NewFalcon under this Agreement and shall entitle Enstar to terminate this Agreement upon written notice to NewFalcon, without any further obligation or liability to NewFalcon (other than unpaid compensation and expenses). (a) The failure by NewFalcon to perform any material duty or obligation imposed under this Agreement, should such failure continue for thirty (30) days after written notice thereof to NewFalcon from Enstar; (b) NewFalcon commences a voluntary case under the Federal Bankruptcy Code, or consents to (or fails to controvert in a timely manner) the commencement of an involuntary case against NewFalcon. - 2 - (c) NewFalcon institutes proceedings for rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, or consents to (or fails to controvert in a timely manner) the institution of any such proceedings against NewFalcon; (d) NewFalcon is unable or admits in writing its inability to pay its debts generally as they come due, or makes an assignment for the benefit of creditors or enters into any arrangement for the adjustment or composition of debts or claims; (e) A court or government having jurisdiction in the premises enters a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of NewFalcon or of any substantial part of the property of NewFalcon, or for the winding-up or liquidation of the affairs of NewFalcon, and such decree or orders remain in force undischarged and unstayed for a period of thirty (30) days, or (ii) for the sequestration or attachment of any substantial part of the property of NewFalcon, without its unconditional return to the possession of NewFalcon, or its unconditional release from such sequestration or attachment, within thirty (30) days thereafter; (f) A court having jurisdiction in the premises enters an order for relief in an involuntary case commenced against NewFalcon under the Federal Bankruptcy Code, and such order remains in force undischarged and unstayed for a period of thirty (30) days; (g) A court or government having jurisdiction in the premises enters a decree or order approving or acknowledging as properly filed or commenced against NewFalcon a petition or proceedings for liquidation, rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, and any such decree or order remains in force undischarged and unstayed for a period of thirty (30) days; or (h) NewFalcon takes any action for the purpose or with the effect of authorizing, acknowledging or confirming the taking or existence of any action or condition specified in paragraph (b), (c) or (d). 6. Prohibition of Assignment. This Agreement may not be voluntarily assigned by any party hereto without the prior written consent of the other party, except that NewFalcon can enter into agreements with affiliates pursuant to which such affiliates will provide certain of the services to be provided by NewFalcon hereunder. No assignment, and no such agreement with any affiliate, however, shall relieve NewFalcon of any of its obligations or liabilities under this Agreement. NewFalcon shall advise the Enstar Group of any assignment of its rights and obligations under this Agreement, or any agreement with any affiliate as aforesaid within five business days thereof. - 3 - 7. Successors and Assigns. Subject to Paragraph 6, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. 8. Other Agreements. Notwithstanding any other provision of this Agreement, this Agreement shall not modify or affect the obligations of the Enstar Group pursuant to any partnership agreement or management agreement or the limitations imposed upon amounts or rates that may be charged by any of them to a partnership, under a partnership agreement or management agreement. 9. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the provision of such services to the Enstar Group and the Affiliate Partnerships and supersedes all prior agreements among the parties hereto and FHGI and FHGLP with respect to the subject matter hereof, including the 1988 Services Agreement. This Agreement may not be modified or amended except by a writing signed by the parties hereto. 10. Governing Law. This Agreement shall be governed, construed, and enforced in accordance with the laws of the State of California. 11. Time. Time shall be of the essence with respect to this Agreement. 12. Notice. All notices, demands, and requests required or permitted to be given under the provisions of this Agreement (a) shall be in writing, (b) may be sent by telecopy (with automatic machine confirmation), delivered by personal delivery, or sent by commercial delivery service or certified mail, return receipt requested, (c) shall be deemed to have been given on the date of actual receipt, which may be conclusively evidenced by the date set forth in the records of any commercial delivery service or on the return receipt, and (d) shall be addressed to the recipient at the address specified below, with respect to any party, to any other address that such party may from time to time designate in a writing delivered in accordance with this Section 12. If to the Enstar Group: Enstar Communications Corporation 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 - 4 - If to NewFalcon: Falcon Communications, L. P. 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 [THIS SPACE INTENTIONALLY LEFT BLANK] - 5 - IN WITNESS WHEREOF, the parties have executed this Services Agreement as of the date first above written. FALCON COMMUNICATIONS, L.P., a California limited partnership By: Falcon Holding Group, L.P., its managing General Partner By: Falcon Holding Group, Inc., its sole General Partner By: /s/ STANLEY S. ITSKOWITCH -------------------------------------- Stanley S. Itskowitch Executive Vice President ENSTAR COMMUNICATIONS CORPORATION, a Georgia corporation By: /s/ STANLEY S. ITSKOWITCH -------------------------------------- Stanley S. Itskowitch Executive Vice President ENSTAR CABLE CORPORATION, a Georgia corporation By: /s/ STANLEY S. ITSKOWITCH -------------------------------------- Stanley S. Itskowitch Executive Vice President - 6 - EX-10.4 5 y58746ex10-4.txt CONSULTING AGREEMENT Exhibit 10.4 CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into as of the 30th day of September, 1998, by and between Falcon Communications, L.P., a California limited partnership ("NewFalcon") and Enstar Communications Corporation, a Georgia corporation ("Enstar") with reference to the following facts: A. Enstar manages various cable television systems (the "Systems") owned and operated by certain partnerships of which Enstar serves as a general partner B. Enstar previously had contracted with Falcon Holding Group, Inc. ("FHGI") for the provision of certain consulting services to Enstar pursuant to a Consulting Agreement dated as of October 1, 1988 (the "1988 Consulting Agreement"). C. With the consent of Enstar, FHGI previously assigned the 1988 Consulting Agreement and its rights and obligations thereunder to Falcon Holding Group, L.P. ("FHGLP") on March 29, 1993. D. Pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement") among FHGLP, NewFalcon, FHGI, TCI Falcon Holdings, LLC ("TCI"), Belo Ventures, Inc. and the other Persons signatory thereto, FHGLP on the date hereof assigned the 1988 Consulting Agreement to NewFalcon with the consent of Enstar. E. NewFalcon is familiar with the business of owning, operating and constructing cable television systems and employs senior financial, marketing, construction, engineering, and other personnel. F. Following the assignment of the 1988 Consulting Agreement, NewFalcon and Enstar terminated the 1988 Consulting Agreement, and Enstar desires to contract with NewFalcon to provide for certain financial, construction, syndication, acquisition, and other non-operational services with respect to the Systems. NOW, THEREFORE, it is agreed as follows: 1. Consultant. Enstar hereby retains NewFalcon and NewFalcon hereby agrees to provide certain consulting services on the terms described below. 2. Consultant Services. Where the same would not violate any franchise, license, contract, law or regulation applicable to the Systems or to NewFalcon, NewFalcon hereby agrees to perform the following services in connection with certain construction, financing and non-operational activities of Enstar: (a) to assist in the placement of all bank and institutional debt and other financial arrangements necessary for the operation, construction, syndication and/or acquisition of any of the Systems; (b) to assist in the supervision and scheduling any construction or improvement of any of the Systems; (c) to assist in the structuring of any private or public offering or syndication of any new partnership in which Enstar will serve as the general partner; (d) to assist in the acquisitions of any additional Systems in all areas of the United States; and (e) to assist in any other non-operational agreements or projects with respect to Enstar's business as may be agreed to by the parties. 3. NewFalcon's Fees. NewFalcon shall be paid for its services hereunder an amount equal to its cost of providing such services. NewFalcon's costs shall include, without limitation, an allocable share of the compensation paid to NewFalcon personnel who are involved in the provision of services to Enstar, an allocable share of the costs of any accounting, statistical or other services required by NewFalcon to perform its obligations hereunder and an allocable share of costs incurred by NewFalcon in maintaining the office of NewFalcon, including, but not limited to, its rent, capital expenditures, utilities and other overhead costs. In general, NewFalcon shall provide Enstar with a monthly invoice with respect to its services performed for each month. 4. Term. The term of this Agreement shall commence upon the date first above written immediately following the assignment by NewFalcon of substantially all of its assets to Falcon Cable Communications, LLC pursuant to the Contribution Agreement, and shall continue until the earlier of: (1) the dissolution of the cable partnerships managed by Enstar; (2) the sale of all of the Systems owned or managed by Enstar; (3) termination pursuant to Paragraph 5; (4) the liquidation of NewFalcon in accordance with the provisions of its partnership agreement; (5) the mutual agreement of the parties hereto; or (6) the delivery of 180 days written notice by either party to the other party. 5. Events of Default. Each of the following events shall constitute a default by NewFalcon under this Agreement and shall entitle Enstar to terminate this Agreement upon written notice to NewFalcon, without any further obligation or liability to NewFalcon (other than unpaid compensation and expenses). (a) The failure by NewFalcon to perform any material duty or obligation imposed under this Agreement, should such failure continue for thirty (30) days after written notice thereof to NewFalcon from Enstar; - 2 - (b) NewFalcon commences a voluntary case under the Federal Bankruptcy Code, or consents to (or fails to controvert in a timely manner) the commencement of an involuntary case against NewFalcon. (c) NewFalcon institutes proceedings for rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, or consents to (or fails to controvert in a timely manner) the institution of any such proceedings against NewFalcon; (d) NewFalcon is unable or admits in writing its inability to pay its debts generally as they come due, or makes an assignment for the benefit of creditors or enters into any arrangement for the adjustment or composition of debts or claims; (e) A court or government having jurisdiction in the premises enters a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of NewFalcon or of any substantial part of the property of NewFalcon, or for the winding-up or liquidation of the affairs of NewFalcon, and such decree or orders remain in force undischarged and unstayed for a period of thirty (30) days, or (ii) for the sequestration or attachment of any substantial part of the property of NewFalcon, without its unconditional return to the possession of NewFalcon, or its unconditional release from such sequestration or attachment, within thirty (30) days thereafter; (f) A court having jurisdiction in the premises enters an order for relief in an involuntary case commenced against NewFalcon under the Federal Bankruptcy Code, and such order remains in force undischarged and unstayed for a period of thirty (30) days; (g) A court or government having jurisdiction in the premises enters a decree or order approving or acknowledging as properly filed or commenced against NewFalcon a petition or proceedings for liquidation, rehabilitation, readjustment or composition (or for any related or similar purpose) under any law (other than the Federal Bankruptcy Code) relating to financially distressed debtors, their creditors or property, and any such decree or order remains in force undischarged and unstayed for a period of thirty (30) days; or (h) NewFalcon takes any action for the purpose or with the effect of authorizing, acknowledging or confirming the taking or existence of any action or condition specified in paragraph (b), (c) or (d). 6. Prohibition of Assignment. This Agreement may not be voluntarily assigned by any party hereto without the prior written consent of the other party, except that NewFalcon can enter into agreements with affiliates pursuant to which such affiliates will provide certain of the services to he provided by NewFalcon to Enstar in consideration of the payment of NewFalcon to such affiliate of a portion of the payments referred to in Paragraph 4. No assignment, and no such agreement with any affiliate, however, shall relieve NewFalcon of - 3 - any of its obligations or liabilities under this Agreement. NewFalcon shall advise Enstar of any assignment of its rights and obligations under this Agreement, or any agreement with any affiliate as aforesaid within five business days thereof. 7. Successors and Assigns. Subject to Paragraph 6, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. 8. Other Agreements. Notwithstanding any other provision of this Agreement, this Agreement shall not modify or affect the obligations of Enstar pursuant to any partnership agreement with respect to the Systems or the limitations upon amounts or rates which may be charged by Enstar to any such System. 9. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the provision of consulting services to Enstar and supersedes all prior agreements among the parties hereto and FHGI and FHGLP with respect to the subject matter hereof, including the 1988 Consulting Agreement. This Agreement may not be modified or amended except by a writing signed by the parties hereto. 10. Governing Law. This Agreement shall be governed, construed, and enforced in accordance with the laws of the State of California. 11. Time. Time shall be of the essence with respect to this Agreement. 12. Notice. All notices, demands, and requests required or permitted to be given under the provisions of this Agreement (a) shall be in writing, (b) may be sent by telecopy (with automatic machine confirmation), delivered by personal delivery, or sent by commercial delivery service or certified mail, return receipt requested, (c) shall be deemed to have been given on the date of actual receipt, which may be conclusively evidenced by the date set forth in the records of any commercial delivery service or on the return receipt, and (d) shall be addressed to the recipient at the address specified below, with respect to any party, to any other address that such party may from time to time designate in a writing delivered in accordance with this Section 12. - 4 - If to Enstar: Enstar Communications Corporation 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 If to NewFalcon: Falcon Communications, L.P. 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 [THIS SPACE INTENTIONALLY LEFT BLANK] - 5 - IN WITNESS WHEREOF, the parties have executed this Consulting Agreement as of the date first above written. FALCON COMMUNICATIONS, L.P., a California limited partnership By: Falcon Holding Group, L.P., its managing General Partner By: Falcon Holding Group, Inc., its sole General Partner By: /s/ Stanley S. Itskowitch -------------------------------------- Stanley S. Itskowitch Executive Vice President ENSTAR COMMUNICATIONS CORPORATION, a Georgia corporation By: /s/ Stanley S. Itskowitch -------------------------------------- Stanley S. Itskowitch Executive Vice President - 6 - EX-10.5.B 6 y58746ex10-5_b.txt FRANCHISE AGREEMENT EXHIBIT 10.5b FRANCHISE AGREEMENT THIS AGREEMENT, effective this 1st day of January, 1995, is between the City of Taylorville, Illinois ("City") and ENSTAR COMMUNICATIONS CORPORATION and ENSTAR INCOME PROGRAM II-2 L.P., ("Enstar"). WHEREAS, the City Council, at its meeting held on June 5, 1995 agreed to renew Enstar's franchise pursuant to the terms reflected in this instrument to which Enstar has agreed. NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein, it is agreed as follows: SECTION 1. SHORT TITLE. This Agreement may be referred to and cited as the "Enstar Franchise Agreement." SECTION 2. DEFINITIONS. Except as provided below, the terms, phrases, words, and their derivations used in this Agreement shall have the meaning given in the City's Cable Ordinance: "Application" means seeking an extension of its franchise, its subsequent renewal proposals, the public hearings held relevant to the proposed renewal, and all related correspondence. "Cable Ordinance" means City Ordinance No. 2544 which governs the operation of a cable system under this Agreement. "Grantee" or "Franchisee" means Enstar or its lawful successor, transferee or assignee. SECTION 3. GRANT OF AUTHORITY. (a) There is hereby granted by the City to the Grantee the right and privilege to construct, operate, maintain and extend a cable system to all places within the City. The rights granted 1 hereunder shall be non-exclusive and shall not be transferred or assigned without the prior approval of the City as specified in the Cable Ordinance, which approval shall not be unreasonably withheld. (b) The Grantee shall have the right to use and occupy roads, streets, alleys, public ways and easements for the purposes of installing its wires, cables, and associated equipment in or on poles, by direct burial, or in underground conduits as necessary for the operation of the cable system. This authority, however, does not obviate the need for obtaining permits from the City for construction involving the disturbance of public streets, sidewalks or thoroughfares and for compliance with all City regulations and requirements relative to construction and operation of facilities in the public rights-of-way. SECTION 4. COMPLIANCE WITH APPLICABLE LAWS AND ORDINANCES. The Franchisee shall, at all times during the life of this Agreement, be subject to all lawful exercise of the police power by the City consistent with the Franchisee's contractual rights and to such reasonable regulation as the City shall hereafter provide, and shall be required to comply fully with all federal and state statutes and regulations governing cable communications. The authority granted under this Agreement is subject to the City's Cable Ordinance. By its acceptance of the terms of this Agreement, the Grantee specifically agrees to also accept and abide by the requirements of said Cable Ordinance, which requirements are incorporated hereby by reference, and all subsequent amendments of the Cable Ordinance provided that such amendments do not abrogate 2 any contractual rights of the Grantee contained herein. SECTION 5. PROVISION OF SERVICE. (a) 1. Consistent with the requirements of the Cable Ordinance, upon request the Franchisee shall extend cable service to all residents within the City limits as determined as of July 1, 1995. 2. The Franchisee and the City agree that as of the date of this Agreement certain residents of the City do not have cable service available. The Franchisee agrees to identify such areas not served and to provide cable service to all locations within the City limits on or before January 1, 1996. (b) The Franchisee shall extend service to each school and City building passed by the cable system. No charge shall be made for installation or for basic service, except the Franchisee may: 1.) charge for its cost of installation if more than one connection is desired at each building; or 2.) charge for that portion of the cost of installation which exceeds One Hundred Dollars ($100.00). If during the term of this Agreement, new schools or other public buildings are constructed within the City, the City may also require the extension of service to such schools under the same terms and conditions as for existing public buildings. (c) The initial subscriber rates are to be as specified in Exhibit "A" hereto. Subscriber rates may be later modified as provided for by federal law or regulation, and as further procedurally defined by the Cable Ordinance. (d) Regular basic service shall consist of a minimum of 12 3 channels. The Franchisee shall create and provide such other categories of service as it may deem necessary, except that the total number of channels available in all categories of service shall not be less than 35 channels. The programming carried shall be determined by the Franchisee; provided, however, the City may suggest changes from time-to-time that it believes will better satisfy public needs in terms of broad categories of programming. (e) At intervals of no less than once a year, the Franchisee shall provide to the City and all of its subscribers the currently applicable subscriber information specified in Section 15(c) of the Cable Ordinance, excepting a copy of the service contract. SECTION 6. LIABILITY AND INDEMNIFICATION. (a) By its acceptance of this Agreement, the Grantee specifically agrees that it will indemnify and hold the City, including all its officials, employees and agents, harmless against any and all claims arising out of the grant of this franchise and the operation of Grantee's cable system. The Grantee shall pay all expenses incurred by the City in defending itself against all such claims, including all out-of-pocket expenses such as attorney and consultant fees, and the reasonable value of any service rendered by the City Attorney or any employees of the City. (b) The Grantee shall maintain throughout the terms of this Agreement comprehensive liability insurance insuring the City, including its officials, employees and agents, and the Grantee with regard to all damages with respect to operations performed by, or on behalf of, the Grantee in the minimum amounts specified in the 4 Cable Ordinance. (c) In lieu of the twenty five thousand dollars ($25,000) security fund required by Section 11 of the Cable Ordinance, the Grantee may, on or before the effective date of this Agreement, establish a security fund in the amount of five thousand dollars ($5,000) and a performance bond in the amount of twenty thousand dollars ($20,000),which shall be used for insuring that the Grantee will fulfill and perform each term and condition of this Agreement and the Cable Ordinance. In case of any breach of a condition hereof, the amount of damages shall be withdrawn by the City from the security deposit and then against any performance bond. Following the procedures prescribed in the Cable Ordinance, the Franchisee shall replenish any amounts withdrawn from the security fund and any applicable performance bond. (d) Because the City will suffer damages from any violation of this Agreement, which damages may be difficult to quantify, the City and the Franchisee agree to the following schedule of liquidated damages: (1) Failure to file reports or supply information as required - $50 per day (2) Failure to perform annual sweep and balance tests -$100 per day. (3) Failure to perform maintenance and retain maintenance records as required - $100 per day. (4) Failure to maintain insurance or replenish security fund/performance as required - $100 per day. 5 (5) Failure to achieve or maintain technical performance standards - $100 per day. (6) Failure to maintain customer service standards - $50 per day. (7) Other material violations - $100 per day violations per day that each violation continues. Before assessing the Franchisee for liquidated damages, the City shall give written notification to the Franchisee in advance so that the Franchisee will have notice of the violation and an opportunity to correct it. The liquidated damages shall not commence accruing for uncorrected violations until the 30th day following the date the notice was received by the Franchisee. A violation will not constitute a breach of the Agreement nor shall liquidated damages accrue where it occurs as a result of acts of God, acts of Federal or City Government which renders performance impossible. (e) All insurance and bond instruments must be approved as to form by the City Attorney prior to their effectiveness. SECTION 7. TECHNICAL REQUIREMENTS. The Grantee shall maintain and extend its system so as to provide high quality signals and reliable service consistent with the proposal contained in its Application. The system shall meet or exceed any applicable technical performance standards of the FCC and the Cable Ordinance. SECTION 8. EMERGENCY USE OF FACILITIES. In the case of any emergency or disaster, the Grantee shall, upon request of the City, make available its facilities to the City for emergency use during the emergency or disaster period. 6 SECTION 9. OTHER BUSINESS LICENSES. This Agreement authorizes only the operation of a cable system as provided for herein, and does not take the place of any other franchise, license, or permit which might be required of the Grantee by law. SECTION 10. DURATION AND ACCEPTANCE OF AGREEMENT. This Agreement and the rights, privileges, and authority hereby granted shall take effect and be in force from the effective date of this Agreement and shall continue in force throughout its term provided that within sixty (60) days after the date of adoption of this Agreement by the City Council the Grantee shall provide evidence of satisfactory compliance with the security fund/performance bond and insurance requirements hereof, notwithstanding any contrary provision of the Cable Ordinance. Failure of the Grantee to do so within said time period shall operate to make this Agreement null and void without further action by the City. SECTION 11. FRANCHISE FEE. As compensation to the City for the use made of its roads, streets, and public thoroughfares, the Franchisee shall pay to the City a franchise fee at the maximum allowable rate provided by law payable as specified in the Cable ordinance. The maximum allowable rate payable shall be determined as of January 1, 1995 and annually on September 1st of each year. In the event of a change in the rate percentum to be paid, such charge shall become effective on the succeeding January 1st. SECTION 12. CUSTOMER SERVICE. The Franchisee shall provide customer service consistent with its Application and the provisions of the Cable Ordinance. 7 SECTION 13. SYSTEM MAINTENANCE. (a) The Franchisee shall maintain the system at the highest commercially practical level of technical quality. To that end, it shall perform, at a minimum, all tests required to be performed by a Cable Operator pursuant to FCC regulations in effect on the effective date of this franchise. (b) The Franchisee shall retain a copy of all maintenance logs and records for a period of two years. Upon request of the City, the Franchisee shall provide copies of such documentation to the City. (c) No less than once a year the Franchisee shall perform a sweep and balance of the system activities to ensure that the entire system is performing as required. SECTION 14. CONFLICTS. (a) In the event of a conflict between this Agreement and the Cable Ordinance, the Cable Ordinance shall prevail unless said Ordinance provides for an exception in the Franchise Agreement or unless this Agreement explicitly modifies or waives a provision of the Ordinance. (b) Section 14(a)(2) is hereby modified to require submission of financial statements based upon the method set forth herein. (1) Annually, the Franchisee shall file with the City Clerk within three (3) months of the end of its Fiscal Year a financial statement disclosing the income and expenses of the 8 operations undertaken pursuant to this Agreement. (2) Such financial statement shall be prepared by the Chief Financial Officer of the Franchisee and shall be sworn by him to be true, correct and complete to the best of his personal knowledge. (3) Such financial statement shall be prepared as the basis of the Enstar Income Program II-2, Hillsboro Region, or its successor (the "Region"). (4) Such Financial Statement shall be calculated by multiplying the results of operations for said Region by a fraction, the numerator of which is the number of subscribers in the Franchisee Territory as of the last day of the Fiscal Year reported and the denominator of which is the number of basic subscribers for the Region. (5) In the event that the Franchisee commences accounting for individual systems within the Region, such commencement shall be deemed to be a relinquishment of the relief granted in this subscription and the Franchisee shall notify the City of such commencement by the method set forth in Section 15 hereof. SECTION 15. NOTICES. All formal notices under this Agreement 9 shall be delivered by U.S. mail (certified or registered), or any courier service that verifies the date of delivery and shall be considered given upon the date of receipt. Notices sent to the City shall be addressed to the City Clerk with a copy to the City Attorney. Notices sent to the Franchisee shall be addressed to its local office to the attention of Regional Manager, Enstar Cable TV, 11 Clearing Avenue, P.O. Box 526, Taylorville, IL 62568 with a duplicate notice to the attention of Senior Vice President, Enstar Communications Corporation, 10900 Wilshire Blvd., Suite 1500, Los Angeles, CA 90024. SECTION 16. MISCELLANEOUS PROVISIONS. (a) Whenever this Agreement shall set forth any time for an act to be performed by or on behalf of the Franchisee, such time shall be deemed of the essence. (b) This Agreement may not be amended except by written instrument executed by both parties hereto. (c) This Agreement shall be interpreted under the laws of the State of Illinois. (d) If any provisions of this Agreement is found by any court, government agency or other body having jurisdiction to be invalid, illegal or unenforceable, the parties shall negotiate appropriate changes to such provision, and the remaining provisions, to the extent practical, shall remain in full force and effect. SECTION 17. TERM OF AGREEMENT. This Agreement shall take effect as of January 1, 1995, provided that such execution occurs on or before July 31, 1995, and one such executed copy is delivered 10 by Enstar to the City Clerk no later than 5:00 p.m., July 31, 1995. If not so executed and delivered in a timely manner, this Agreement shall be null and void. Once effective, this Agreement shall remain in effect until December 31, 2001, unless extended or renewed as provided for in Section 18 hereof. Provided, however, if the requirements of Sections 6(b) and (c) and 10 of this Agreement are not satisfied within sixty (60) days of the effective date, this Agreement shall become null and void. SECTION 18. RENEWAL AND EXTENSION OF FRANCHISE GRANTED HEREUNDER. (a) The franchise granted hereunder shall be extended for a term commencing at 12:00 a.m., January 1, 2002 and expiring at 11:59 p.m., December 31, 2009, upon substantial compliance by the Franchisee with the material terms and conditions set forth in this section. (b) In the event the Franchisee has requested a transfer of the franchise by the filing of an Application for Transfer of Franchise pursuant to Section 8 of the Cable Ordinance or by any other procedure which resulted in a transfer of the franchise pursuant to Section 34 of the Cable Ordinance, the right to extend the franchise set forth in subsection (a) above may be transferred to any transferee upon a majority vote of the City Council taken at a regular meeting. (c) In the event that the City Council has revoked or terminated the franchise pursuant to Section 35 of the Cable Ordinance, the extension of said franchise set forth in subsection 11 (a) above shall be null and void. (d) In the event the Franchisee is determined to have violated subsection (c) of Section 37 or Section 38 of the Cable Ordinance, the right to renew and extend said franchise set forth in subsection (a) above shall be null and void. (e) (1) The Franchisee shall seek such renewal and extension of the franchise by submitting a notice to the City Clerk requesting such extension not later than January 1, 2002. Said request shall include a sworn affidavit of an officer of the company indicating that the Franchisee has substantially complied with applicable federal law and the material provisions of Sections 10 through 19 of the Cable Ordinance; has made payment of any and all sums due to the City of Taylorville; and, the amount paid as liquidated damages as provided for in Section 6(d) provided herein. (2) Upon receipt of such notice by the City Clerk, the Mayor and City Council shall commence a Performance Evaluation as provided for in Section 33 of the Cable Ordinance for the purpose of determining substantial compliance with federal law and Sections 10 to 19 of the Cable Ordinance and substantial compliance with subsections (b) through (e) of Section 18 of this Agreement. (3) In the event that the City Council finds, as a result of said performance evaluation, that the Franchisee has substantially complied with said sections, the City Council 12 shall renew and extend the franchise of the Franchisee through and including December 31, 2009 provided, however, that to obtain such renewal, Franchisee must agree to pay to the City of Taylorville franchise fees at the maximum allowable rate imposed by law; to pay all of the costs incurred by the City of Taylorville, not to exceed Ten Thousand Dollars ($10,000) in conducting a performance evaluation provided for herein, and the execution of a substantially similar franchise agreement setting forth the duties and obligations of the parties. (4) In the event that the City Council finds, as a result of said performance evaluation, that the Franchisee has not substantially complied with the provisions of this Agreement and all provisions of the Cable Ordinance set forth therein, the extension of said franchise set forth in subsection (a) above shall be null and void. (5) The City Council shall adopt procedural rules for conducting the Performance Evaluation provided for herein. Said Rules shall provide that the determinations and findings to be made in the subsections shall be adopted only by a majority vote of the City Council at a regularly scheduled meeting. SECTION 19. RECONSTRUCTION OF EXISTING SYSTEM. Notwithstanding any provision of the Cable Ordinance, Enstar agrees to upgrade the distribution system for the provision of the services provided for herein as set forth in this section. The upgrade of said system shall begin not later than July 1, 13 1995. The upgrade of said system shall be completed within 24 months from the date of the commencement of construction. The system upgrade shall be designed to a 750 megahertz and constructed for 550 megahertz capacity operation. Enstar shall upgrade the system by installing a fiber optic cable piggyback trunkline throughout said system. The system shall be constructed not less than the same technical standards and capacities as all other franchise territories that are served by the Taylorville region of Enstar. The company shall periodically inform the City of the progress of such upgrade work and provide monthly written status reports to the City on such progress, including maps showing areas where such upgrade work is to be performed. Prior to the commencement of construction, Enstar shall obtain all necessary permits, licenses or other authorization as required by all applicable laws and ordinances and shall otherwise comply with all terms and conditions of this franchise and the cable Ordinance concerning construction. In addition to requirements for insurance of the operations of Enstar, the following additional insurance restrictions shall apply during the period of said upgrade as set forth in this paragraph. Prior to the commencement of construction, Enstar shall post with the City Clerk a Construction Bond in the amount of $100,000 conditioned upon the upgrade of the system in a workmanlike manner in accordance with the standards set forth in this Franchise Agreement and in the cable Ordinance; and, a Performance Bond in the amount of $100,000 conditioned upon the completion of the 14 system within the times and in accordance with the specifications set forth herein. Additionally, Enstar shall cause the City to be named as an additional named insured on any certificate of insurance tendered by any contractor or subcontractor performing work in connection with said upgrade as contemplated by this section. Enstar shall be obligated to provide said certificates by the latter of 60 days after the commencement of the upgrade or 60 days after the execution of any contract or subcontract for the performance of upgrade work. SECTION 20. PUBLIC, EDUCATIONAL AND GOVERNMENTAL ACCESS COMMITMENT. Following completion of the Reconstruction of the System provided for in Section 19 hereof: (a) Enstar agrees to make available to the City of Taylorville and the appropriate educational and public organizations one channel each for public, educational and governmental access programming. Such channels shall be activated by Enstar upon it receipt and approval of an appropriate proposal for the provision of public, educational or governmental access programming, which proposal includes an agreement to indemnify Enstar for liability incurred as a result of programming content. Enstar agrees to cooperate with the City of Taylorville or any appropriate public or educational organization seeking activation of an access channel and shall, to reasonable commercial limits, provide assistance, technical expertise and other material as may be required for the provision of access and programming. (b) Enstar reserves the right to provide financial or 15 material assistance to the City of Taylorville or any qualified public or educational organization which Enstar, in its sole discretion, deems appropriate for such assistance to enhance the provision of access services in the City of Taylorville. (c) Enstar recognizes the value of the provision of cable television services as an educational tool in the schools within the school districts located within the corporate boundaries of the City of Taylorville. As a result of such recognition, Enstar hereby covenants and agrees to provide free basic services to said educational institutions now in existence and to provide service to any newly constructed educational facility within the City of Taylorville. In furtherance of said recognition, Enstar further agrees to continue its participation in the "Cable in the Classroom" program or any program providing similar substitute services, throughout the term of this franchise and any extensions hereof. SECTION 21. PROVISION OF LOCAL OFFICE FACILITIES. Enstar recognizes the economic value of the location of its regional office facility in the City of Taylorville. As a consequence, Enstar will exercise its best efforts during the term of the franchise, and any extensions hereof, to retain the location of its regional facility within the corporate limits of the City of Taylorville, however, Enstar reserves the right to relocate its facility in the event Enstar determines, in its sole discretion, that business conditions warrant such relocation. Notwithstanding the foregoing or any contrary provisions of the Cable Ordinance, 16 Enstar covenants and agrees to retain a regional office location in substantially the form existing on the date of the adoption of this franchise within the corporate limits of the City of Taylorville for a period of not less than 36 months from the effective date of this franchise. Subsequent to said period, Enstar agrees to provide not less than 90 days notice to the Mayor and City Council of the City of Taylorville in the event it determines to relocate the regional office facility to another community. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as follows: CITY OF TAYLORVILLE, ILLINOIS Attest: By: /s/ Illegible /s/ Pamela J. Peabody ----------------------------------- ------------------------------------ Mayor City Clerk Date: 7/1/96 --------------------------------- ENSTAR COMMUNICATIONS CORPORATION Attest: By: /s/ Illegible /s/ Danielle Niellet ----------------------------------- ------------------------------------ Its V. P. ------------------------------- Date: 4/17/96 --------------------------------- A fully executed copy of this Agreement was deposited and filed with the City of Taylorville, Illinois, on the 1st day of July 1996. /s/ Pamela J. Peabody ------------------------------------ City Clerk 17 ENSTAR CABLE TV - Taylorville, IL TAY892-TAYO1 (Effective: 4/15/95)
CHANNEL LINE-UP * 2 QVC * 3 WCIA 3-CBS CHAMPAIGN, IL * 4 WAND 17-ABC DECATUR, IL * 6 KSDK5-NBC ST. LOUIS, MO * 6 USA NETWORK 7 THE MOVIE CHANNEL * 8 WFHL 23-IND DECATUR, IL * 9 WILL-TV 12-PBS URBANA-CHAMPAIGN, IL * 10 WICS 2O-NBC SPRINGFIELD. IL * 11 KPLR-TV II-IND ST. LOUIS. MO + 12 THE WEATHER CHANNEL * 13 WRSP-TV 55 FOX SPRINGFIELD. IL * 14 LIFETIME 15 CINEMAX * 16 ESPN 17 THE DISNEY CHANNEL + 18 CNN * 19 MTV * 21 HBO + 22 THE NASHVILLE NETWORK = 23 WGN-TV = 24 WTBS 17-IND ATLANTA, GA = 25 THE FAMILY CHANNEL = 26 TNT = 27 THE DISCOVERY CHANNEL 28 SHOWTIME + 29 CNN HEADLINE NEWS * 30 LOCAL-CHARACTER GENERATED * 31 ARTS & ENTERTAINMENT * 32 COUNTRY MUSIC TV * 33 AMERICAN MOVIE CLASSICS * 34 NICKELODEON * 35 CNBC * 98 SCI-FI CHANNEL * 99 C-SPAN
RATES BASIC (*) 21.08 TIER (+) 1.26 SATPAC (=) 4.65 BASIC ON ADDITIONAL OUTLET 0.00 INSTALLATION/SERVICE (per hr) 45.00 INSTALL MATERIALS (if any) At Cost REMOTE 0.14 NON-ADDRESSABLE CONVERTER 1.17 RADIO SERVICE 1.95 WIRE MAINTENANCE AGREEMENT 1.50 LATE PAYMENT FEE 1.50 RETURNED CHECK FEE 15.00 LOST/STOLEN CONVERTER EQUIP Prices Vary DAMAGED CONVERTER EQUIPMENT Actual Cost to Repair PREMIUM SERVICES CINEMAX 10.45 THE DISNEY CHANNEL 9.45 HBO 11.00 THE MOVIE CHANNEL 10.45 SHOWTIME 10.45
- -------------------------------------------------------------------------------- All Broadcast TV stations carried on a channel higher than 13 can only be received via cable through a converter box, unless you have a cable-ready TV set. Converter boxes are available for rent at the low rate listed above. The above rates may not include applicable taxes, fees and assessments. Any such amounts will be itemized on your bill. EX-10.6 7 y58746ex10-6.txt FRANCHISE ORDINANCE Exhibit 10.6 Litchfield, IL Cable Television Franchise Ordinance An Ordinance Setting Forth Regulations, Terms and Conditions Under Which Cable Television Systems Shall Operate in Litchfield, IL and Granting to Enstar Income Program II-1 a Franchise to Construct, Operate and Maintain a Cable Television System Within the City. TABLE OF CONTENTS TITLE AND PURPOSES OF ORDINANCE ..................................................................................... 1 DEFINITIONS ......................................................................................................... 1 FRANCHISE TO OPERATE REQUIRED ....................................................................................... 3 GRANT OF FRANCHISE .................................................................................................. 3 FRANCHISE FEES ...................................................................................................... 3 SUBSCRIBER RATES .................................................................................................... 4 CUSTOMER SERVICE AND CONSUMER PROTECTION ............................................................................ 5 INFORMATION PROVIDED BY GRANTEE TO SUBSCRIBERS....................................................................... 6 TECHNICAL STANDARDS.................................................................................................. 7 EXTENSION OF CABLE SERVICE........................................................................................... 7 FREE BASIC CABLE SERVICE TO PUBLIC BUILDINGS......................................................................... 9 SYSTEM IMPROVEMENTS.................................................................................................. 9 INSURANCE............................................................................................................ 10 INDEMNIFICATION...................................................................................................... 10 FRANCHISE VIOLATIONS: PROCEDURES, NOTICE, AND CURE................................................................... 11 FRANCHISE TERMINATION AND CONTINUITY OF SERVICE...................................................................... 12 FORCE MAJEUR......................................................................................................... 12 GRANT OF ADDITIONAL FRANCHISE AND COMPETING SERVICE PROVIDERS ....................................................... 13 TRANSFER OR ASSIGNMENT OF FRANCHISE ................................................................................. 14 COMPLIANCE WITH STATE AND FEDERAL LAW................................................................................ 15 NOTICE TO THE GRANTEE................................................................................................ 15 STREET OCCUPANCY .................................................................................................... 15 ACCESS TO PUBLIC AND PRIVATE PROPERTY................................................................................ 16 NONDISCRIMINATION IN EMPLOYMENT...................................................................................... 16 GRANTEE MAY ISSUE RULES ............................................................................................. 17 SEVERABILITY OF ORDINANCE PROVISIONS................................................................................. 17 EFFECTIVE DATE ...................................................................................................... 17
AN ORDINANCE SETTING FORTH THE REGULATIONS, TERMS AND CONDITIONS UNDER WHICH CABLE TELEVISION SYSTEMS SHALL OPERATE IN LITCHFIELD, IL AND GRANTING A FRANCHISE TO ENSTAR INCOME PROGRAM II-1, ITS SUCCESSORS AND ASSIGNS TO CONSTRUCT, OPERATE AND MAINTAIN A CABLE TELEVISION SYSTEM IN THE CITY BE IT ORDAINED BY THE CITY COUNCIL OF LITCHFIELD, IL AS FOLLOWS: 1 TITLE AND PURPOSES OF ORDINANCE This Ordinance shall be known as the Litchfield Cable Television Franchise Ordinance. The purposes of this Ordinance are: a) to establish the terms and conditions under which a cable television system must operate within Litchfield, IL (which may hereafter be referred to as "City", "Franchising Authority", or "Grantor"); b) to provide for the payment of a franchise fee to the City for costs associated with administering and regulating the system; and c) to grant a cable television franchise to Enstar Income Program II-1 (hereafter referred to as Enstar" or "Grantee"). 2 DEFINITIONS For the purposes of this Ordinance the following terms, phrases, words and their derivations shall have the meaning defined herein, unless the context clearly indicates that another meaning is intended. Words used in the present tense include the future, words in the plural number include the singular number, and words in the singular number include the plural number. 2.1 "Cable Act" means The Cable Communications Policy Act of 1984 as modified by The Cable Television Consumer Protection and Competition Act of 1992, and the Telecommunications Act of 1996. 2.2 "Cable Television System" means any non-broadcast facility consisting of a set of transmission paths and associated signal reception, transmission and control equipment, that is designed to distribute to subscribers or other users audio, video and other forms of communications services via electronic or electrical signals. 2.3 "Channel" is a band of frequencies in the electromagnetic spectrum, capable of carrying one audio-visual television signal. 2.4 "City" means Litchfield, IL in its present form or in any later reorganized, consolidated, enlarged or reincorporated form, which is legally authorized to grant a cable television franchise under state and federal law. The City may also be referred to as "Franchising Authority" or "Grantor". Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 1 2.5 "Enstar" means Enstar Income Program II-1, which may also be referred to as "Grantee". 2.6 "FCC" means the Federal Communications Commission. 2.7 "Franchise" means the rights granted pursuant to this Ordinance to construct, own and operate a cable television system along the public ways in the City, or within specified areas in the City. 2.9 "Franchise Area" means that portion of the City for which a franchise is granted under the authority of this Ordinance. If not otherwise stated in an exhibit to this Ordinance, the Franchise Area shall be the legal and geographic limits of the City, including all territory which may be hereafter annexed to the City. 2.9 "Franchising Authority" means Litchfield, IL, its City Council acting as the City's duly elected governing body, its lawful successor or such other person or body duly authorized by the City to grant a cable television franchise. 2.10 "Grantee" means a person or business entity, or its lawful successor or Assignee, which has been granted a franchise by the City pursuant to this Ordinance. 2.11 "Gross Subscriber Receipts" as the term is used in calculating franchise fees means revenues actually received by the Grantee from television and other services (other services include, but are not limited to, monthly fees charged Subscribers for Basic Service; monthly fees charged Subscribers for any tier of Cable Service other than Basic Service; Installation, disconnection and re-connection fees; leased Channel fees; Converter rentals; advertising revenues; revenues from home shopping Channels) arising from and attributable to the operation of a cable system in Litchfield after deducting the following: a) any fees or assessments levied on subscribers or users of the system which are collected by the Grantee for payment to a governmental entity; b) franchise fees paid by the Grantee to the City; c) state or local sales or property taxes imposed on the Grantee and paid to a governmental entity; and d) federal copyright fees paid by the Grantee to the Copyright Tribunal in Washington, DC. 2.12 "Normal Business Hours" means those hours during which most similar businesses in the community are open to serve customers. 2.13 'Normal Operating Conditions" means those service conditions which are within the control of the Grantee. Those conditions which are not within the control of the Grantee include, but are not limited to, natural disasters, civil disturbances, power outages, telephone network outages, and severe or unusual weather conditions. Those conditions which are ordinarily within the control of the Grantee include, but are not limited to, special promotions, pay-per-view events rate increases, regular peak or seasonal demand periods, and maintenance or upgrade of the cable system. Litchfield, IL Cable TV Franchise Ordinance January 25, 2000 Page 2 2.14 "Public Way" or "Right-of-Way" means the surface, the air space above the surface and the area below the surface of any public street, highway, lane, path, alley, sidewalk, boulevard, drive, bridge, tunnel, park, parkways, waterways, or other public right-of-way including public utility easements or rights-of-way and any temporary or permanent fixtures or improvements located thereon now or hereafter held by the City which shall entitle the City and the Grantee to the use thereof for the purpose of installing and maintaining the Grantee's cable television system. 2.15 "School" means any public elementary or secondary school. 2.16 "Service Interruption" means the loss of picture or sound on one or more cable channels. 2.17 "Subscriber" means any person who receives monthly cable television service provided by the Grantee's cable television system. 3 FRANCHISE TO OPERATE REQUIRED It shall be unlawful to operate a cable television system within the City unless a valid franchise has first been obtained from the City pursuant to the terms of this Ordinance. A franchise granted pursuant to this Ordinance shall authorize the Grantee to provide cable television services within the City and to charge subscribers for such services. It shall also authorize and permit the Grantee to traverse any portion of the City in order to provide service outside the City. Unless otherwise specified, the Franchise Area shall be the legal boundaries of the City. 4 GRANT OF FRANCHISE A non-exclusive franchise is hereby granted to Enstar Income Program II-1 (which may be referred to herein as "Enstar" or "Grantee") to operate and maintain a cable television system in the City for a period of ten (10) years commencing on the date of adoption of this ordinance. Enstar shall have the option to renew this franchise for an additional term of five (5) years, provided that it is in substantial compliance with the material terms of this ordinance at the time of its expiration. 5 FRANCHISE FEES 5.1 The Grantee shall pay a franchise fee which is intended to compensate the City for all costs which may be associated with administering or regulating Grantee's cable system. The amount of the franchise fee shall be five (5%) percent of the Grantee's annual Gross Subscriber Receipts, as defined herein. Such fee shall be paid on a quarterly basis. Grantee shall be entitled to list the franchise fee as a separate line item on monthly bills. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 3 5.2 Due to federal and local regulations requiring that Grantee notify cable subscribers at least thirty (30) days prior to the effective date of any increases in monthly charges on subscriber bills, any increased franchise fee amounts which may be due to the City shall begin accruing sixty (60) days following the effective date of this Ordinance. If the City requires more than thirty (30) days notice to subscribers of increased rates, then any increased franchise fee amounts which may be due to the City shall begin accruing sixty (60) days after the City's required notice period. 5.3 Within 120 days from the end of the fiscal quarter Grantee shall file a report showing Grantee's Gross Subscriber Receipts for the calendar year and the amount of franchise fees due to the City. The Grantee shall have an obligation to maintain financial records of its Gross Subscriber Receipts and Grantee fee payments for audit purposes for a period of three years, and the City shall have the right to audit the Grantee's books at the offices where such books are maintained. 6 SUBSCRIBER RATES 6.1 All charges to subscribers shall be consistent with a schedule of fees for services offered and established by the Grantee. Rates shall be nondiscriminatory in nature and uniform to persons of like classes under similar circumstances and conditions. 6.2 The Grantee will provide the City with thirty (30) days advance written notice of any change in rates and charges whenever possible. 6.3 Grantee may offer different or discounted rates at its discretion for promotional purposes and may establish different rates for different classes of subscribers where appropriate, such as offering discounted rates to low income individuals or groups or bulk rates to multiple unit dwellings. 6.4 Grantee shall inform each new subscriber of all applicable fees and charges for providing cable television service. 6.5 Grantee may, at its own discretion and in a non-discriminatory manner, waive, reduce or suspend connection fees, monthly service fees or other charges on a one time or monthly basis for promotional purposes. 6.6 Grantee may refuse to provide service to any person because a prior account with that person remains due and owing. 6.7 A Grantee may offer service which requires advance payment of periodic service charges. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 4 6.8 The Grantee shall provide refunds to subscribers in the following cases: 6.8(a) If the Grantee fails within a reasonable time to commence service requested by a subscriber, it will refund all deposits or advance charges that the subscriber has paid in connection with the request for such service at the request of the subscriber. 6.8(b) If a subscriber terminates any service at any time and has a credit balance for deposits or unused services, upon request from the subscriber and upon return of all of Grantee's equipment, the Grantee will refund the appropriate credit balance to the subscriber. The subscriber will be responsible for furnishing the Grantee a proper address to which to mail the refund. 6.8(c) If any subscriber's cable service is out of order for more than 48 consecutive hours during the month due to technical failure, damage, or circumstances within the control of the Grantee, the Grantee will credit the account of that subscriber on a pro rata basis upon the subscriber's written request. The credit will be calculated using the number of twenty-four (24) hour periods that service is impaired and the number of channels on which service is impaired as a fraction of the total number of days in the month that the service impairment occurs and the total number of channels provided by the system in the absence of an impairment. 7 CUSTOMER SERVICE AND CONSUMER PROTECTION 7.1 CABLE SYSTEM OFFICE HOURS AND TELEPHONE AVAILABILITY The Grantee will maintain a local, toll-free or collect call telephone access line which will be available to its subscribers 24 hours per day, seven days per week. Trained company representatives will be available to respond to customer telephone inquiries during normal business hours. After normal business hours, the access line may be answered by a service or an automated response system, including an answering machine. Inquiries received after normal business hours must be responded to by a trained company representative on the next business day. Customer service center and bill payment locations will be open at least during normal business hours. 7.2 INSTALLATION, OUTAGES AND SERVICE CALLS 7.2(a) Standard installations will be performed within seven (7) business days after an order has been placed. "Standard" installations are those that are located up to 125 feet from the existing distribution system. 7.2(b) Excluding conditions beyond the control of the Grantee, the Grantee will begin working on "outages" to cable service promptly, and in no event shall the response time for calls received between 7:00 AM and 12:00 Midnight exceed four (4) hours, except that the Grantee or its employees shall not be required to perform work past Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 5 12:00 Midnight, it shall complete work necessary to correct the outage, the following day. The Grantee must begin actions to correct all other service problems the next business day after notification of the service problem. For the purposes of this Agreement, an outage shall be defined as the cessation of video and/or audio reception on one or more channels affecting three (3) or more subscribers who receive service from the same cable, feeder line, or node, or who receive cable service from the same cable system tap serving a multi-family dwelling. 7.2(c) The "appointment window" alternatives for installations, service calls, and other installation activities will be either a specific time or a four-hour time block during normal business hours. The Grantee may schedule service calls and other installation activities outside of normal business hours for the express convenience of the customer. 7.2(d) If Grantee's representative is running late for an appointment with a customer and will not be able to keep the appointment as scheduled, the customer will be contacted. The appointment will be rescheduled, as necessary, at a time which is convenient for the customer. 7.2(e) If the Grantee's service representative appears for an appointment scheduled by a customer within the time period promised and no one is present at the customer's dwelling to permit necessary physical access to the dwelling unit, then Grantee may charge the customer for the service call, up to a maximum of $25. 8 INFORMATION PROVIDED BY GRANTEE TO SUBSCRIBERS 8.1 The Grantee shall provide written information on each of the following areas at the time of installation of service, at least annually to all subscribers, and at any time upon request: products and services offered; prices and options for programming services and conditions of subscription to programming and other services; installation and services maintenance policies; instructions on how to use the cable service; channel positions of programming carried on the system; and billing and complaint procedures, including the address and telephone number of the local franchise authority's cable office. 8.2 Customers will be notified of any changes in rates, programming services or channel positions thirty (30) days in advance of such changes if the change is within the control of the Grantee. In addition, the Grantee shall notify subscribers thirty (30) days in advance of any significant changes in the other information required by paragraph (c)(3)(i)(A) of this section. Notwithstanding any other provision of Part 76, Grantee shall not be required to provide prior notice of any rate change that is the result of a regulatory fee, franchise fee, or any other fee, tax, assessment, or charge of any kind imposed by any Federal agency, State, or Franchising Authority on the transaction between the Grantee and the subscriber. 8.3 Bills will be clear, concise and understandable. Bills will be itemized, with Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 6 itemizations including basic and premium service charges and equipment charges. Bills will also clearly delineate all activity during the billing period, including optional charges, rebates and credits. In case of a billing dispute, the Grantee must respond to a written complaint from a subscriber within thirty (30) days. 8.4 Refund checks will be issued promptly, but no later than either: the customer's next billing cycle following resolution of the request or sixty (60) days, or the return of the equipment supplied by the Grantee if service is terminated. 8.5 Credits for services will be issued no later than the customer's next billing cycle following the determination that a credit is warranted. 9 TECHNICAL STANDARDS 9.1 Grantee shall be responsible for insuring that the cable system is designed, installed, and operated in a manner that fully complies with Federal Communications Commission (FCC) rules regarding cable television technical standards. Grantee shall be prepared to show, on request by an authorized representative of the Commission or the Franchising Authority, that the system does, in fact, comply with the rules. 9.2 Grantee shall conduct complete performance tests of the system at least twice each calendar year (at intervals not to exceed seven months), and shall maintain the resulting test data on file at the Grantee's local business office for at least five (5) years. The test data shall be made available for inspection by the Commission or the local franchiser, upon request. The performance test shall be directed at determining the extent to which the system complies with all the technical standards set forth in Section 76.605(a) of the Commission's rules. 10 EXTENSION OF CABLE SERVICE 10.1 A Grantee which is not already serving the entire franchise area shall provide service to all portions of the franchise area reaching a minimum density of thirty (30) dwelling units per linear strand mile, as measured from the nearest coaxial cable line, within twelve (12) months after the grant of a franchise. 10.2 Grantee shall provide aerial or buried drop lines to new subdivisions within the franchise area at the request of the developer provided that the developer contracts and agrees with the Grantee to pay the cost of the extension of the service. 10.3 Grantee shall extend and make cable television service available to any resident within the franchise area who requests connection at the standard connection charge if the connection to the resident would require no more than a standard one hundred and fifty (150) foot aerial drop or a seventy-five (75) foot buried drop line or extension from the nearest coaxial feeder cable. With respect to requests for connection requiring an aerial or buried drop line in excess Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 7 of the maximum standard distance, Grantee shall extend and make available cable television service to such residents at a connection charge not to exceed its actual costs for the distance exceeding the standard one hundred and fifty (150) feet of aerial or seventy-five (75) feet of underground cable respectively. 10.4 In areas with fewer than thirty (30) residential units per proposed cable bearing strand mile, Grantee shall offer a cost-sharing arrangement with residents. A dwelling unit will be counted for this purpose if its lot fronts a street. The cost-sharing arrangement shall consist of the following: 10.4(a) At the request of a resident desiring service, Grantee shall determine the cost of the plant extension required to provide service to the potential subscriber from the closest point on the cable system where it is technically feasible. The cost of construction shall be allocated based on the following formula: 10.4(a)(1)If a request for extension of service into a residential area requires the construction of cable plant which does not pass at least thirty (30) potential subscribers per proposed cable bearing strand mile, Grantee and residents who agree to subscribe to cable service will each bear their proportionate share of construction costs. For example, if there are five (5) dwelling units per proposed cable bearing strand mile, Grantee's share will equal 5/30ths or one sixth (1/6) of the construction cost. The remaining cost will be shared equally by each subscriber. 10.4(a)(2)Should additional residents actually subscribe to cable television service in areas where subscribers have already paid a proportionate share under the extension cost sharing formula, subscribers who have previously paid a proportionate share under the extension formula shall be reimbursed pro rata for their contribution or a proportional share thereof. In such case, the pro rata shares shall be recalculated and each new subscriber shall pay the new pro rata share, and all subscribers who previously paid a proportionate share shall receive pro rata refunds. In the event such subscribers (or prior subscribers) have been disconnected or have moved and owe the Grantee money which has not been recovered, Grantee shall have the right to first apply the refund to amounts owed the Grantee and give the balance, if any to the subscriber. At such time as there are thirty (30) potential subscribers per cable bearing strand mile, the subscribers shall receive their pro rata share of construction costs. In any event, one (1) year after the completion of a project, subscribers who have paid a share of line extension costs are no longer eligible for refunds, and the amounts paid in construction costs will be credited to the plant account of Grantee. 10.4(a)(3)Where the density of residential dwelling and occupied commercial or industrial structures, adverse terrain, or other factors render extension of the system and offering of cable service impractical, technically infeasible or Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 8 would create an economic hardship, the City may, upon petition of the Grantee, either waive the extension of the system into such areas, or allow the extension and offer of service on special terms or conditions which are reasonable and fair to the City , the Grantee and potential subscribers in such areas. 11 FREE BASIC CABLE SERVICE TO PUBLIC BUILDINGS Grantee shall provide, without charge, one service outlet activated for basic subscriber service to each police station, fire station, public school, public library and the City office. If it is necessary to extend Grantee's trunk or feeder lines more than two hundred (200) feet solely to provide service to any such school or public building, the City or the building owner or occupants shall have the option of either paying Grantee's direct costs for line extensions in excess of two hundred (200) feet or releasing the Grantee from the obligation to provide service to such building. Furthermore, Grantee shall be permitted to recover the direct cost of installing cable service, when requested to do so, in order to provide: a) more than one outlet, b) inside wiring, or c) a service outlet requiring more than two hundred (200) feet of drop cable to any public building. 12 SYSTEM IMPROVEMENTS 12.1 SYSTEM UPGRADE Grantee agrees to upgrade the existing Litchfield cable TV system on or before January 1, 2001. The upgraded system will be constructed so as to provide the capability of passing a minimum of 83 channels on an analog and/or digital basis through its trunk and feeder lines. 12.2 PEG ACCESS 12.2(a) Within ninety (90) days of completion of the upgrade, Enstar Cable agrees to provide and maintain one Access channel on its cable system for exclusive Governmental and/or Educational use. 12.2(b) Within ninety (90) days of completion of the upgrade, Enstar Cable agrees to provide an audio/visual return path from the studio located at 1700 North State Street which will allow the City to cablecast live or taped programming on the Access channel to all subscribers via the subscriber network. 12.2(c) Enstar agrees to provide to the City two annual PEG access support payments of $6,000 each, for a total support payment of $12,000 over the life of this Agreement. The support payments shall be due upon the first and second year anniversaries of this Agreement. Grantee shall have the right to collect the two $6,000 payments from its subscribers on a monthly pro rata, per subscriber basis, and to identify the amount it collects on behalf of the City as a line item pass-through on subscriber's billing statements. No additional payment will be due during the term of this Agreement. 12.2(d) Grantee may pass through to subscribers, in their monthly billing statements, the direct and indirect costs of satisfying the above franchise requirements that are required by the franchising authority to sub public, educational, and governmental Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 9 access channels as allowed by federal law. Such costs may include the per channel cost of providing PEG access channels, PEG access programming, and a reasonable allocation for general and administrative overhead. 12.3 PROGRAMMING Upon completion of the rebuild Enstar Cable agrees to provide additional programming options. Enstar Cable agrees to meet with the City on a periodic basis for the purpose of receiving input into the determination of specific programming choices. Programming decisions may be based on the following determining factors: program availability, signal strength, community needs, and economic viability. Grantee specifically agrees to consider the following new programming additions upon completion of the rebuild: University of Illinois sporting events and Pay-Per-View movie & special event options. 13 INSURANCE Within ninety (90) days following the grant of a franchise the Grantee shall obtain the following insurance policies: 13.1 A general comprehensive liability policy indemnifying, defending and saving harmless the City, its officers, boards, commissions, agents or employees from any and all claims by any person whatsoever on account of injury to or death of a person or persons occasioned by the operations of the Grantee under the franchise herein granted, or alleged to have been so caused or occurred, with a minimum liability of One Million Dollars ($1,000,000) per personal injury, death of any one person or damage to property and Two Million Dollars ($2,000,000) for personal injury, death of any two or more persons in any one occurrence or damage to property. 13.2 All insurance policies called for herein shall be in a form satisfactory to the City and shall require thirty (30) days written notice of any cancellation to both the City and the Grantee. The Grantee shall, in the event of any such cancellation notice, obtain, pay all premiums for, and file with the City , written evidence of the issuance of replacement policies within thirty (30) days following receipt by the City or the Grantee of any notice of cancellation. In recognition of the foregoing each party agrees to cause their respective insurance carriers to waive any rights of subrogation. 14 INDEMNIFICATION The Grantee, by its acceptance of a franchise granted pursuant to this Ordinance, shall indemnify and hold harmless the City, its officials, boards, commissions and employees against any and all claims, suits, causes of action, proceedings, and judgments for damage arising out of the award of a franchise to the Grantee and its operation of the cable television system under the franchise, such indemnification shall include any related attorney fees. These damages shall include, but not be limited to, penalties arising out of copyright infringements and damages arising out of any failure by Grantee to secure consents from the owners, authorized distributors or licensees of programs to be Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 10 delivered by the Grantee's cable television system whether or not any act or omission complained of is authorized, allowed, or prohibited by the franchise. 15 FRANCHISE VIOLATIONS: PROCEDURES, NOTICE, AND CURE Before exercising any right of redress available to it under the terms of this Ordinance, including determination of any penalty assessable under applicable law, the City shall follow the procedures set forth in this Section. 15.1 The City shall notify Grantee in writing, by Certified Mail, of any alleged violation, ("Violation Notice") which notice shall include a detailed description of any alleged violation and a request for cure of such violation. 15.2 Except in the case of a safety hazard posing an imminent danger to public health and safety, Grantee shall have thirty (30) days from the date of receipt of such notice to respond in writing, indicating: (1) that Grantee has cured the alleged violation, providing reasonable documentation demonstrating that the alleged violation has been cured; (2) that Grantee has commenced or will commence actions to cure the alleged violation, but that the alleged violation cannot reasonably be cured immediately, describing the steps taken to be taken to cure the alleged violation; or (3) that grantee disagrees with the allegation that a violation has occurred and contests the Violation Notice, stating the reasons therefor. Pending the completion of an administrative hearing which may be held, the City shall not impose penalties upon Grantee. 15.3 Upon receipt of Grantees response to the Violation Notice, the City may either accept Grantee's explanation and/or proposed cure, or if it believes that the violation will not be cured within a reasonable period of time, the City may schedule an administrative hearing, affording Grantee due process, and an opportunity to present evidence. Grantee shall be given at least thirty (30) days written notice of such a hearing. 15.4 Within thirty (30) days of an administrative hearing, the City shall issue a written report stating its findings and the reasons therefor. The City may determine (a) that the alleged violation has been corrected, or is in the process of being corrected by Grantee, and that no further action is required; (b) that an extension of the time or other appropriate relief should be granted until the cure can be completed; (c) that the problem is beyond Grantee's direct control and that Grantee is not at fault; or (c) that Grantee has violated one or more provisions of its franchise and that appropriate action should be taken by the City. 15.5 In case of an alleged violation(s) of applicable system technical standards, construction standards, or safety codes, if the alleged violation does not pose a substantial and immediate safety hazard, Grantee shall be allowed a reasonable and sufficient time to complete any required corrections or repairs to the system. So long as Grantee demonstrates that it is working diligently and in good faith to correct any Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 11 alleged technical violations, the City shall not assess penalties against the Grantee. A "substantial and immediate safety hazard" shall be defined as one posing an imminent likelihood of causing significant bodily injury if not repaired immediately. Grantee shall not be penalized for other minor violations of the Franchise or applicable codes, so long as Grantee makes its best efforts to correct any problem or violation within a reasonable period of time of the discovery of alleged violation. 15.6 Nothing in this section shall be construed to restrict Grantee's right to appeal the City's actions to a court of competent jurisdiction. 16 FRANCHISE TERMINATION AND CONTINUITY OF SERVICE 16.1 In the event of a formal denial of renewal or revocation of a franchise, which denial or revocation is upheld by final judicial adjudication of any appeal(s) which may be filed, the Grantee shall be have a period of one (1) year from such final adjudication within which to transfer or convey the assets of the cable system to another owner. Approval of such proposed transfer or assignment shall not be unreasonably withheld by the City. 16.2 In the event the franchise term expires prior to formal action being taken by the City either to renew the franchise or deny renewal, the term of this franchise shall automatically be extended until such time as formal action to renew or deny renewal is taken by the City. The renewal procedures and criteria contained in Section 626(c) of the Cable Communications Policy Act of 1984, as amended, shall be followed by the City and the Grantee. 17 FORCE MAJEUR In the event the Grantee is prevented or delayed in the performance of any of its obligations under this Ordinance by reason of flood, fires, hurricanes, tornadoes, earthquakes or other acts of God, unavoidable casualty, insurrections, war, riot, sabotage, unavailability of materials or supplies, vandalism, strikes, boycotts, lockouts, labor disputes, shortage of labor, unusually severe weather conditions, acts or omissions or delays by utility companies upon whom Grantee is dependent for pole attachments or easement use, Grantee is unable to obtain necessary financing or any other event which is beyond the reasonable control of the Grantee, the Grantee shall have a reasonable time under the circumstances to perform its obligations under this Ordinance or to procure a reasonable and comparable substitute for such obligations. Under such circumstances the Grantee shall not be held in default or noncompliance with the provisions of the Ordinance nor shall it suffer any penalty relating thereto. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 12 18 GRANT OF ADDITIONAL FRANCHISE AND COMPETING SERVICE PROVIDERS 18.1 APPLICATION PROCEDURES 18.1(a) An application for a new cable television franchise shall be submitted to the City in a form specified by or acceptable to the City, and in accordance with procedures and schedules established by the City. The City may request such facts and information as it deems appropriate. 18.1(b) Upon request, any applicant shall furnish to the City a map of suitable scale, showing all roads and public buildings, which indicates the areas to be served and the proposed dates of commencement of service for each area. The proposed service area shall be subject to approval by the City. If approved, the service area shall be incorporated into any franchise granted pursuant to this Ordinance. If no service area is specifically delineated in a franchise, it shall be considered to be coterminous with the boundaries of the City. 18.1(c) After receiving an application for a franchise, the City shall examine the legal, financial, technical and character qualifications of the applicant. The City may grant one or more non-exclusive franchises creating a right to construct and operate a cable television system within the public ways of the City, subject to the provisions of this Section. 18.1(d) In the event an application is filed proposing to serve a franchise area which overlaps, in whole or in part, an existing Grantee's franchise area, a copy of such application shall be served upon any existing Grantee by the City by registered or certified mail. Such notice shall be considered a condition precedent to consideration of the application for a franchise by the City. 18.2 COMPETING SERVICE PROVIDERS 18.2(a) Any franchise granted by the City shall be non-exclusive. However, nothing in this ordinance shall be construed to require it to grant more than one franchise if the City determines, that granting additional franchises would be detrimental to the public interest. 18.2(b) In the event a competing service provider commences operation of a communications facility which offers services similar to those offered by Grantee, the City shall not require Grantee to operate under terms or conditions otherwise required by this Ordinance which are either less favorable or more burdensome than those under which the competing service provider must operate. Any franchise which may be granted by the City to a competing service provider shall require the new Grantee to Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 13 provide cable service to the entire franchise area then served by the existing Grantee. An existing Grantee may, at its discretion, comply with the most favorable terms contained in any subsequent franchise granted by the City. 18.3 PERMITS FOR NON-FRANCHISED ENTITIES The City may issue a license, easement or other permit to a person other than the Grantee to permit that person to traverse any portion of the Grantee's franchise area within the City in order to provide service outside, but not within the City. Such license or easement, absent a grant of a franchise in accordance with this Ordinance, shall not authorize nor permit said person to provide cable television service of any type to any home or place of business within the City nor render any other service within the City. 19 TRANSFER OR ASSIGNMENT OF FRANCHISE 19.1 A Grantee may transfer or assign its franchise to another entity (the "Assignee") upon thirty (30) days notice to the City. The Grantee shall provide to the City a reasonable showing that the proposed Assignee or Transferee possesses the technical and financial qualifications to operate the cable TV system properly. The proposed Transferee or Assignee shall provide the City with a written statement that it agrees to comply with all material terms of the franchise to be transferred. The City shall not unreasonably delay or deny the assignment or transfer of a franchise. The reasonableness of the City's actions shall be subject to judicial review by a court of appropriate jurisdiction. The proposed transfer or assignment shall be deemed approved if no action is taken by the City within sixty (60) days of the written request for transfer by the Grantee. 19.2 The Grantee may secure financing or an indebtedness by trust, mortgage, or other instrument of hypothecation of the franchise, in whole or in part, without requiring the consent of the City. Consent shall not be required to assign a franchise from one business entity to another which is operated or managed by the Grantee or any affiliated entity. In addition, so long as the manager and/or general partner of the Grantee remains the same, consent shall not be required to transfer the interests of any limited partner of the Grantee, who has no day to day operational control of the Grantee or the system. 19.3 A Grantee may transfer or assign its franchise to an affiliated entity upon thirty (30) days notice to the City. Consent of the City shall not be required for such an assignment, provided that; a) the City is provided with a reasonable showing that the proposed Assignee possesses the technical and financial qualifications to operate the cable TV system and, b) that the Assignee agrees to comply with the terms of this Ordinance. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 14 20 COMPLIANCE WITH STATE AND FEDERAL LAW The Grantee and the City shall at all times comply with all applicable State and Federal laws and the applicable rules and regulations of administrative agencies. If the Federal Communications Commission (FCC) or any other federal or state governmental body or agency enacts any law or regulation or exercises any paramount jurisdiction over the subject matter of this Ordinance or any franchise granted hereunder, the jurisdiction of the City shall cease and no longer exist to the extent such superseding jurisdiction shall preempt or preclude the exercise of like jurisdiction by the City. The City and the Grantee reserve all rights they each may possess under law, unless expressly waived herein. 21 NOTICE TO GRANTEE Except as otherwise provided in this Ordinance, the City shall not meet to take any action involving the Grantee's franchise unless the City has notified the Grantee by certified mail at least thirty (30) days prior to such meeting, as to its time, place and purpose. The notice provided for in this section shall be in addition to, and not in lieu of, any other notice to the Grantee provided for in this Ordinance. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if mailed by certified mail return receipt requested, addressed to the Grantee's corporate office as follows: Enstar Income Program II-1 C/o Charter Communications 12444 Powerscourt Dr. Suite 100 St. Louis, Missouri 63131 Attn: Celeste Vossmeyer 22 STREET OCCUPANCY 22.1 Grantee shall utilize existing poles, conduits and other facilities whenever possible, but may construct or install new, different, or additional poles, conduits, or other facilities whether on the public way or on privately-owned property with the written approval of the appropriate government authority, and, if necessary the property owner. Such approval shall not be unreasonably withheld by the governmental agency. 22.2 All transmission lines, equipment and structures shall be so installed and located as to cause minimum interference with the rights and appearance and reasonable convenience of property owners who adjoin on any public way and at all times shall be kept and maintained in a safe condition and in good order and repair. The Grantee shall at all times employ reasonable care and shall use commonly accepted methods and devices for preventing failures and accidents which are likely to cause damage, injuries or nuisances to the public. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 15 22.3 Grantee shall have the authority to trim trees on public property at its own expense as may be necessary to protect its wires and facilities, subject to the direction of the City or other appropriate governmental authority. 22.4 The Franchisee shall, upon reasonable notice, protect or relocate its cable communications system, or part thereof, from any street, easement or right of way, as reasonably directed by the Municipality. However, Grantee shall only be required to place its wiring underground if all other existing utilities are also required to be placed underground. Unless an emergency situation exists, for the purpose of this section and in order to allow the Franchisee to budget for any required relocation, in the event a public works or public improvement project is pre-planned in the Municipality's prior year budget process, "reasonable notice" will be construed as written notification of no later than October 31 of the prior year, or within 45 days of the conclusion of Municipality's budget process, whichever allows the Municipality more time. The Grantee shall in all cases have the right of abandonment of its property. If public funds are available to any company using such street, easement, or right of way for the purpose of defraying the cost of the foregoing, such funds shall also be made available to the Grantee. 23 ACCESS TO PUBLIC AND PRIVATE PROPERTY 23.1 Grantee shall have the right to enter and have access to the property and premises of the City or that of any subscriber for purposes of installing cable TV service or recovering and removing Grantee's property and equipment when a subscriber's service is terminated and a subscriber refuses to return such equipment to the Grantee. 23.2 The City shall not permit any person who owns or controls a residential multiple unit dwelling, trailer park, condominium, apartment complex, subdivision or other property to interfere with the right of any tenant, resident or lawful occupant thereof to receive cable installation, service or maintenance from Grantee, except as federal or state law shall otherwise require. 23.3 Upon request by Grantee, the City shall promptly exercise any rights it may have to permit or enable Grantee to obtain or utilize easements with respect to any residential multiple unit dwelling, trailer park, condominium, apartment complex, subdivision or other property as required to facilitate Grantee's use thereof for purposes of providing system service to the tenants, residents or lawful occupants thereof. In any such proceeding, the restitution to the Owner for the amount of space utilized by the system, considering the enhanced value to the premises resulting from the installation of cable television facilities, shall be a one-time charge of $1.00 per dwelling unit. 24 NONDISCRIMINATION IN EMPLOYMENT The Grantee shall neither refuse to hire nor discharge from employment nor discriminate against any person in compensation, terms, conditions, or privileges of employment because of age, sex, race, Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 16 color, creed, or national origin. The Grantee shall insure that employees are treated without regard to their age, sex, race, color, creed or national origin. 25 GRANTEE MAY ISSUE RULES The Grantee shall have the authority to issue such rules, regulations, terms and conditions of its business as shall be reasonably necessary to enable it to exercise its rights and perform its services under this Ordinance and the Rules of the FCC, and to assure uninterrupted service to each and all of its subscribers. Such rules and regulations shall not be deemed to have the force of law. 26 SEVERABILITY OF ORDINANCE PROVISIONS If any section of this Ordinance or the franchise, or any portion thereof, is held invalid or unconstitutional by any court of competent jurisdiction or administrative agency, such decision shall not affect the validity of the remaining portions of the Ordinance or franchise. 27 EFFECTIVE DATE This ordinance shall become effective upon the date of its adoption by the City. Any failure by the City to follow proper procedures under state or local law in adopting this Ordinance or granting a franchise shall not abrogate the rights or obligations of either the Grantee or the City under this Ordinance. If, following adoption of this Ordinance it is subsequently determined that proper legal procedures have not been followed by the City, it shall be the responsibility of the City to rectify any procedural defects and ratify the terms of this Ordinance. Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 17 PASSED AND APPROVED by the City Council of Litchfield this 10th day of February 2000. BY: /s/ [SIG] -------------------------------------------- Title: ATTEST: /s/ [SIG] -------------------------------------------- Title: City Clerk ACCEPTED BY Enstar Income Program II-1. BY: /s/ [SIG] -------------------------------------------- Title: Sr. V.P. Operations Central Region ATTEST: /s/ Deanne Porter -------------------------------------------- Title: Executive Assistant Litchfield, IL Cable TV Franchise Ordinance January 3, 2000 Page 18 EX-99.1 8 y58746ex99-1.txt LETTER RESPONSIVE TO TEMP. NOTE 3T TO ARTICLE 3 EXHIBIT 99.1 LETTER TO THE COMMISSION PURSUANT TO TEMPORARY NOTE 3T ENSTAR INCOME PROGRAM II-1, L.P. 12405 Powerscourt Drive St. Louis, Missouri 63131 March 29, 2002 Securities and Exchange Commission Washington, D.C. 20549 Ladies and Gentlemen: Pursuant to temporary note 3T, Enstar Income Program II-1, L.P. has obtained a letter of representation from Arthur Andersen stating that the December 31, 2001 audit was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit, and availability of national office consultation. Availability of personnel at foreign affiliates of Arthur Andersen was not relevant to the audit. Very truly yours, ENSTAR COMMUNICATIONS CORPORATION, General Partner of Enstar Income Program II-1, L.P. By: /s/ Paul E. Martin -------------------------------- Name: Paul E. Martin Title: Vice President and Corporate Controller (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----