-----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, SvjlHcMF+fj5FUV1lKPYla3Fn3V0bQn57jy0K6B/m1MvV0LJR17mprnuoxTns2rU IA1pWff4JayMyvaxEbdEqg== 0001047469-99-012580.txt : 19990402 0001047469-99-012580.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012580 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENSTAR INCOME PROGRAM 1984-1 LP CENTRAL INDEX KEY: 0000737762 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 581581136 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13333 FILM NUMBER: 99579858 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 MAIL ADDRESS: STREET 1: 10900 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90024 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------to ----------- Commission File Number 0-13333 ENSTAR INCOME PROGRAM 1984-1, L.P. ------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) GEORGIA 58-1581136 - ----------------------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10900 WILSHIRE BOULEVARD - 15TH FLOOR LOS ANGELES, CALIFORNIA 90024 - ---------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 824-9990 -------------- 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 - 29,935 of the registrant's 29,940 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 PART I ITEM 1. BUSINESS INTRODUCTION Enstar Income Program 1984-1, L.P., a Georgia limited partnership (the "Partnership"), is engaged in the ownership, operation and development, and, when appropriate, sale or other disposition, of cable television systems in small to medium-sized communities. The Partnership was formed on December 12, 1983. The general partner of the Partnership is Enstar Communications Corporation, a Georgia corporation (the "General Partner"). On September 30, 1988, ownership of the General Partner was acquired by Falcon Cablevision, a California limited partnership that has been engaged in the ownership and operation of cable television systems since 1984 ("Falcon Cablevision"). The general partner of Falcon Cablevision was Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), until September 1998. On September 30, 1998, FHGLP acquired ownership of the General Partner from Falcon Cablevision. Simultaneously with the closing of that transaction, FHGLP contributed all of its existing cable television system operations to Falcon Communications, L.P. ("FCLP"), a California limited partnership and successor to FHGLP. FHGLP serves as the managing partner of FCLP, and the general partner of FHGLP is Falcon Holding Group, Inc., a California corporation ("FHGI"). The General Partner has contracted with FCLP and its affiliates to provide management services for the Partnership. See Item 13., "Certain Relationships and Related Transactions." The General Partner, FCLP and affiliated companies are responsible for the day to day management of the Partnership and its operations. See "Employees" below. Based on its belief that the market for cable systems has generally improved, the General Partner is evaluating strategies for liquidating the Partnership. These strategies include the potential sale of substantially all of the Partnership's assets to third parties and/or affiliates of the General Partner, and the subsequent liquidation of the Partnership. The General Partner expects to complete its evaluation within the next several months and intends to advise unitholders promptly if it believes that commencing a liquidating transaction would be in the best interests of unitholders. A cable television system receives television, radio and data signals at the system's "headend" site by means of over-the-air antennas, microwave relay systems and satellite earth stations. These signals are then modulated, amplified and distributed, primarily through coaxial and fiber optic distribution systems, to customers who pay a fee for this service. Cable television systems may also originate their own television programming and other information services for distribution through the system. Cable television systems generally are constructed and operated pursuant to non-exclusive franchises or similar licenses granted by local governmental authorities for a specified term of years. The Partnership's cable television systems (the "systems"), offer customers various levels (or "tiers") of cable services consisting of broadcast television signals of local network, independent and educational stations, a limited number of television signals from so-called "super stations" originating from distant cities (such as WGN), various satellite-delivered, non-broadcast channels (such as Cable News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN, Turner Network Television ("TNT") and The Disney Channel), programming originated locally by the cable television system (such as public, educational and governmental access programs) and informational displays featuring news, weather, stock market and financial reports, and public service announcements. A number of the satellite services are also offered in certain packages. For an extra monthly charge, the systems also offer "premium" television services to their customers. These services (such as Home Box Office ("HBO") and Showtime) are satellite channels that consist principally of feature films, live sporting events, concerts and other special entertainment features, usually presented without commercial interruption. See "Legislation and Regulation." -2- 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 the systems. In addition to customer revenues, the systems receive revenue from the sale of available advertising spots on advertiser-supported programming. The systems also offer to their customers home shopping services, which pay the systems a share of revenues from sales of products in the systems' service areas, in addition to paying the systems a separate fee in return for carrying their shopping service. Certain other channels have also offered the cable systems managed by FCLP, including those of the Partnership, fees in return for carrying their service. Due to a general lack of channel capacity available for adding new channels, the Partnership's management cannot predict the impact of such potential payments on the Partnership's business. See Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Partnership began its cable television business operations in 1984 with the acquisition of certain cable television systems and expanded its operations in 1985 with additional system acquisitions. The Partnership sold certain of its cable television systems during 1986 and 1987. As of December 31, 1998, the Partnership offered cable service in South Carolina, North Carolina and Tennessee. The two South Carolina systems are located in and around the cities of Kershaw (Lancaster County) and River Hills (York County). The Partnership's North Carolina system serves portions of Greene County, including the municipalities of Grifton, Snow Hill, Hookerton and Walstonburg. The three Tennessee systems cover portions of the municipalities of Covington, Bolivar, Brownsville and Burlison. As of December 31, 1998, the Partnership served approximately 10,800 basic subscribers in these areas. The Partnership does not expect to make any additional material acquisitions during the remaining term of the Partnership. FCLP receives a management fee and reimbursement of expenses from the General Partner for managing the Partnership's cable television operations. See Item 11., "Executive Compensation." The Chief Executive Officer of FHGI is Marc B. Nathanson. Mr. Nathanson has managed FCLP or its predecessors since 1975. Mr. Nathanson is a veteran of more than 30 years in the cable industry and, prior to forming FCLP's predecessors, held several key executive positions with some of the nation's largest cable television companies. The principal executive offices of the Partnership, the General Partner and FCLP are located at 10900 Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and their telephone number is (310) 824-9990. See Item 10., "Directors and Executive Officers of the Registrant." BUSINESS STRATEGY Historically, the Partnership has followed a systematic approach to acquiring, operating and developing cable television systems based on the primary goal of increasing operating cash flow while maintaining the quality of services offered by its cable television systems. The Partnership's business strategy has focused on serving small to medium-sized communities. The Partnership believes that given a similar rate, technical, and channel capacity/utilization profile, its cable television systems generally involve less risk of increased competition than systems in large urban cities. In the Partnership's markets, consumers have access to only a limited number of over-the-air broadcast television signals. In addition, these markets typically offer fewer competing entertainment alternatives than large cities. Nonetheless, the Partnership believes that all cable operators will face increased competition in the future from alternative providers of multi-channel video programming services. See "Competition." Adoption of rules implementing certain provisions of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") by the Federal Communications Commission (the "FCC") has had a negative impact on the Partnership's revenues and cash flow. These rules are subject to further amendment to give effect to the Telecommunications Act of 1996 (the "1996 Telecom Act"). Among other changes, the 1996 Telecom Act provides that the regulation of certain cable programming service tier ("CPST") rates will terminate on March 31, 1999. There can be no assurance as to what, if any, further action -3- may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Partnership's business. See "Legislation and Regulation" and Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." CLUSTERING The Partnership has sought to acquire cable television operations in communities that are proximate to other owned or affiliated systems in order to achieve the economies of scale and operating efficiencies associated with regional "clusters." The Partnership believes clustering can reduce marketing and personnel costs and can also reduce capital expenditures in cases where cable service can be delivered through a central headend reception facility. CAPITAL EXPENDITURES As noted in "Technological Developments," the Partnership's systems have no available channel capacity with which to add new channels or to provide pay-per-view offerings to customers. As a result, significant amounts of capital for future upgrades will be required in order to increase available channel capacity, improve quality of service and facilitate the expansion of new services such as advertising, pay-per-view, new unregulated tiers of satellite-delivered services and home shopping, so that the systems remain competitive within the industry. The Partnership's management has selected a technical standard that incorporates the use of fiber optic technology where applicable in its engineering design for the majority of its systems that are to be rebuilt. A system built with this type of architecture can provide for future channels of analog service as well as new digital services. Such a system will also permit the introduction of high speed data transmission/Internet access and telephony services in the future after incurring incremental capital expenditures related to these services. The Partnership is also evaluating the use of digital compression technology in its systems. See "Technological Developments" and "Digital Compression." As discussed in prior reports, the Partnership postponed a number of rebuild and upgrade projects because of the uncertainty related to implementation of the 1992 Cable Act and the negative impact thereof on the Partnership's business and access to capital. As a result, the Partnership's systems are significantly less technically advanced than had been expected prior to the implementation of deregulation. The Partnership is party to a loan agreement with an affiliate which provides for a revolving loan facility of $7,481,700 (the "Facility"). The Partnership expects to use borrowings under the Facility to upgrade its systems. The Partnership's upgrade program is presently estimated to require aggregate capital expenditures of approximately $8,300,000 and covers 12 franchise areas. These upgrades are currently required in six existing franchise agreements covering eight franchise areas. The upgrades required by the six existing franchise agreements are estimated to cost approximately $4,900,000 and must be completed by June 2000, December 2001 and February 2002. Capital expenditures budgeted for 1999 include approximately $48,000 to begin the upgrades and $501,000 for the replacement of other assets. See "Digital Compression," "Legislation and Regulation" and Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." DECENTRALIZED MANAGEMENT The General Partner manages the Partnership's systems on a decentralized basis. The General Partner believes that its decentralized management structure, by enhancing management presence at the system level, increases its sensitivity to the needs of its customers, enhances the effectiveness of its customer service efforts, eliminates the need for maintaining a large centralized corporate staff and facilitates the maintenance of good relations with local governmental authorities. -4- MARKETING The Partnership's marketing strategy is to provide added value to increasing levels of subscription services through "packaging." In addition to the basic service package, customers in substantially all of the systems may purchase an expanded group of regulated services, additional unregulated packages of satellite-delivered services, and premium services. The Partnership has employed a variety of targeted marketing techniques to attract new customers by focusing on delivering value, choice, convenience and quality. The Partnership employs direct mail, radio and local newspaper advertising, telemarketing and door-to-door selling utilizing demographic "cluster codes" to target specific messages to target audiences. In certain systems, the Partnership offers discounts to customers who purchase premium services on a limited trial basis in order to encourage a higher level of service subscription. The Partnership also has a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the initial decision to subscribe and encourage customers to purchase higher service levels. CUSTOMER SERVICE AND COMMUNITY RELATIONS The Partnership places a strong emphasis on customer service and community relations and believes that success in these areas is critical to its business. The Partnership has developed and implemented a wide range of monthly internal training programs for its employees, including its regional managers, that focus on the Partnership's operations and employee interaction with customers. The effectiveness of the Partnership's training program as it relates to the employees' interaction with customers is monitored on an ongoing basis, and a portion of the regional managers' compensation is tied to achieving customer service targets. The Partnership conducts an extensive customer survey on a periodic basis and uses the information in its efforts to enhance service and better address the needs of its customers. A quarterly newsletter keeps customers up to date on new service offerings, special events and company information. In addition, the Partnership is participating in the industry's Customer Service Initiative which emphasizes an on-time guarantee program for service and installation appointments. The Partnership's corporate executives and regional managers lead the Partnership's involvement in a number of programs benefiting the communities the Partnership serves, including, among others, Cable in the Classroom, Drug Awareness, Holiday Toy Drive and the Cystic Fibrosis Foundation. Cable in the Classroom is the cable television industry's public service initiative to enrich education through the use of commercial-free cable programming. In addition, a monthly publication, CABLE IN THE CLASSROOM magazine provides educational program listings by curriculum area, as well as feature articles on how teachers across the country use the programs. -5- DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS The table below sets forth certain operating statistics for the Partnership's cable systems as of December 31, 1998.
Average Monthly Premium Revenue Per Homes Basic Basic Service Premium Basic System Passed (1) Subscribers Penetration (2) Units (3) Penetration (4) Subscriber (5) - ------ ---------- ----------- --------------- --------- --------------- -------------- Snow Hill, NC 5,325 1,689 31.7% 522 30.9% $39.25 Kershaw, SC 4,205 2,209 52.5% 891 40.3% $36.51 Brownsville, TN 15,285 6,906 45.2% 2,991 43.3% $40.62 ------ ------- ----- Total 24,815 10,804 43.5% 4,404 40.8% $39.59 ------ ------- ----- ------ ------- -----
- ---------------------- 1 Homes passed refers to estimates by the Partnership of the approximate number of dwelling units in a particular community that can be connected to the distribution system without any further extension of principal transmission lines. Such estimates are based upon a variety of sources, including billing records, house counts, city directories and other local sources. 2 Basic subscribers as a percentage of homes passed by cable. 3 Premium service units include only single channel services offered for a monthly fee per channel and do not include tiers of channels offered as a package for a single monthly fee. 4 Premium service units as a percentage of homes subscribing to cable service. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes for more than one premium service. 5 Average monthly revenue per basic subscriber has been computed based on revenue for the year ended December 31, 1998. -6- CUSTOMER RATES AND SERVICES The Partnership's cable television systems offer customers packages of services that include the local area network, independent and educational television stations, a limited number of television signals from distant cities, numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN, TNT and The Disney Channel) and certain information and public access channels. For an extra monthly charge, the systems provide certain premium television services, such as HBO and Showtime. The Partnership also offers other cable television services to its customers. For additional charges, in most of its systems, the Partnership also rents remote control devices and VCR compatible devices (devices that make it easier for a customer to tape a program from one channel while watching a program on another). The service options offered by the Partnership vary from system to system, depending upon a system's channel capacity and viewer interests. Rates for services also vary from market to market and according to the type of services selected. Pursuant to the 1992 Cable Act, most cable television systems are subject to rate regulation of the basic service tier, the non-basic service tiers other than premium (per channel or program) services, the charges for installation of cable service, and the rental rates for customer premises equipment such as converter boxes and remote control devices. These rate regulation provisions affect all of the Partnership's systems not deemed to be subject to effective competition under the FCC's definition. Currently, none of the Partnership's systems are subject to effective competition. See "Legislation and Regulation." At December 31, 1998, the Partnership's monthly rates for basic cable service for residential customers, including certain discounted rates, ranged from $20.05 to $26.75 and its premium service rate was $11.95, excluding special promotions offered periodically in conjunction with the Partnership's marketing programs. A one-time installation fee, which the Partnership may wholly or partially waive during a promotional period, is usually charged to new customers. Commercial customers, such as hotels, motels and hospitals, are charged a negotiated, non-recurring fee for installation of service and monthly fees based upon a standard discounting procedure. Most multi-unit dwellings are offered a negotiated bulk rate in exchange for single-point billing and basic service to all units. These rates are also subject to regulation. EMPLOYEES The various personnel required to operate the Partnership's business are employed by the Partnership, the General Partner, its subsidiary corporation and FCLP. As of February 12, 1999, the Partnership had seven employees, the cost of which is charged directly to the Partnership. The employment costs incurred by the General Partner, its subsidiary corporation and FCLP are allocated and charged to the Partnership for reimbursement pursuant to the partnership agreement and management agreement. Other personnel required to operate the Partnership's business are employed by affiliates of the General Partner. The cost of such employment is allocated and charged to the Partnership. The amounts of these reimbursable costs are set forth below in Item 11., "Executive Compensation." TECHNOLOGICAL DEVELOPMENTS As part of its commitment to customer service, the Partnership seeks to apply technological advances in the cable television industry to its cable television systems on the basis of cost effectiveness, capital availability, enhancement of product quality and service delivery and industry-wide acceptance. Currently, the Partnership's systems have an average channel capacity of 36 which was fully utilized at December 31, 1998. The Partnership believes that system upgrades would enable it to provide customers with greater programming diversity, better picture quality and alternative communications delivery systems made possible by the introduction of fiber optic technology and by the possible future application of digital -7- compression. See "Business Strategy - Capital Expenditures," "Legislation and Regulation" and Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." The use of fiber optic cable as an alternative to coaxial cable is playing a major role in expanding channel capacity and improving the performance of cable television systems. Fiber optic cable is capable of carrying hundreds of video, data and voice channels and, accordingly, its utilization is essential to the enhancement of a cable television system's technical capabilities. The Partnership's current policy is to utilize fiber optic technology where applicable in rebuild projects which it undertakes. The benefits of fiber optic technology over traditional coaxial cable distribution plant include lower ongoing maintenance and power costs and improved picture quality and reliability. DIGITAL COMPRESSION The Partnership has been closely monitoring developments in the area of digital compression, a technology that will enable cable operators to increase the channel capacity of cable television systems by permitting a significantly increased number of video signals to fit in a cable television system's existing bandwidth. Depending on the technical characteristics of the existing system, the Partnership believes that the utilization of digital compression technology will enable its systems to increase channel capacity in certain systems in a manner that could, in the short term, be more cost efficient than rebuilding such systems with higher capacity distribution plant. However, the Partnership believes that unless the system has sufficient unused channel capacity and bandwidth, the use of digital compression to increase channel offerings is not a substitute for the rebuild of the system, which will improve picture quality, system reliability and quality of service. The use of digital compression will expand the number and types of services these systems offer and enhance the development of current and future revenue sources. This technology is under frequent management review. PROGRAMMING The Partnership purchases basic and premium programming for its systems from FCLP. In turn, FCLP charges the Partnership for these costs based on an estimate of what the General Partner could negotiate for such services for the 15 partnerships managed by the General Partner as a group (approximately 91,000 basic subscribers at December 31, 1998), which is generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Certain other channels have also offered FCLP and the Partnership's systems fees in return for carrying their service. Due to a lack of channel capacity available for adding new channels, the Partnership's management cannot predict the impact of such potential payments on its business. In addition, the FCC may require that such payments from programmers be offset against the programming fee increases which can be passed through to subscribers under the FCC's rate regulations. FCLP's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. FCLP does not have long-term programming contracts for the supply of a substantial amount of its programming. Accordingly, no assurance can be given that its, and correspondingly the Partnership's, programming costs will not increase substantially in the near future, or that other materially adverse terms will not be added to FCLP's programming contracts. Management believes, however, that FCLP's relations with its programming suppliers generally are good. The Partnership's cable programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to basic customers, requirements to carry channels under retransmission carriage agreements entered into with certain programming sources, increased costs to produce or purchase cable programming generally (including sports programming), inflationary increases and other factors. The 1996 retransmission carriage agreement negotiations resulted in the Partnership agreeing to carry one new service in its Brownsville and Kershaw systems, for which it expects to receive reimbursement of certain costs related to launching the service. All other negotiations were completed with essentially no change to the previous agreements. Under the FCC's rate regulations, increases -8- in programming costs for regulated cable services occurring after the earlier of March 1, 1994, or the date a system's basic cable service became regulated, may be passed through to customers. See "Legislation and Regulation - Federal Regulation - Carriage of Broadcast Television Signals." Generally, programming costs are charged among systems on a per customer basis. FRANCHISES Cable television systems are generally constructed and operated under non-exclusive franchises granted by local governmental authorities. These franchises typically contain many conditions, such as time limitations on commencement and completion of construction; conditions of service, including number of channels, types of programming and the provision of free service to schools and certain other public institutions; and the maintenance of insurance and indemnity bonds. The provisions of local franchises are subject to federal regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and Regulation." As of December 31, 1998, the Partnership held 22 franchises. These franchises, all of which are non-exclusive, provide for the payment of fees to the issuing authority. Annual franchise fees imposed on the Partnership systems range up to 5% of the gross revenues generated by a system. The 1984 Cable Act prohibits franchising authorities from imposing franchise fees in excess of 5% of gross revenues and also permits the cable system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. The following table groups the franchises of the Partnership's cable television systems by date of expiration and presents the number of franchises for each group of franchises and the approximate number and percentage of homes subscribing to cable service for each group as of December 31, 1998.
Number of Percentage of Year of Number of Basic Basic Franchise Expiration Franchises Subscribers Subscribers ----------------------- ---------- ----------- ------------- Prior to 2000 6 5,947 55.0% 2000 - 2004 5 1,892 17.5% 2005 and after 11 2,965 27.5% ---- ------- ------ Total 22 10,804 100.0% ---- ------- ------ ---- ------- ------
The Partnership operates cable television systems which serve multiple communities. As of December 31, 1998, all areas were served by franchises. In certain instances, where a single franchise comprises a large percentage of the customers in an operating region, the loss of such franchise could decrease the economies of scale achieved by the Partnership's clustering strategy. The Partnership has never had a franchise revoked for any of its systems and believes that it has satisfactory relationships with substantially all of its franchising authorities. The 1984 Cable Act provides, among other things, for an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied and the franchising authority acquires ownership of the system or effects a transfer of the system to another person, the operator generally is entitled to the "fair market value" for the system covered by such franchise, but no value may be attributed to the franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes comprehensive renewal procedures which require that an incumbent franchisee's renewal -9- application be assessed on its own merit and not as part of a comparative process with competing applications. See "Legislation and Regulation." COMPETITION Cable television systems compete with other communications and entertainment media, including over-the-air television broadcast signals which a viewer is able to receive directly using the viewer's own television set and antenna. The extent to which a cable system competes with over-the-air broadcasting depends upon the quality and quantity of the broadcast signals available by direct antenna reception compared to the quality and quantity of such signals and alternative services offered by a cable system. Cable systems also face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theaters and home video products, including videotape recorders and videodisc players. In recent years, the FCC has adopted policies providing for authorization of new technologies and a more favorable operating environment for certain existing technologies that provide, or may provide, substantial additional competition for cable television systems. The extent to which cable television service is competitive depends in significant part upon the cable television system's ability to provide an even greater variety of programming than that available over the air or through competitive alternative delivery sources. Individuals presently have the option to purchase home satellite dishes, which allow the direct reception of satellite-delivered broadcast and nonbroadcast program services formerly available only to cable television subscribers. Most satellite-distributed program signals are being electronically scrambled to permit reception only with authorized decoding equipment for which the consumer must pay a fee. The 1992 Cable Act enhances the right of cable competitors to purchase nonbroadcast satellite-delivered programming. See "Legislation and Regulation-Federal Regulation." Television programming is now also being delivered to individuals by high-powered direct broadcast satellites ("DBS") utilizing video compression technology. This technology has the capability of providing more than 100 channels of programming over a single high-powered DBS satellite with significantly higher capacity available if, as is the case with DIRECTV, multiple satellites are placed in the same orbital position. Unlike cable television systems, however, DBS satellites are limited by law in their ability to deliver local broadcast signals. One DBS provider, EchoStar, has announced plans to deliver a limited number of local broadcast signals in a limited number of markets and has initiated efforts to have the practice legalized. Legislation has been introduced in Congress which would permit DBS operators to elect to provide local broadcast signals to their customers under the Copyright Act. If DBS providers are ultimately permitted to deliver local broadcast signals, cable television systems would lose a significant competitive advantage. DBS service can be received virtually anywhere in the continental United States through the installation of a small rooftop or side-mounted antenna, and it is more accessible than cable television service where cable plant has not been constructed or where it is not cost effective to construct cable television facilities. DBS service is being heavily marketed on a nationwide basis by several service providers. In addition, medium-power fixed-service satellites can be used to deliver direct-to-home satellite services over small home satellite dishes, and one provider, PrimeStar, currently provides service to subscribers using such a satellite. DIRECTV has recently agreed to purchase PrimeStar. Multichannel multipoint distribution systems ("wireless cable") deliver programming services over microwave channels licensed by the FCC and received by subscribers with special antennas. Wireless cable systems are less capital intensive, are not required to obtain local franchises or to pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. To date, the ability of wireless cable services to compete with cable television systems has been limited by channel capacity (35-channel maximum) and the need for unobstructed line-of-sight over-the-air transmission. Although relatively few wireless cable systems in the United States are currently in operation or under construction, virtually all markets have been licensed or tentatively licensed. The use of digital compression technology, and the FCC's -10- recent amendment to its rules, which permits reverse path or two-way transmission over wireless facilities, may enable wireless cable systems to deliver more channels and additional services. Private cable television systems compete to service condominiums, apartment complexes and certain other multiple unit residential developments. The operators of these private systems, known as satellite master antenna television ("SMATV") systems, often enter into exclusive agreements with apartment building owners or homeowners' associations which preclude franchised cable television operators from serving residents of such private complexes. However, the 1984 Cable Act gives franchised cable operators the right to use existing compatible easements within their franchise areas upon nondiscriminatory terms and conditions. Accordingly, where there are preexisting compatible easements, cable operators may not be unfairly denied access or discriminated against with respect to the terms and conditions of access to those easements. There have been conflicting judicial decisions interpreting the scope of the access right granted by the 1984 Cable Act, particularly with respect to easements located entirely on private property. Under the 1996 Telecom Act, SMATV systems can interconnect non-commonly owned buildings without having to comply with local, state and federal regulatory requirements that are imposed upon cable systems providing similar services, as long as they do not use public rights of way. The FCC has initiated a new interactive television service which will permit non-video transmission of information between an individual's home and entertainment and information service providers. This service, which can be used by DBS systems, television stations and other video programming distributors (including cable television systems), is an alternative technology for the delivery of interactive video services. It does not appear at the present time that this service will have a material impact on the operations of cable television systems. The FCC has allocated spectrum in the 28 GHz range for a new multichannel wireless service that can be used to provide video and telecommunications services. The FCC recently completed the process of awarding licenses to use this spectrum via a market-by-market auction. It cannot be predicted at this time whether such a service will have a material impact on the operations of cable television systems. Cable systems generally operate pursuant to franchises granted on a non-exclusive basis. In addition, the 1992 Cable Act prohibits franchising authorities from unreasonably denying requests for additional franchises and permits franchising authorities to build and operate their own cable systems. Municipally-owned cable systems enjoy certain competitive advantages such as lower-cost financing and exemption from the payment of franchise fees. The 1996 Telecom Act eliminates the restriction against ownership (subject to certain exceptions) and operation of cable systems by local telephone companies within their local exchange service areas. Telephone companies are now free to enter the retail video distribution business through any means, such as DBS, wireless cable, SMATV or as traditional franchised cable system operators. Alternatively, the 1996 Telecom Act authorizes local telephone companies to operate "open video systems" (a facilities-based distribution system, like a cable system, but which is "open," i.e., also available for use by programmers other than the owner of the facility) without obtaining a local cable franchise, although telephone companies operating such systems can be required to make payments to local governmental bodies in lieu of cable franchise fees. Up to two-thirds of the channel capacity on an "open video system" must be available to programmers unaffiliated with the local telephone company. As a result of the foregoing changes, well financed businesses from outside the cable television industry (such as public utilities that own the poles to which cable is attached) may become competitors for franchises or providers of competing services. The 1996 Telecom Act, however, also includes numerous provisions designed to make it easier for cable operators and others to compete directly with local exchange telephone carriers in the provision of traditional telephone service and other telecommunications services. -11- Other new technologies, including Internet-based services, may become competitive with services that cable television systems can offer. The 1996 Telecom Act directed the FCC to establish, and the FCC has adopted, regulations and policies for the issuance of licenses for digital television ("DTV") to incumbent television broadcast licensees. DTV is expected to deliver high definition television pictures, multiple digital-quality program streams, as well as CD-quality audio programming and advanced digital services, such as data transfer or subscription video. The FCC also has authorized television broadcast stations to transmit textual and graphic information useful both to consumers and businesses. The FCC also permits commercial and noncommercial FM stations to use their subcarrier frequencies to provide nonbroadcast services including data transmission. The cable television industry competes with radio, television, print media and the Internet for advertising revenues. As the cable television industry continues to offer more of its own programming channels, e.g., Discovery and USA Network, income from advertising revenues can be expected to increase. Recently a number of Internet service providers, commonly known as ISPs, have requested local authorities and the FCC to provide rights of access to cable television systems' broadband infrastructure in order that they be permitted to deliver their services directly to cable television systems' customers. In a recent report, the FCC declined to institute a proceeding to examine this issue, and concluded that alternative means of access are or soon will be made to a broad range of ISPs. The FCC declined to take action on ISP access to broadband cable facilities, and the FCC indicated that it would continue to monitor this issue. Several local jurisdictions also are reviewing this issue. Telephone companies are accelerating the deployment of Asymmetric Digital Subscriber Line technology, known as ADSL. These companies report that ADSL technology will allow Internet access to subscribers at peak data transmission speeds equal or greater than that of modems over conventional telephone lines. Several of the Regional Bell Operating Companies have requested the FCC to fully deregulate packet-switched networks (a type of data communication in which small blocks of data are independently transmitted and reassembled at their destination) to allow them to provide high-speed broadband services, including interactive online services, without regard to present service boundaries and other regulatory restrictions. The Partnership cannot predict the likelihood of success of the online services offered by these competitors, (ISP attempts to gain access to the cable industry's broadband facilities), or the impact on the Partnership's business. Premium programming provided by cable systems is subject to the same competitive factors which exist for other programming discussed above. The continued profitability of premium services may depend largely upon the continued availability of attractive programming at competitive prices. Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment, are constantly occurring. Thus, it is not possible to predict the competitive effect that ongoing or future developments might have on the cable industry. See "Legislation and Regulation." -12- LEGISLATION AND REGULATION The cable television industry is regulated by the FCC, some state governments and substantially all local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past materially affected, and may in the future materially affect, the Partnership and the cable television industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable television industry and a description of certain state and local laws. The Partnership believes that the regulation of its industry remains a matter of interest to Congress, the FCC and other regulatory authorities. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the Partnership. FEDERAL REGULATION The primary federal statute dealing with the regulation of the cable television industry is the Communications Act of 1934 (the "Communications Act"), as amended. The three principal amendments to the Communications Act that shaped the existing regulatory framework for the cable television industry were the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations to implement the provisions contained in the Communications Act. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain of these federal regulations as adopted to date follows. RATE REGULATION The 1992 Cable Act replaced the FCC's previous standard for determining "effective competition," under which most cable systems were not subject to local rate regulation, with a statutory provision that resulted in nearly all cable television systems becoming subject to local rate regulation of basic service. The 1996 Telecom Act, however, expanded the definition of effective competition to include situations where a local telephone company or an affiliate, or any multichannel video provider using telephone company facilities, offers comparable video service by any means except DBS. A finding of effective competition exempts both basic and nonbasic tiers from regulation. Additionally, the 1992 Cable Act required the FCC to adopt a formula, enforceable by franchising authorities, to assure that basic cable rates are reasonable; allowed the FCC to review rates for nonbasic service tiers (other than per-channel or per-program services) in response to complaints filed by franchising authorities and/or cable customers; prohibited cable television systems from requiring subscribers to purchase service tiers above basic service in order to purchase premium services if the system is technically capable of doing so; required the FCC to adopt regulations to establish, on the basis of actual costs, the price for installation of cable service, remote controls, converter boxes and additional outlets; and allowed the FCC to impose restrictions on the retiering and rearrangement of cable services under certain limited circumstances. The 1996 Telecom Act limits the class of complainants regarding nonbasic tier rates to franchising authorities only and ends FCC regulation of nonbasic tier rates on March 31, 1999. The FCC's regulations contain standards for the regulation of basic and nonbasic cable service rates (other than per-channel or per-program services). Local franchising authorities and/or the FCC are empowered to order a reduction of existing rates which exceed the maximum permitted level for either basic and/or nonbasic cable services and associated equipment, and refunds can be required. The rate regulations adopt a benchmark price cap system for measuring the reasonableness of existing basic and nonbasic service rates. Alternatively, cable operators have the opportunity to make cost-of-service showings which, in some cases, may justify rates above the applicable benchmarks. The rules also require that charges for cable-related equipment (E.G., converter boxes and remote control devices) and installation services be unbundled from the provision of -13- cable service and based upon actual costs plus a reasonable profit. The regulations also provide that future rate increases may not exceed an inflation-indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs. Cost-based adjustments to these capped rates can also be made in the event a cable operator adds or deletes channels. In addition, new product tiers consisting of services new to the cable system can be created free of rate regulation as long as certain conditions are met, such as not moving services from existing tiers to the new tier. These provisions currently provide limited benefit to the Partnership's systems due to the lack of channel capacity previously discussed. There is also a streamlined cost-of-service methodology available to justify a rate increase on basic and regulated nonbasic tiers for "significant" system rebuilds or upgrades. Franchising authorities have become certified by the FCC to regulate the rates charged by the Partnership for basic cable service and for installation charges and equipment rental. The Partnership has had to bring its rates and charges into compliance with the applicable benchmark or equipment and installation cost levels in substantially all of its systems. This has had a negative impact on the Partnership's revenues and cash flow. FCC regulations adopted pursuant to the 1992 Cable Act require cable systems to permit customers to purchase video programming on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the cable system is technically incapable of doing so. Generally, an exemption from compliance with this requirement for cable systems that do not have such technical capability is available until a cable system obtains the capability, but not later than December 2002. At the present time, the Partnership's systems are unable to comply with this requirement. CARRIAGE OF BROADCAST TELEVISION SIGNALS The 1992 Cable Act adopted new television station carriage requirements. These rules allow commercial television broadcast stations which are "local" to a cable system, I.E., the system is located in the station's Area of Dominant Influence, to elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether the cable system will have to negotiate for "retransmission consent" to carry the station. Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, within the larger of: (i) a 50-mile radius from the station's city of license; or (ii) the station's Grade B contour (a measure of signal strength). Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable systems must obtain retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations," I.E., commercial satellite-delivered independent stations, such as WGN. The Partnership has thus far not been required to pay cash compensation to broadcasters for retransmission consent or been required by broadcasters to remove broadcast stations from the cable television channel line-ups. The Partnership has, however, agreed to carry some services in specified markets pursuant to retransmission consent arrangements which it believes are comparable to those entered into by most other large cable operators, and for which it pays monthly fees to the service providers, as it does with other satellite providers. The second election between must-carry and retransmission consent for local commercial television broadcast stations was October 1, 1996, and the Partnership has agreed to carry one new service in specified markets pursuant to these retransmission consent arrangements. The next election between must-carry and retransmission consent for local commercial television broadcast stations will be October 1, 1999. The FCC is currently conducting a rulemaking proceeding regarding the carriage responsibilities of cable television systems during the transition of broadcast television from analog to digital transmission. Specifically, the FCC is exploring whether to amend the signal carriage rules to accommodate the carriage of digital broadcast television signals. The Partnership is unable to predict the ultimate outcome of this proceeding or the impact of new carriage requirements on the operations of its cable systems. -14- NONDUPLICATION OF NETWORK PROGRAMMING Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or nonsimultaneous network programming of certain lower priority distant stations affiliated with the same network as the local station. DELETION OF SYNDICATED PROGRAMMING FCC regulations enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from certain other television stations which are carried by the cable system. The extent of such deletions will vary from market to market and cannot be predicted with certainty. However, it is possible that such deletions could be substantial and could lead the cable operator to drop a distant signal in its entirety. PROGRAM ACCESS The 1992 Cable Act contains provisions that are intended to foster the development of competition to traditional cable systems by regulating the access of competing multichannel video providers to vertically integrated, satellite-distributed cable programming services. Consequently, with certain limitations, the federal law generally precludes any satellite distributed programming service affiliated with a cable company from favoring an affiliated company over competitors; requires such programmers to sell their programming to other multichannel video providers; and limits the ability of such satellite program services to offer exclusive programming arrangements to their affiliates. FRANCHISE FEES Franchising authorities may impose franchise fees, but such payments cannot exceed 5% of a cable system's annual gross revenues. Under the 1996 Telecom Act, franchising authorities may not exact franchise fees from revenues derived from telecommunications services. RENEWAL OF FRANCHISES The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Even after the formal renewal procedures are invoked, franchising authorities and cable operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. The 1992 Cable Act makes several changes to the process under which a cable operator seeks to enforce his renewal rights, which could make it easier in some cases for a franchising authority to deny renewal. While a cable operator must still submit its request to commence renewal proceedings within thirty to thirty-six months prior to franchise expiration to invoke the formal renewal process, the request must be in writing and the franchising authority must commence renewal proceedings not later than six months after receipt of such notice. The four-month period for the franchising authority to grant or deny the renewal now runs from the submission of the renewal proposal, not the completion of the public proceeding. Franchising authorities may consider the "level" of programming service provided by a cable operator in deciding whether to renew. For alleged franchise violations occurring after December 29, 1984, franchising authorities are no longer precluded from denying renewal based on failure to substantially comply with the material terms of the franchise where the franchising authority has "effectively acquiesced" to such past violations. Rather, the franchising authority is estopped if, -15- after giving the cable operator notice and opportunity to cure, it fails to respond to a written notice from the cable operator of its failure or inability to cure. Courts may not reverse a denial of renewal based on procedural violations found to be "harmless error." CHANNEL SET-ASIDES The 1984 Cable Act permits local franchising authorities to require cable operators to set aside certain channels for public, educational and governmental access programming. The 1984 Cable Act further requires cable television systems with thirty-six or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. While the 1984 Cable Act allowed cable operators substantial latitude in setting leased access rates, the 1992 Cable Act requires leased access rates to be set according to a formula determined by the FCC. COMPETING FRANCHISES The 1992 Cable Act prohibits franchising authorities from unreasonably refusing to grant franchises to competing cable television systems and permits franchising authorities to operate their own cable television systems without franchises. OWNERSHIP The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against local exchange telephone companies ("LECs") providing video programming directly to customers within their local telephone exchange service areas. However, with certain limited exceptions, a LEC may not acquire more than a 10% equity interest in an existing cable system operating within the LEC's service area. The 1996 Telecom Act also authorized LECs and others to operate "open video systems." A recent judicial decision overturned various parts of the FCC's open video rules, including the FCC's restriction preventing local governmental authorities from requiring open video system operators to obtain a franchise. The Partnership expects the FCC to modify its open video rules to comply with the federal court's decision, but is unable to predict the impact any rule modifications may have on the Partnership's business and operations. See "Business-Competition." The 1984 Cable Act and the FCC's rules prohibit the common ownership, operation, control or interest in a cable system and a local television broadcast station whose predicted grade B contour (a measure of a television station's signal strength as defined by the FCC's rules) covers any portion of the community served by the cable system. The 1996 Telecom Act eliminates the statutory ban and directs the FCC to review its rule within two years. Such a review is presently pending. Finally, in order to encourage competition in the provision of video programming, the FCC adopted a rule prohibiting the common ownership, affiliation, control or interest in cable television systems and wireless cable facilities having overlapping service areas, except in very limited circumstances. The 1992 Cable Act codified this restriction and extended it to co-located SMATV systems. Permitted arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom Act exempts cable systems facing effective competition from the wireless cable and SMATV restriction. In addition, a cable operator can purchase a SMATV system serving the same area and technically integrate it into the cable system. The 1992 Cable Act permits states or local franchising authorities to adopt certain additional restrictions on the ownership of cable television systems. Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of cable systems which a single cable operator can own. In general, no cable operator can have an attributable interest in cable systems which pass more than 30% of all homes nationwide. Attributable interests for these purposes include voting interests of 5% or more (unless there is another single holder of more than 50% of the voting stock), officerships, directorships, general partnership interests and limited partnership interests (unless the limited partners have no material involvement in the limited partnership's business). These rules are under review by the -16- FCC. The FCC has stayed the effectiveness of these rules pending the outcome of the appeal from a U.S. District Court decision holding the multiple ownership limit provision of the 1992 Cable Act unconstitutional. The FCC has also adopted rules which limit the number of channels on a cable system which can be occupied by programming in which the entity which owns the cable system has an attributable interest. The limit is 40% of the first 75 activated channels. The FCC also recently commenced a rulemaking proceeding to examine, among other issues, whether any limitations on cable-DBS cross-ownership are warranted in order to prevent anticompetitive conduct in the video services market. FRANCHISE TRANSFERS The 1992 Cable Act requires franchising authorities to act on any franchise transfer request submitted after December 4, 1992 within 120 days after receipt of all information required by FCC regulations and by the franchising authority. Approval is deemed to be granted if the franchising authority fails to act within such period. TECHNICAL REQUIREMENTS The FCC has imposed technical standards applicable to the cable channels on which broadcast stations are carried, and has prohibited franchising authorities from adopting standards which are in conflict with or more restrictive than those established by the FCC. Those standards are applicable to all classes of channels which carry downstream National Television System Committee (the "NTSC") video programming. The FCC also has adopted additional standards applicable to cable television systems using frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful interference with aeronautical navigation and safety radio services and has also established limits on cable system signal leakage. Periodic testing by cable operators for compliance with the technical standards and signal leakage limits is required and an annual filing of the results of these measurements is required. The 1992 Cable Act requires the FCC to periodically update its technical standards to take into account changes in technology. Under the 1996 Telecom Act, local franchising authorities may not prohibit, condition or restrict a cable system's use of any type of subscriber equipment or transmission technology. The FCC has adopted regulations to implement the requirements of the 1992 Cable Act designed to improve the compatibility of cable systems and consumer electronics equipment. Among other things, these regulations generally prohibit cable operators from scrambling their basic service tier. The 1996 Telecom Act directs the FCC to set only minimal standards to assure compatibility between television sets, VCRs and cable systems, and to rely on marketplace competition to best determine which features, functions, protocols, and product and service options meet the needs of consumers. Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure the competitive availability to consumers of customers premises equipment, such as converters, used to access the services offered by cable television systems and other multichannel video programming distributions ("MVPD"). Pursuant to those rules, consumers are given the right to attach compatible equipment to the facilities of their MVPD so long as the equipment does not harm the network, does not interfere with the services purchased by other customers, and is not used to receive unauthorized services. As of July 1, 2000, MVPDs (other than DBS operators) are required to separate security from non-security functions in the customer premises equipment which they sell or lease to their customers and offer their customers the option of using component security modules obtained from the MVPD with set-top units purchased or leased from retail outlets. As of January 1, 2005, MVPDs will be prohibited from distributing new set -top equipment integrating both security and non-security functions to their customers. -17- POLE ATTACHMENTS The FCC currently regulates the rates and conditions imposed by certain public utilities for use of their poles unless state public service commissions are able to demonstrate that they regulate the rates, terms and conditions of cable television pole attachments. In the absence of state regulation, the FCC administers such pole attachment rates through use of a formula which it has devised. The 1996 amendments to the Communications Act modified the FCC's pole attachment regulatory scheme by requiring the FCC to adopt new regulations. These regulations become effective in 2001 and govern the charges for pole attachments used by companies, including cable operators, that provide telecommunications services by immediately permitting certain providers of telecommunications services to rely upon the protections of the current law until the new rate formula becomes effective in 2001, and by requiring that utilities provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of-way controlled by the utility. In adopting its new attachment regulations, the FCC concluded, in part, that a cable operator providing Internet service on its cable system is not providing a telecommunications service for purposes of the new rules. The new rate formula adopted by the FCC and which is applicable for any party, including cable systems, which offer telecommunications services will result in significantly higher attachment rates for cable systems which choose to offer such services. Any resulting increase in attachment rates as a result of the FCC's new rate formula will be phased in over a five-year period in equal annual increments, beginning in February 2001. Several parties have requested the FCC to reconsider its new regulations and several parties have challenged the new rules in court. A federal district court recently upheld the constitutionality of the new statutory provision, and the utilities involved in that litigation have appealed the lower court's decision. The FCC also has initiated a proceeding to determine whether it should adjust certain elements of the current rate formula. If adopted, these adjustments could increase rates for pole attachments and conduit space. The Partnership is unable to predict the outcome of this current litigation or the ultimate impact of any revised FCC rate formula or of any new pole attachment rate regulations on its business and operations. OTHER MATTERS Other matters subject to FCC regulation include certain restrictions on a cable system's carriage of local sports programming; rules governing political broadcasts; customer service standards; obscenity and indecency; home wiring; equal employment opportunity; privacy; closed captioning; sponsorship identification; system registration; and limitations on advertising contained in nonbroadcast children's programming. COPYRIGHT Cable television systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable system with respect to over-the-air television stations. Any future adjustment to the copyright royalty rates will be done through an arbitration process supervised by the U.S. Copyright Office. Cable operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for overpayment of copyright fees. Copyrighted music transmitted in programming supplied to cable television systems by pay cable networks (such as HBO) and basic cable networks (such as USA Network) is licensed by the networks through private agreements with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"), the two major performing rights organizations in the United States. As a result of extensive litigation, -18- both ASCAP and BMI now offer "through to the viewer" licenses to the cable networks which cover the retransmission of the cable networks' programming by cable systems to their customers. Payment for music performed in programming offered on a per program basis remains unsettled. The Partnership recently participated in a settlement with BMI for payment of fees in connection with the Request pay-per-view network. Industry litigation of this issue with ASCAP is likely. Copyrighted music transmitted by cable systems themselves, E.G., on local origination channels or in advertisements inserted locally on cable networks, must also be licensed. Cable industry negotiations with ASCAP, BMI and SESAC, Inc. (a third and smaller performing rights organization) are in progress. LOCAL REGULATION Because a cable television system uses local streets and rights-of-way, cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions. Although the 1984 Cable Act provides for certain procedural protections, there can be no assurance that renewals will be granted or that renewals will be made on similar terms and conditions. Upon receipt of a franchise, the cable system owner usually is subject to a broad range of obligations to the issuing authority directly affecting the business of the system. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction, and even from city to city within the same state, historically ranging from reasonable to highly restrictive or burdensome. The specific terms and conditions of a franchise and the laws and regulations under which it was granted directly affect the profitability of the cable television system. Cable franchises generally contain provisions governing charges for basic cable television services, fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and the number and types of cable services provided. The 1996 Telecom Act prohibits a franchising authority from either requiring or limiting a cable operator's provision of telecommunications services. The 1984 Cable Act places certain limitations on a franchising authority's ability to control the operation of a cable system operator, and the courts have from time to time reviewed the constitutionality of several general franchise requirements, including franchise fees and access channel requirements, often with inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive franchises, and allows franchising authorities to exercise greater control over the operation of franchised cable television systems, especially in the area of customer service and rate regulation. Moreover, franchising authorities are immunized from monetary damage awards arising from regulation of cable television systems or decisions made on franchise grants, renewals, transfers and amendments. Existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry can be predicted at this time. ITEM 2. PROPERTIES The Partnership owns or leases parcels of real property for signal reception sites (antenna towers and headends), microwave facilities and business offices, and owns or leases its service vehicles. The Partnership believes that its properties, both owned and leased, are in good condition and are suitable and adequate for the Partnership's business operations. -19- The Partnership owns substantially all of the assets related to its cable television operations, including its program production equipment, headend (towers, antennas, electronic equipment and satellite earth stations), cable plant (distribution equipment, amplifiers, customer drops and hardware), converters, test equipment and tools and maintenance equipment. ITEM 3. LEGAL PROCEEDINGS The Partnership is periodically a party to various legal proceedings. Such legal proceedings are ordinary and routine litigation proceedings that are incidental to the Partnership's business and management believes that the outcome of all pending legal proceedings will not, in the aggregate, have a material adverse effect on the financial condition of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -20- PART II ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY HOLDER MATTERS LIQUIDITY While the Partnership's equity securities, which consist of units of limited partnership interests, are publicly held, there is no established public trading market for the units and it is not expected that a market will develop. The approximate number of equity security holders of record was 977 as of December 31, 1998. In addition to restrictions on the transferability of units contained in the Partnership Agreement, the transferability of units may be affected by restrictions on resales imposed by federal or state law. Pursuant to documents filed with the Securities and Exchange Commission on February 18, 1999, Madison Liquidity Investors 104, LLC ("Madison") initiated a tender offer to purchase up to approximately 9.9% of the outstanding units for $210 per unit. On March 2, 1999, the Partnership filed a Recommendation Statement on Schedule 14D-9 and distributed a letter to unitholders recommending that unitholders reject Madison's offer. DISTRIBUTIONS The Partnership Agreement generally provides that all Partnership profits, gains, losses, credits, and cash distributions (all as defined) from operations or liquidation be allocated one percent to the general partners 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 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. The policy of the General Partner (although there is no contractual obligation to do so) is to cause the Partnership to make cash distributions on a quarterly basis throughout the operational life of the Partnership, assuming the availability of sufficient cash flow from Partnership operations. The amount of such distributions, if any, will vary from quarter to quarter depending upon the Partnership's results of operations and the General Partner's determination of whether otherwise available funds are needed for the Partnership's ongoing working capital and liquidity requirements. It is also the General Partner's policy to distribute available net proceeds from sales of cable television systems. However, on February 22, 1994, the FCC announced significant amendments to its rules implementing certain provisions of the 1992 Cable Act. Compliance with these rules has had a negative impact on the Partnership's revenues and cash flow. The Partnership began making periodic cash distributions to limited partners during 1984 and discontinued distributions in January 1990. No distributions were made during 1996, 1997 or 1998. For more information regarding distributions, see Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Partnership's ability to pay distributions, the actual level of distributions and the continuance of distributions, if any, will depend on a number of factors, including the amount of cash flow from operations, projected capital expenditures, provision for contingent liabilities, availability of bank -21- financing, regulatory or legislative developments governing the cable television industry, and growth in customers. Some of these factors are beyond the control of the Partnership, and consequently, no assurances can be given regarding the level or timing of future distributions, if any. The Partnership's Facility does not restrict the payment of distributions to partners unless an event of default exists thereunder or the Partnership's ratio of debt to cash flow is greater than 4 to 1. -22 ITEM 6. SELECTED FINANCIAL DATA Set forth below is selected financial data of the Partnership for the five years ended December 31, 1998. This data should be read in conjunction with the Partnership's financial statements included in Item 8 hereof and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7.
Year Ended December 31, ----------------------------------------------------------------------------------- OPERATIONS STATEMENT DATA 1994 1995 1996 1997 1998 -------------- ------------- -------------- ------------- ------------- Revenues $ 4,532,800 $ 4,919,300 $ 5,243,500 $ 5,369,200 $ 5,221,100 Costs and expenses (2,964,900) (3,010,900) (3,175,000) (3,473,500) (3,184,700) Depreciation and amortization (1,242,600) (1,173,500) (570,600) (583,100) (747,600) -------------- ------------- -------------- ------------- ------------- Operating income 325,300 734,900 1,497,900 1,312,600 1,288,800 Interest expense (275,200) (270,600) (187,900) (107,500) (103,900) Interest income 29,800 53,200 43,500 34,700 25,700 Gain on sale of cable assets - 3,300 100 - - Casualty gain (loss) - - - 202,400 (271,000) -------------- ------------- -------------- ------------- ------------- Net income $ 79,900 $ 520,800 $ 1,353,600 $ 1,442,200 $ 939,600 -------------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- ------------- ------------- PER UNIT OF LIMITED PARTNERSHIP INTEREST: Net income $ 2.64 $ 17.22 $ 44.76 $ 47.69 $ 31.07 -------------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- ------------- ------------- OTHER OPERATING DATA Net cash provided by operating activities $ 1,380,200 $ 1,712,900 $ 1,804,800 $ 1,830,400 $ 2,084,800 Net cash used in investing activities (504,900) (960,700) (1,170,000) (825,600) (1,398,400) Net cash used in financing activities (440,100) (986,600) (565,700) (1,546,300) (113,300) EBITDA (1) 1,567,900 1,908,400 2,068,500 1,895,700 2,036,400 EBITDA to revenues 34.6% 38.8% 39.4% 35.3% 39.0% Total debt to EBITDA 1.9x 1.0x .5x .1x - Capital expenditures $ 480,800 $ 934,300 $ 1,149,600 $ 776,900 $ 1,389,800 As of December 31, ------------------------------------------------------------------------------------ BALANCE SHEET DATA 1994 1995 1996 1997 1998 -------------- ------------- -------------- ------------- -------------- Total assets $ 4,196,700 $ 3,853,400 $ 4,605,200 $ 4,696,100 $ 5,417,400 Total debt 3,011,000 1,942,800 1,042,800 250,000 - General partner's deficit (74,200) (69,000) (55,500) (41,100) (31,700) Limited partners' capital (deficit) (80,300) 435,300 1,775,400 3,203,200 4,133,400
- -------------------- 1 EBITDA is calculated as operating income before depreciation and amortization. Based on its experience in the cable television industry, the Partnership believes that EBITDA and related measures of cash flow serve as important financial analysis tools for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. In addition, the covenants in the primary debt instrument of the Partnership use EBITDA-derived calculations as a measure of financial performance. EBITDA is not a measurement determined under GAAP and does not represent cash generated from operating activities in accordance with GAAP. EBITDA should not be considered by the reader as an alternative to net income as an indicator of the Partnership's financial performance or as an alternative to cash flows as a measure of liquidity. In addition, the Partnership's definition of EBITDA may not be identical to similarly titled measures used by other companies. -23- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The 1992 Cable Act required the FCC to, among other things, implement extensive regulation of the rates charged by cable television systems for basic and programming service tiers, installation, and customer premises equipment leasing. Compliance with those rate regulations has had a negative impact on the Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the 1996 Telecom Act provides that the regulation of CPST rates will terminate on March 31, 1999. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Partnership's business. Accordingly, the Partnership's historical financial results as described below are not necessarily indicative of future performance. This Report includes certain forward looking statements regarding, among other things, future results of operations, regulatory requirements, competition, capital needs and general business conditions applicable to the Partnership. 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 1998 COMPARED TO 1997 The Partnership's revenues decreased from $5,369,200 to $5,221,100, or by 2.8%, for the year ended December 31, 1998 compared to 1997. Of the $148,100 decrease, $326,700 was due to decreases in the number of subscriptions for basic, pay, tier and equipment rental services. These decreases were partially offset by a $467,300 increase due to increases in regulated service rates that were implemented by the Partnership in 1997 and a $7,500 increase in other revenue producing items. As of December 31, 1998, the Partnership had approximately 10,800 basic subscribers and 4,400 premium service units. Service costs decreased from $2,012,500 to $1,848,400, or by 8.2%, for the year ended December 31, 1998 as compared to 1997. Service costs represent costs directly attributable to providing cable services to customers. Lower copyright fees accounted for most of the decrease as a result of the industry-wide change in status of one satellite service that resulted in lower fees. Copyright fees also decreased in direct relation to decreased revenues as described above. General and administrative expenses decreased from $857,400 to $676,000, or by 21.2%, for the year ended December 31, 1998 as compared to 1997, primarily due to decreases in bad debt expense, personnel costs and customer billing expenses. Management fees and reimbursed expenses increased from $603,600 to $660,300, or by 9.4%, for the year ended December 31, 1998 as compared to 1997. Management fees decreased in direct relation to decreased revenues as described above. Reimbursed expenses increased as a result of transferring system operating management of the Partnership's Tennessee systems from an affiliate to the General Partner. Depreciation and amortization expense increased from $583,100 to $747,600, or by 28.2%, for the year ended December 31, 1998 as compared to 1997, primarily due to depreciation of asset additions -24- including expenditures to replace segments of the Partnership's North Carolina cable plant and subscriber connections that were damaged by a storm. Operating income decreased from $1,312,600 to $1,288,800, or by 1.8%, for the year ended December 31, 1998 as compared to 1997, primarily due to increases in amortization and depreciation expense and decreases in revenues as described above. Interest expense decreased from $107,500 to $103,900, or by 3.3%, for the year ended December 31, 1998 as compared to 1997, primarily due to lower average borrowings in 1998 caused by the repayment of the Partnership's note payable in June 1998. Interest income decreased from $34,700 to $25,700, or by 25.9%, for the year ended December 31, 1998 as compared to 1997, primarily due to lower average cash balances available for investment. The Partnership recognized a $271,000 casualty loss during 1998 related to storm damage sustained by its North Carolina system in 1996 and 1998. See Note 3 of Notes to Financial Statements. Due to the factors described above, the Partnership's net income decreased from $1,442,200 to $939,600, or by 34.8%, for the year ended December 31, 1998 compared to 1997. EBITDA is calculated as operating income before depreciation and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a percentage of revenues increased from 35.3% in 1997 to 39.0% during 1998. The increase was primarily due to lower copyright fees and bad debt expense as described above. EBITDA increased from $1,895,700 to $2,036,400, or by 7.4%, as a result. 1997 COMPARED TO 1996 The Partnership's revenues increased from $5,243,500 to $5,369,200, or by 2.4%, for the year ended December 31, 1997 compared to 1996. Of the $125,700 increase, $358,500 was due to increases in regulated service rates that were implemented by the Partnership in the second and fourth quarters of 1996 and the fourth quarter of 1997, $64,800 was due to the July 1, 1996 restructuring of The Disney Channel from a premium channel to a tier channel and $2,500 was due to increases in other revenue producing items. These increases were partially offset by a $300,100 decrease due to decreases in the number of subscriptions for basic, pay, tier and equipment rental services. As of December 31, 1997, the Partnership had approximately 11,200 basic subscribers and 4,900 premium service units. Service costs increased from $1,859,500 to $2,012,500, or by 8.2%, for the year ended December 31, 1997 as compared to 1996. Service costs represent costs directly attributable to providing cable services to customers. Increases in copyright fees and decreases in capitalization of labor and overhead costs accounted for the majority of the increase. Copyright fees increased in direct relation to increased revenues as described above. Capitalization of labor and overhead costs decreased as a result of fewer capital projects in 1997. General and administrative expenses increased from $758,100 to $857,400, or by 13.1%, for the year ended December 31, 1997 as compared to 1996, primarily due to an increase in bad debt expense. Management fees and reimbursed expenses increased from $557,400 to $603,600, or by 8.3%, for the year ended December 31, 1997 as compared to 1996. Management fees increased in direct relation to increased revenues as described above. Reimbursed expenses increased primarily due to higher allocated personnel costs resulting from staff additions and wage increases. -25- Depreciation and amortization expense increased from $570,600 to $583,100, or by 2.2%, for the year ended December 31, 1997 as compared to 1996, primarily due to depreciation of asset additions. Operating income decreased from $1,497,900 to $1,312,600, or by 12.4%, for the year ended December 31, 1997 as compared to 1996, primarily due to increases in bad debt expense and copyright fees as described above. Interest expense decreased from $187,900 to $107,500, or by 42.8%, for the year ended December 31, 1997 as compared to 1996, primarily due to lower average borrowings during 1997. Interest income decreased from $43,500 to $34,700, or by 20.2%, for the year ended December 31, 1997 as compared to 1996, due to lower average cash balances available for investment. The Partnership recognized a $202,400 gain on involuntary conversion of cable system assets during 1997 related to storm damage sustained in its North Carolina system. Due to the factors described above, the Partnership's net income increased from $1,353,600 to $1,442,200 for the year ended December 31, 1997 compared to 1996. EBITDA is calculated as operating income before depreciation and amortization. See footnote 1 to "Selected Financial Data." EBITDA as a percentage of revenues decreased from 39.4% during 1996 to 35.3% in 1997. The decrease was primarily caused by higher bad debt expense and copyright fees. EBITDA decreased from $2,068,500 to $1,895,700, or by 8.4%, as a result. DISTRIBUTIONS TO PARTNERS As provided in the partnership agreement, distributions to partners are funded from income before depreciation and amortization after providing for working capital and other liquidity requirements, including debt service and capital expenditures not otherwise funded by borrowings. No distributions were made during 1996, 1997 or 1998. No assurance can be given regarding the level or timing of future distributions, if any. LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary objective, having invested its net offering proceeds in cable systems, is to distribute to its partners all available cash flow from operations and proceeds from the sale of cable systems, if any, after providing for expenses, debt service and capital requirements. In general, these capital requirements involve expansion, improvement and upgrade of the Partnership's existing cable systems. Based on its belief that the market for cable systems has generally improved, the General Partner is evaluating strategies for liquidating the Partnership. These strategies include the potential sale of substantially all of the Partnership's assets to third parties and/or affiliates of the General Partner, and the subsequent liquidation of the Partnership. The General Partner expects to complete its evaluation within the next several months and intends to advise unitholders promptly if it believes that commencing a liquidating transaction would be in the best interests of unitholders. The Partnership relies upon the availability of cash generated from operations and possible borrowings to fund its ongoing expenses, debt service and capital requirements. The Partnership's capital expenditures were $1,389,800 in the year ended December 31, 1998. As of the date of this Report, substantially all of the available channel capacity in the Partnership's cable television systems is being utilized and each of such systems requires an upgrade. The entire upgrade program is presently estimated to -26- require aggregate capital expenditures of approximately $8,300,000 and covers 12 franchise areas. These upgrades are currently required in six existing franchise agreements covering eight franchise areas. The upgrades required by the six existing franchise agreements are estimated to cost approximately $4,900,000 and must be completed by June 2000, December 2001 and February 2002. Capital expenditures budgeted for 1999 include approximately $48,000 to begin three of the upgrades and $501,000 for the replacement of other assets. The Partnership believes that borrowings under its credit agreement together with cash flow from operations will be adequate to fund capital expenditures and other liquidity requirements. The Partnership is party to a loan agreement with Enstar Finance Company, LLC ("EFC"), a subsidiary of the General Partner. The loan agreement provides for a revolving loan facility of $7,481,700 (the "Facility"). The Partnership prepaid its outstanding borrowings of $250,000 on June 22, 1998, although the Partnership's management expects to reborrow under the Facility in the future for the upgrade of the Partnership's systems. The Partnership's Facility matures on August 31, 2001, at which time all amounts then outstanding are due in full. Borrowings bear interest at the lender's base rate (7.75% at December 31, 1998) plus 0.625%, or at an offshore rate plus 1.875%. Under certain circumstances, the Partnership is required to make mandatory prepayments, which permanently reduce the maximum commitment under the Facility. The Facility contains certain financial tests and other covenants including, among others, restrictions on incurrence of indebtedness, investments, sales of assets, acquisitions and other covenants, defaults and conditions. The Facility does not restrict the payment of distributions to partners unless an event of default exists thereunder or the Partnership's ratio of debt to cash flow is greater than 4 to 1. However, due to the upgrade program discussed above, the General Partner believes it is critical to conserve cash and borrowing capacity and, consequently, has concluded that it would not be prudent for the Partnership to resume paying distributions at this time. Beginning in August 1997, the General Partner elected to self-insure the Partnership's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. In October 1998, FCLP reinstated third party insurance coverage for all of the cable television properties owned or managed by FCLP to cover damage to cable distribution plant and subscriber connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties owned or managed by FCLP. Approximately 64% of the Partnership's subscribers are served by its system in Brownsville, Tennessee and neighboring communities. Significant damage to the system due to seasonal weather conditions or other events could have a material adverse effect on the Partnership's liquidity and cash flows. The Partnership continues to purchase insurance coverage in amounts its management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. During the fourth quarter of 1998, FCLP, on behalf of the General Partner, continued its identification and evaluation of the Partnership's Year 2000 business risks and its exposure to computer systems, to operating equipment which is date sensitive and to the interface systems of its vendors and service providers. The evaluation has focused on identification and assessment of systems and equipment that may fail to distinguish between the year 1900 and the year 2000 and, as a result, may cease to operate or may operate improperly when dates after December 31, 1999 are introduced. Based on a study conducted in 1997, FCLP concluded that certain of the Partnership's information systems were not Year 2000 compliant and elected to replace such software and hardware with -27- applications and equipment certified by the vendors as Year 2000 compliant. FCLP installed a number of the new systems in January 1999. The remaining systems are expected to be installed by mid-1999. The total anticipated cost, including replacement software and hardware, will be borne by FCLP. FCLP is utilizing internal and external resources to install the new systems. FCLP does not believe that any other significant information technology ("IT") projects affecting the Partnership have been delayed due to efforts to identify and address Year 2000 issues. Additionally, FCLP has continued to inventory the Partnership's operating and revenue generating equipment to identify items that need to be upgraded or replaced and has surveyed cable equipment manufacturers to determine which of their models require upgrade or replacement to become Year 2000 compliant. Identification and evaluation, while ongoing, are substantially completed and a plan is being developed to remediate non-compliant equipment prior to January 1, 2000. FCLP expects to complete its planning process by the end of May 1999. Upgrade or replacement, testing and implementation will be performed thereafter. The cost of such replacement or remediation, currently estimated at $2,000, is not expected to have a material effect on the Partnership's financial position or results of operations. The Partnership had not incurred any costs related to the Year 2000 project as of December 31, 1998. FCLP plans to inventory, assess, replace and test equipment with embedded computer chips in a separate segment of its project, presently scheduled for the second half of 1999. FCLP has continued to survey the Partnership's significant third party vendors and service suppliers to determine the extent to which the Partnership's interface systems are vulnerable should those third parties fail to solve their own Year 2000 problems on a timely basis. Among the most significant service providers upon which the Partnership relies are programming suppliers, power and telephone companies, various banking institutions and the Partnership's customer billing service. A majority of these service suppliers either have not responded to FCLP's inquiries regarding their Year 2000 compliance programs or have responded that they are unsure if they will become compliant on a timely basis. Consequently, there can be no assurance that the systems of other companies on which the Partnership must rely will be Year 2000 compliant on a timely basis. FCLP expects to develop a contingency plan in 1999 to address possible situations in which various systems of the Partnership, or of third parties with which the Partnership does business, are not compliant prior to January 1, 2000. Considerable effort will be directed toward distinguishing between those contingencies with a greater probability of occurring from those whose occurrence is considered remote. Moreover, such a plan will necessarily focus on systems whose failure poses a material risk to the Partnership's results of operations and financial condition. The Partnership's most significant Year 2000 risk is an interruption of service to subscribers, resulting in a potentially material loss of revenues. Other risks include impairment of the Partnership's ability to bill and/or collect payment from its customers, which could negatively impact its liquidity and cash flows. Such risks exist primarily due to technological operations dependent upon third parties and to a much lesser extent to those under the control of the Partnership. Failure to achieve Year 2000 readiness in either area could have a material adverse impact on the Partnership. The Partnership is unable to estimate the possible effect on its results of operations, liquidity and financial condition should its significant service suppliers fail to complete their readiness programs prior to the Year 2000. Depending on the supplier, equipment malfunction or type of service provided, as well as the location and duration of the problem, the effect could be material. For example, if a cable programming supplier encounters an interruption of its signal due to a Year 2000 satellite malfunction, the Partnership will be unable to provide the signal to its cable subscribers, which could result in a loss of revenues, although the Partnership would attempt to provide its customers with alternative program services for the period during which it could not provide the original signal. Due to the number of individually owned and operated channels the Partnership carries for its subscribers, and the packaging of those channels, the Partnership is unable to estimate any reasonable dollar impact of such interruption. -28- 1998 VS. 1997 Operating activities provided $254,400 more cash in the year ended December 31, 1998 than in 1997. Collection of an insurance claim receivable provided $304,500 more cash in 1998 due to receipt of the insurance settlement during the year. Changes in accounts receivable and prepaid expenses provided $25,500 more cash in 1998 than in 1997 due to differences in the timing of receivable collections and in the payment of prepaid expenses. The Partnership used $190,100 more cash in 1998 for the payment of liabilities owed to third party creditors due to differences in the timing of payments. The Partnership used $572,800 more cash in investing activities in 1998 than in 1997 due to a $612,900 increase in capital expenditures, partially offset by a $40,100 decrease in expenditures for intangible assets. Financing activities used $1,433,000 less cash in 1998 than in 1997. The Partnership used $780,300 less cash to pay deferred management fees and reimbursed expenses owed to the General Partner, $542,800 less cash, net of new borrowings, for the repayment of debt and $109,900 less cash for deferred loan costs related to its Facility. 1997 VS. 1996 Operating activities provided $25,600 more cash in the year ended December 31, 1997 than in 1996. The Partnership used $147,900 less cash to pay liabilities owed to third-party creditors as a result of differences in the timing of payments. Changes in receivables, prepaid expenses and other assets used $56,900 more cash in 1997 due to differences in the timing of receivable collections and in the payment of prepaid expenses. The Partnership used $344,400 less cash in investing activities in 1997 than in 1996 due to a $372,700 decrease in capital expenditures, partially offset by a $24,600 increase in expenditures for intangible assets. The Partnership received $3,700 less cash from the sale of cable assets in 1997 than in 1996. Financing activities used $980,600 more cash in 1997 than in 1996. The Partnership used $1,004,600 more cash to pay deferred management fees and reimbursed expenses owed to the General Partner, $142,800 more cash to repay debt under its previous credit agreement and $83,200 more cash for the payment of deferred loan costs related to the new Facility. Borrowings under the Facility provided $250,000 in 1997. NEW ACCOUNTING PRONOUNCEMENT In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on Costs of Start-Up Activities." The new standard, which becomes effective for the Partnership on January 1, 1999, requires costs of start-up activities to be expensed as incurred. The Partnership believes that adoption of this standard will not have an impact on the Partnership's financial position or results of operations. INFLATION Certain of the Partnership's expenses, such as those for wages and benefits, equipment repair and replacement, and billing and marketing generally increase with inflation. However, the Partnership does not believe that its financial results have been, or will be, adversely affected by inflation in a material way, provided that the Partnership is able to increase its service rates periodically, of which there can be no assurance. See "Legislation and Regulation." -29- ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership is not currently exposed to material market risks associated with its financial instruments, although the Partnership would be subject to interest rate risk were it to borrow under its Facility with EFC. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information required to be filed hereunder are indexed on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -30- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The general partners of a partnership may be considered for certain purposes the functional equivalent of directors and executive officers. Enstar Communications Corporation is the sole general partner of the Partnership. Since its incorporation in Georgia in 1982, the General Partner has been engaged in the cable-telecommunications business, both as a general partner of 15 limited partnerships formed to own and operate cable television systems and through a wholly-owned operating subsidiary. As of December 31, 1998, the General Partner managed cable television systems serving approximately 91,000 basic subscribers. On September 30, 1998, FHGLP acquired ownership of the General Partner from Falcon Cablevision. FHGI is the sole general partner of FHGLP. FHGLP controls the general partners of the 15 limited partnerships which operate under the Enstar name (including the Partnership). Although these limited partnerships are affiliated with FHGLP, their assets are owned by legal entities separate from the Partnership. Set forth below is certain general information about the Directors and Executive Officers of the General Partner:
NAME POSITION - ---- -------- Marc B. Nathanson Director, Chairman of the Board and Chief Executive Officer Frank J. Intiso Director, President and Chief Operating Officer Stanley S. Itskowitch Director, Executive Vice President and General Counsel Michael K. Menerey Director, Executive Vice President, Chief Financial Officer and Secretary Joe A. Johnson Executive Vice President - Operations Thomas J. Hatchell Executive Vice President - Operations Abel C. Crespo Vice President, Corporate Controller
MARC B. NATHANSON, 53, has been Chairman of the Board and Chief Executive Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995 also served as President. He has been Chairman of the Board and Chief Executive Officer of Enstar Communications Corporation since October 1988, and also served as its President prior to September 1995. Prior to 1975, Mr. Nathanson was Vice President of Marketing for Teleprompter Corporation, then the largest cable operator in the United States. He also held executive positions with Warner Cable and Cypress Communications Corporation. He is a former President of the California Cable Television Association and a member of Cable Pioneers. He is currently a director of the National Cable Television Association ("NCTA") and will Chair its 1999 National Convention. At the 1986 NCTA convention, Mr. Nathanson was honored by being named the recipient of the Vanguard Award for outstanding contributions to the growth and development of the cable television industry. Mr. Nathanson is a 30-year veteran of the cable television industry. He is a founder of the Cable Television Administration and Marketing Society ("CTAM") and the Southern California Cable Television Association. Mr. Nathanson is an Advisory Board member of TVA, (Brazil) and also Chairman of the Board and Chief Executive Officer of Falcon International Communications, LLC. Mr. Nathanson was appointed by President Clinton on November 1, 1998 as Chair of the Board of Governors for the International Bureau of Broadcasting which oversees Voice of America, Radio/TV Marti, Radio Free Asia, Radio Free Europe and Radio Liberty. Mr. Nathanson is a trustee of the Annenburg School of Communications at the University of Southern California and a member of the Board of Visitors of the Anderson School of Management at UCLA. In addition, he serves on the Board of the UCLA Foundation and the UCLA Center for Communications Policy and is on the Board of Governors of AIDS Project Los Angeles and Cable Positive. -31- FRANK J. INTISO, 52, was appointed President and Chief Operating Officer of FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso held the positions of Executive Vice President and Chief Operating Officer, with responsibility for the day-to-day operations of all cable television systems under the management of Falcon. He has been President and Chief Operating Officer of Enstar Communications Corporation since September 1995, and between October 1988 and September 1995 held the positions of Executive Vice President and Chief Operating Officer. Mr. Intiso has a Masters Degree in Business Administration from UCLA and is a Certified Public Accountant. He currently serves as Immediate Past Chair of the California Cable Television Association and is on the boards of the Cable Advertising Bureau, Cable in the Classroom, and the California Cable Television Association. He is a member of the American Institute of Certified Public Accountants, the American Marketing Association, the American Management Association and the Southern California Cable Television Association. STANLEY S. ITSKOWITCH, 60, has been a Director of FHGI and its predecessors since 1975. He served as Senior Vice President and General Counsel of FHGI from 1987 to 1990 and has been Executive Vice President and General Counsel since February 1990. Mr. Itskowitch has been Executive Vice President and General Counsel of Enstar Communications Corporation since October 1988. He has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a marketer of chemical products, since 1980. He is a Certified Public Accountant and a former tax partner in the New York office of Touche Ross & Co. (now Deloitte & Touche LLP). He has a J.D. Degree and an L.L.M. Degree in Tax from New York University School of Law. Mr. Itskowitch is also Executive Vice President and General Counsel of Falcon International Communications, LLC. MICHAEL K. MENEREY, 47, has been Executive Vice President, Chief Financial Officer and Secretary of FHGI and Enstar Communications Corporation since February 1998 and was Chief Financial Officer and Secretary of FHGI and its predecessors between 1984 and 1998 and of Enstar Communications Corporation since October 1988. Mr. Menerey is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants, and he was formerly associated with BDO Seidman. JOE A. JOHNSON, 54, has been Executive Vice President of Operations of FHGI since September 1995, and was a Divisional Vice President of FHGI between 1989 and 1992. He has been Executive Vice President-Operations of Enstar Communications Corporation since January 1996. From 1982 to 1989, he held the positions of Vice President and Director of Operations for Sacramento Cable Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and Regional Manager positions with Warner Amex and Teleprompter. Mr. Johnson is also a member of the Cable Pioneers. THOMAS J. HATCHELL, 49, has been Executive Vice President of Operations of FHGI and Enstar Communications Corporation since February 1998. From October 1995 to February 1998, he was Senior Vice President of Operations of Falcon International Communications, L.P. and its predecessor company and was a Senior Vice President of FHGI from January 1992 to September 1995. Mr. Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From 1981 to 1989, he served as Vice President and Regional Manager for the San Luis Obispo, California region owned by an affiliate of FHGI. He was Vice President of Construction of an affiliate of FHGI from June 1980 to June 1981. ABEL C. CRESPO, 39, has been Vice President, Corporate Controller of FHGI and Enstar Communications Corporation since March 1999. He previously had served as Controller since January 1997. Mr. Crespo joined Falcon in December 1984, and has held various accounting positions during that time. Mr. Crespo holds a Bachelor of Science degree in Business Administration from California State University, Los Angeles. -32- OTHER OFFICERS OF FALCON The following sets forth certain biographical information with respect to certain additional members of FHGI management. LYNNE A. BUENING, 45, has been Vice President of Programming of FHGI since November 1993. From 1989 to 1993, she served as Director of Programming for Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening held programming and marketing positions in the cable, broadcast and newspaper industries. OVANDO COWLES, 45, has been Vice President of Advertising Sales and Production of FHGI since January 1992. From 1988 to 1991, he served as Director of Advertising Sales and Production at Cencom Cable Television in Pasadena, California. From 1985 to 1988, he was an Advertising Sales Account Executive at Choice TV, an affiliate of FHGI. HOWARD J. GAN, 52, has been Vice President of Regulatory Affairs of FHGI and its predecessors since 1988. Prior to joining FHGI, he was General Counsel at Malarkey-Taylor Associates, a Washington, D.C.-based telecommunications consulting firm, from 1986 to 1988, and was Vice President and General Counsel at CTIC Associates from 1978 to 1983. In addition, he was an attorney and an acting Branch Chief of the Federal Communications Commission's Cable Television Bureau from 1973 to 1978. R.W. ("SKIP") HARRIS, 51, has been Vice President of Marketing of FHGI since June 1991. Mr. Harris was National Director of Affiliate Marketing for The Disney Channel from 1985 to 1991. He was also a sales manager, regional marketing manager and director of marketing for Cox Cable Communications from 1978 to 1985. MARTIN B. SCHWARTZ, 39, has been Vice President of Corporate Development of FHGI since March 1999. Mr. Schwartz joined Falcon in November 1989 and has held various finance, planning and corporate development positions during that time, most recently that of Director of Corporate Development. Mr. Schwartz has a Masters Degree in Business Administration from UCLA. JOAN SCULLY, 63, has been Vice President of Human Resources of FHGI and its predecessors since May 1988. From 1987 to May 1988, she was self-employed as a management consultant to cable and transportation companies. She served as Director of Human Resources of a Los Angeles-based cable company from 1985 through 1987. Prior to that time, she served as a human resource executive in the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in Human Resources Management from Pepperdine University. RAYMOND J. TYNDALL, 51, has been Vice President of Engineering of FHGI since October 1989. From 1975 to September 1989, he held various technical positions with Choice TV and its predecessors. From 1967 to 1975, he held various technical positions with Sammons Communications. He is a certified National Association of Radio and Television Engineering ("NARTE") engineer in lightwave, microwave, satellite and broadband and is a member of the Cable Pioneers. In addition, FHGI has six Divisional Vice Presidents who are based in the field. They are G. William Booher, Daniel H. DeLaney, Ron L. Hall, Ronald S. Hren, Michael E. Kemph and Michael D. Singpiel. Each director of the Corporate General Partner is elected to a one-year term at the annual shareholder meeting to serve until the next annual shareholder meeting and thereafter until his respective successor is elected and qualified. Officers are appointed by and serve at the discretion of the directors of the Corporate General Partner. -33- ITEM 11. EXECUTIVE COMPENSATION MANAGEMENT FEE The Partnership has a management agreement (the "Management Agreement") with Enstar Cable Corporation, a wholly owned subsidiary of the General Partner (the "Manager"), pursuant to which Enstar Cable Corporation manages the Partnership's systems and provides all operational support for the activities of the Partnership. For these services, the Manager receives a management fee of 5% of the Partnership's gross revenues, excluding revenues from the sale of cable television systems or franchises, calculated and paid monthly. In addition, the Partnership reimburses the Manager for certain operating expenses incurred by the Manager in the day-to-day operation of the Partnership's cable systems. The Management Agreement also requires the Partnership to indemnify the Manager (including its officers, employees, agents and shareholders) against loss or expense, absent negligence or deliberate breach by the Manager of the Management Agreement. The Management Agreement is terminable by the Partnership upon sixty (60) days written notice to the Manager. The Manager has engaged FCLP to provide certain management services for the Partnership and pays FCLP a portion of the management fees it receives in consideration of such services and reimburses FCLP for expenses incurred by FCLP on its behalf. Additionally, the Partnership receives certain system operating management services from affiliates of the Manager in lieu of directly employing personnel to perform such services. The Partnership reimburses the affiliates for its allocable share of their operating costs. The General Partner also performs certain supervisory and administrative services for the Partnership, for which it is reimbursed. For the fiscal year ended December 31, 1998, the Manager charged the Partnership management fees of approximately $261,100 and reimbursed expenses of $399,200. The Partnership also reimbursed affiliates approximately $26,900 for system operating management services. In addition, certain programming services are purchased through FCLP. The Partnership paid FCLP approximately $1,161,700 for these programming services for fiscal year 1998. PARTICIPATION IN DISTRIBUTIONS The General Partner is entitled to share in distributions from, and profit and losses in, the Partnership. See Item 5., "Market for Registrant's Equity Securities and Related Security Holder Matters." -34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 1, 1999, the only persons known by the Partnership to own beneficially or that may be deemed to own beneficially more than 5% of the units were:
Name and Address Amount and Nature of Percent Title of Class of Beneficial Owner Beneficial Ownership of Class - ----------------------------- ----------------------- ---------------------- -------- Units of Limited Partnership Paul Isaacs 1,510(1) 5.0% Interest 7 Douglas Lane Larchmont, NY 10538
(1) As reported to the Partnership by its transfer agent, Gemisys Corporation. The General Partner is a wholly-owned subsidiary of FHGLP. FHGI owns a 10.6% interest in, and is the general partner of, FHGLP. As of March 3, 1999, the common stock of FHGI was owned as follows: 78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is trustee and he and members of his family are beneficiaries; 20% by Greg A. Nathanson; and 1.5% by Stanley S. Itskowitch. Greg A. Nathanson is Marc B. Nathanson's brother. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONFLICTS OF INTEREST On September 30, 1998, FHGLP acquired ownership of Enstar Communications Corporation from Falcon Cablevision and FCLP assumed the management services operations of FHGLP. FCLP now manages the operations of the partnerships of which Enstar Communications Corporation is the General Partner, including the Partnership. FCLP began receiving management fees and reimbursed expenses which had previously been paid by the Partnership, as well as other affiliated entities, to FHGLP. The day-to-day management of FCLP is substantially the same as that of FHGLP, which serves as the managing partner of FCLP. Certain members of management of the General Partner have also been involved in the management of other cable ventures. FCLP may enter into other cable ventures, including ventures similar to the Partnership. The Partnership relies upon the 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 Partnership is also party to a loan agreement with a subsidiary of the Corporate General Partner. See Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Conflicts of interest involving acquisitions and dispositions of cable television systems could adversely affect Unitholders. For instance, the economic interests of management in other affiliated partnerships are different from those in the Partnership and this may create conflicts relating to which acquisition opportunities are preserved for which entities. These affiliations subject FCLP, FHGLP and the General Partner and their management to certain conflicts of interest. Such conflicts of interest relate to the time and services management will devote -35- to the Partnership's affairs and to the acquisition and disposition of cable television systems. Management or its affiliates may establish and manage other entities which could impose additional conflicts of interest. FCLP, FHGLP and the General Partner will resolve all conflicts of interest in accordance with their fiduciary duties. FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNER A general partner is accountable to a limited partnership as a fiduciary and consequently must exercise good faith and integrity in handling partnership affairs. Where the question has arisen, some courts have held that a limited partner may institute legal action on his own behalf and on behalf of all other similarly situated limited partners (a class action) to recover damages for a breach of fiduciary duty by a general partner, or on behalf of the partnership (a partnership derivative action) to recover damages from third parties. Section 14-9-1001 of the Georgia Revised Uniform Limited Partnership Act also allows a partner to maintain a partnership derivative action if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed. Certain cases decided by federal courts have recognized the right of a limited partner to bring such actions under the Securities and Exchange Commission's Rule 10b-5 for recovery of damages resulting from a breach of fiduciary duty by a general partner involving fraud, deception or manipulation in connection with the limited partner's purchase or sale of partnership units. The partnership agreement provides that the General Partner will be indemnified by the Partnership for acts performed within the scope of its authority under the partnership agreement if such general partner (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 its conduct was negligent. In addition, the partnership agreement provides that the General Partner will not be liable to the Partnership or its limited partners for errors in judgment or other acts or omissions not amounting to negligence or misconduct. Therefore, limited partners will have a more limited right of action than they would have absent such provisions. In addition, the Partnership maintains, at its expense and in such reasonable amounts as the General Partner shall determine, a liability insurance policy which insures the General Partner, FHGI and its affiliates (which include FCLP), officers and directors and such other persons as the General Partner shall determine, against liabilities which they may incur with respect to claims made against them for certain wrongful or allegedly wrongful acts, including certain errors, misstatements, misleading statements, omissions, neglect or breaches of duty. To the extent that the exculpatory provisions purport to include indemnification for liabilities arising under the Securities Act of 1933, it is the opinion of the Securities and Exchange Commission that such indemnification is contrary to public policy and therefore unenforceable. -36- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements Reference is made to the Index to Financial Statements on page F-1. (a) 2. Financial Statement Schedules Reference is made to the Index to Financial Statements on page F-1. (a) 3. Exhibits Reference is made to the Index to Exhibits on Page E-1. (b) Reports on Form 8-K None. -37- SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 1999. ENSTAR INCOME PROGRAM 1984-1, L.P. By: Enstar Communications Corporation, General Partner By: /s/ Marc B. Nathanson ------------------------ Marc B. Nathanson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 29th day of March 1999.
Signatures Title(*) - --------------------- ----------------------------------------------------- /s/ Marc B. Nathanson Chairman of the Board and Chief Executive Officer - -------------------------- (Principal Executive Officer) Marc B. Nathanson /s/ Michael K. Menerey Executive Vice President, Chief Financial Officer, - -------------------------- Secretary and Director Michael K. Menerey (Principal Financial and Accounting Officer) /s/ Frank J. Intiso President, Chief Operating Officer and Director - -------------------------- Frank J. Intiso /s/ Stanley S. Itskowitch Executive Vice President, General Counsel - -------------------------- and Director Stanley S. Itskowitch
(*) Indicates position(s) held with Enstar Communications Corporation, the General Partner of the Registrant. -38- INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors F-2 Balance Sheets - December 31, 1997 and 1998 F-3 Financial Statements for each of the three years in the period ended December 31, 1998: Statements of Operations F-4 Statements of Partnership Capital (Deficit) F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7
All schedules have been omitted because they are either not required, not applicable or the information has otherwise been supplied. F-1 REPORT OF INDEPENDENT AUDITORS Partners Enstar Income Program 1984-1, L.P. (A Georgia Limited Partnership) We have audited the accompanying balance sheets of Enstar Income Program 1984-1, L.P. (A Georgia Limited Partnership) as of December 31, 1997 and 1998, and the related statements of operations, partnership capital (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enstar Income Program 1984-1, L.P. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Los Angeles, California March 12, 1999 F-2 ENSTAR INCOME PROGRAM 1984-1, L.P. BALANCE SHEETS =================================
December 31, ------------------------------- 1997 1998 ---------- ---------- ASSETS: Cash and cash equivalents $ 462,900 $1,036,000 Accounts receivable, less allowance of $28,000 and $5,500 for possible losses 107,500 27,800 Insurance claim receivable 399,700 - Prepaid expenses and other assets 135,800 150,000 Property, plant and equipment, less accumulated depreciation and amortization 3,387,200 4,048,700 Franchise cost, net of accumulated amortization of $235,400 and $114,500 74,600 66,000 Deferred loan costs and other deferred charges, net 128,400 88,900 ---------- ---------- $4,696,100 $5,417,400 ---------- ---------- ---------- ---------- LIABILITIES AND PARTNERSHIP CAPITAL LIABILITIES: Accounts payable $ 529,800 $ 420,800 Due to affiliates 754,200 894,900 Note payable - affiliate 250,000 - ---------- ---------- TOTAL LIABILITIES 1,534,000 1,315,700 ---------- ---------- COMMITMENTS AND CONTINGENCIES PARTNERSHIP CAPITAL (DEFICIT): General partner (41,100) (31,700) Limited partners 3,203,200 4,133,400 ---------- ---------- TOTAL PARTNERSHIP CAPITAL 3,162,100 4,101,700 ---------- ---------- $4,696,100 $5,417,400 ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-3 ENSTAR INCOME PROGRAM 1984-1, L.P. STATEMENTS OF OPERATIONS ==================================
Year Ended December 31, -------------------------------------- 1996 1997 1998 ---------- ---------- ---------- REVENUES $5,243,500 $5,369,200 $5,221,100 ---------- ---------- ---------- OPERATING EXPENSES: Service costs 1,859,500 2,012,500 1,848,400 General and administrative expenses 758,100 857,400 676,000 General Partner management fees and reimbursed expenses 557,400 603,600 660,300 Depreciation and amortization 570,600 583,100 747,600 ---------- ---------- ---------- 3,745,600 4,056,600 3,932,300 ---------- ---------- ---------- Operating income 1,497,900 1,312,600 1,288,800 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense (187,900) (107,500) (103,900) Interest income 43,500 34,700 25,700 Gain on sale of cable assets 100 - - Casualty gain (loss) - 202,400 (271,000) ---------- ---------- ---------- (144,300) 129,600 (349,200) ---------- ---------- ---------- NET INCOME $1,353,600 $1,442,200 $ 939,600 ---------- ---------- ---------- ---------- ---------- ---------- Net income allocated to General Partner $ 13,500 $ 14,400 $ 9,400 ---------- ---------- ---------- ---------- ---------- ---------- Net income allocated to Limited Partners $1,340,100 $1,427,800 $ 930,200 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 44.76 $ 47.69 $ 31.07 ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING THE YEAR 29,940 29,940 29,940 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-4 ENSTAR INCOME PROGRAM 1984-1, L.P. STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT) ===========================================
General Limited Partner Partners Total --------- ----------- ---------- PARTNERSHIP DEFICIT, January 1, 1996 $(69,000) $ 435,300 $ 366,300 Net income for year 13,500 1,340,100 1,353,600 -------- ---------- ---------- PARTNERSHIP DEFICIT, December 31, 1996 (55,500) 1,775,400 1,719,900 Net income for year 14,400 1,427,800 1,442,200 -------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), December 31, 1997 (41,100) 3,203,200 3,162,100 Net income for year 9,400 930,200 939,600 -------- ---------- ---------- PARTNERSHIP CAPITAL (DEFICIT), December 31, 1998 $(31,700) $4,133,400 $4,101,700 -------- ---------- ---------- -------- ---------- ----------
See accompanying notes to financial statements. F-5 ENSTAR INCOME PROGRAM 1984-1, L.P. STATEMENTS OF CASH FLOWS ===================================
Year Ended December 31, ---------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 1,353,600 $ 1,442,200 $ 939,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 570,600 583,100 747,600 Amortization of deferred loan costs 14,500 50,300 29,500 Gain on sale of cable assets (100) - - Casualty (gain) loss - (202,400) 271,000 Increase (decrease) from changes in: Accounts receivable, prepaid expenses and other assets (73,700) 40,000 65,500 Insurance claim receivable 6,700 (163,900) 140,600 Accounts payable (66,800) 81,100 (109,000) ----------- ----------- ----------- Net cash provided by operating activities 1,804,800 1,830,400 2,084,800 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (1,149,600) (776,900) (1,389,800) Proceeds from sale of property, plant and equipment 3,700 - - Increase in intangible assets (24,100) (48,700) (8,600) ----------- ----------- ----------- Net cash used in investing activities (1,170,000) (825,600) (1,398,400) ----------- ----------- ----------- Cash flows from financing activities: Repayment of debt (900,000) (1,042,800) - Borrowings from affiliate - 250,000 - Repayment of borrowings from affiliate - - (250,000) Deferred loan costs (30,700) (113,900) (4,000) Due to affiliates 365,000 (639,600) 140,700 ----------- ----------- ----------- Net cash used in financing activities (565,700) (1,546,300) (113,300) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 69,100 (541,500) 573,100 Cash and cash equivalents at beginning of year 935,300 1,004,400 462,900 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,004,400 $ 462,900 $ 1,036,000 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to financial statements. F-6 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 1 - SUMMARY OF ACCOUNTING POLICIES FORM OF PRESENTATION Enstar Income Program 1984-1, L.P., a Georgia limited partnership (the "Partnership"), owns and operates cable television systems in rural areas of North Carolina, South Carolina and Tennessee. The financial statements do not give effect to any assets that the partners may have outside of their interest in the Partnership, nor to any obligations, including income taxes, of the partners. CASH EQUIVALENTS For purposes of the statements of cash flows, the Partnership considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 1996 include $884,000 of short-term investments in commercial paper. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Direct costs associated with installations in homes not previously served by cable are capitalized as part of the distribution system, and reconnects are expensed as incurred. For financial reporting, depreciation and amortization is computed using the straight-line method over the following estimated useful lives: Cable television systems 5-15 years Vehicles 3 years Furniture and equipment 5-7 years Leasehold improvements Life of lease FRANCHISE COST The excess of cost over the fair values of tangible assets and customer lists of cable television systems acquired represents the cost of franchises. In addition, franchise cost includes capitalized costs incurred in obtaining new franchises and the renewal of existing franchises. These costs are amortized using the straight-line method over the lives of the franchises, ranging up to 15 years. The Partnership periodically evaluates the amortization periods of these intangible assets to determine whether events or circumstances warrant revised estimates of useful lives. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. The Partnership is in the process of negotiating the renewal of expired franchise agreements for six of the Partnership's 22 franchises. F-7 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES Costs related to obtaining new loan agreements are capitalized and amortized to interest expense over the life of the loan. Other deferred charges are amortized using the straight-line method over two years. RECOVERABILITY OF ASSETS The Partnership assesses on an ongoing basis the recoverability of intangible and capitalized plant assets based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimate were less than net book value, net book value would then be reduced to estimated fair value, which would generally approximate discounted cash flows. The Partnership also evaluates the amortization periods of assets, including franchise costs and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. REVENUE RECOGNITION Revenues from customer fees, equipment rental and advertising are recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. INCOME TAXES As a partnership, Enstar Income Program 1984-1, 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, 1998, the book basis of the Partnership's net assets exceeds its tax basis by $1,039,500. 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 1998 in the financial statements is $751,200 more than tax income of the Partnership for the same period, caused principally by timing differences in depreciation expense. COSTS OF START-UP ACTIVITIES In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on Costs of Start-Up Activities." The new standard, which becomes effective for the Partnership on January 1, 1999, requires costs of start-up activities to be expensed as incurred. The Partnership believes that adoption of this standard will not have an impact on the Partnership's financial position or results of operations. F-8 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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 partner. Earnings and losses per unit of limited partnership interest are based on the weighted average number of units outstanding during the year. The General Partner does not own units of Partnership interest in the Partnership, but rather holds 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 December 12, 1983 to acquire, construct, improve, develop and operate cable television systems. The partnership agreement provides for Enstar Communications Corporation (the "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. Sale of interests in the Partnership began in February 1984, and the initial closing took place in May 1984. The Partnership continued to raise capital until $7,500,000 (the maximum) was sold by September 1984. The Partnership acquired its first property subsequent to the initial closing. The Partnership acquired several other operating properties during 1984 and 1985. On September 30, 1988, Falcon Cablevision, a California limited partnership, purchased all of the outstanding capital stock of the General Partner. On September 10, 1993, Enstar Communications Corporation, the General Partner, purchased the general partnership interest held by Robert Graff, Jr., the individual general partner, in Enstar Income Program 1984-1, L.P. and five affiliated partnerships. The purchase was made pursuant to an agreement dated August 9, 1988 and amended September 10, 1993, by and among Enstar Communications Corporation, Falcon Cablevision and Robert Graff, Jr. Following the purchase, Enstar Communications Corporation became the sole general partner of Enstar Income Program 1984-1, L.P. On September 30, 1998, Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), acquired ownership of the General Partner from Falcon Cablevision. Simultaneously with the closing of that transaction, FHGLP contributed all of its existing cable television system operations to Falcon Communications, L.P. ("FCLP"), a California limited partnership and successor to FHGLP. FHGLP serves as the managing partner of FCLP. The General Partner has contracted with FCLP and its affiliates to provide management services for the Partnership. F-9 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 2 - PARTNERSHIP MATTERS (CONTINUED) 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. The partnership agreement limits the amount of debt the Partnership may incur. NOTE 3 - INSURANCE CLAIM RECEIVABLE Insurance claim receivable at December 31, 1997 represents an uncollected claim arising from storm related system damage which occurred in 1996. The Partnership recognized a gain of $202,400 in 1997 reflecting the anticipated insurance reimbursement over the net carrying value of the damaged assets. The insurance carrier disputed elements of the claim. In 1998, the Partnership negotiated a settlement of the insurance claim in which the Partnership collected $140,600 in full settlement of the claim. The remaining receivable amount of $259,100 was recorded as a casualty loss. The Partnership's Snow Hill, North Carolina cable system sustained damage due to a hurricane on August 26, 1998. The cost of replacing and upgrading the damaged assets amounted to approximately $26,500. As discussed in Note 7, the Partnership was self-insured for damage caused by this storm. The cost of repairs was funded from available cash reserves and operating cash flow. The Partnership recognized a casualty loss of $11,900 in 1998. NOTE 4 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
December 31, ----------------------------- 1997 1998 ------------- ------------ Cable television systems $ 13,596,700 $ 14,752,500 Vehicles, furniture and equipment, and leasehold improvements 268,400 390,700 ------------ ------------ 13,865,100 15,143,200 Less accumulated depreciation and amortization (10,477,900) (11,094,500) ------------ ------------ $ 3,387,200 $ 4,048,700 ------------ ------------ ------------ ------------
F-10 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the short maturity of those instruments. NOTE PAYABLE - AFFILIATE The carrying amount approximates fair value due to the variable rate nature of the note payable. NOTE 6 - NOTE PAYABLE - AFFILIATE On September 30, 1997, the Partnership completed new financing arrangements with a subsidiary of the General Partner, Enstar Finance Company, LLC ("EFC"). EFC obtained a secured bank facility of $35 million from two agent banks in order to obtain funds that would in turn be advanced to the Partnership and certain of the other partnerships managed by the General Partner. The Partnership entered into a loan agreement with EFC for a revolving loan facility (the "Facility") of $7,481,700 of which $250,000 was advanced to the Partnership at closing. Such funds together with available cash were used to repay $619,000 of previously deferred management fees and reimbursed expenses due the General Partner. The Partnership prepaid its outstanding borrowings of $250,000 in June 1998. The Partnership's Facility matures on August 31, 2001, at which time all amounts then outstanding are due in full. Borrowings bear interest at the lender's base rate (7.75% at December 31, 1998) plus 0.625%, or at an offshore rate plus 1.875%. The Partnership is permitted to prepay amounts outstanding under the Facility at any time without penalty, and is able to reborrow throughout the term of the Facility up to the maximum commitment then available so long as no event of default exists. If the Partnership has "excess cash flow" (as defined in its loan agreement) and has leverage, as defined, in excess of 4.25 to 1, or receives proceeds from sales of its assets in excess of a specified amount, the Partnership is required to make mandatory prepayments under the Facility. Such prepayments permanently reduce the maximum commitment under the Facility. The Partnership is also required to pay a commitment fee of 0.5% per annum on the unused portion of its Facility, and an annual administrative fee. Advances by EFC under its partnership loan facilities are independently collateralized by individual partnership borrowers so that no partnership is liable for advances made to other partnerships. Borrowings under the Partnership's Facility are collateralized by substantially all assets of the Partnership. At closing, the Partnership paid to EFC a $76,100 facility fee. This represented the Partnership's pro rata portion of a similar fee paid by EFC to its lenders. The Facility contains certain financial tests and other covenants including, among others, restrictions on incurrence of indebtedness, investments, sales of assets, acquisitions and other covenants, defaults and conditions. The Facility does not restrict the payment of distributions to partners unless an event of default exists thereunder or the Partnership's ratio of debt to cash flow is greater than 4 to 1. The General Partner believes the Partnership was in compliance with the covenants at December 31, 1998. F-11 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 6 - NOTE PAYABLE - AFFILIATE (CONTINUED) The General Partner contributed $462,300 of its receivable balance due from the Partnership for deferred management fees and reimbursed expenses as an equity contribution to EFC. This balance remains an outstanding obligation of the Partnership. NOTE 7 - COMMITMENTS AND CONTINGENCIES The Partnership leases buildings associated with the franchises under operating leases expiring in various years through 2006. Future minimum rental payments under non-cancelable leases having remaining terms in excess of one year as of December 31, 1998 are as follows:
Year Amount --------------- -------- 1999 $12,600 2000 12,500 2001 8,300 2002 6,100 2003 5,400 Thereafter 16,200 ------- $61,100 ------- -------
Rentals, other than pole rentals, charged to operations amounted to $30,400, $31,800 and $33,000 in 1996, 1997 and 1998, respectively. Total expense charged to operations for pole rentals was $98,600, $99,900 and $105,800 in 1996, 1997 and 1998, respectively. Other commitments include approximately $4.9 million at December 31, 1998 to upgrade the Partnership's cable systems in eight franchise areas, but management intends to spend approximately $8.3 million in total to upgrade its systems. Franchise agreements for the eight required upgrades specify completion dates ranging from June 2000 to February 2002. The Partnership is subject to regulation by various federal, state and local government entities. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") provides for, among other things, federal and local regulation of rates charged for basic cable service, cable programming service tiers ("CPSTs") and equipment and installation services. Regulations issued in 1993 and significantly amended in 1994 by the Federal Communications Commission (the "FCC") have resulted in changes in the rates charged for the Partnership's cable services. The Partnership believes that compliance with the 1992 Cable Act has had a significant negative impact on its operations and cash flow. It also believes that any potential future liabilities for refund claims or other related actions would not be material. The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to cable television, the 1996 Telecom Act, among other things, (i) ends the regulation of certain CPSTs in 1999; (ii) expands the definition of effective competition, the existence of which displaces rate regulation; (iii) eliminates the restriction against the ownership and operation of cable systems by telephone F-12 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED) companies within their local exchange service areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions. Beginning in August 1997, the General Partner elected to self-insure the Partnership's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. In October 1998, FCLP reinstated third party insurance coverage for all of the cable television properties owned or managed by FCLP to cover damage to cable distribution plant and subscriber connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible which applies to all of the cable television properties owned or managed by FCLP. Approximately 64% of the Partnership's subscribers are served by its system in Brownsville, Tennessee and neighboring communities. Significant damage to the system due to seasonal weather conditions or other events could have a material adverse effect on the Partnership's liquidity and cash flows. The Partnership continues to purchase insurance coverage in amounts its management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. NOTE 8 - EMPLOYEE BENEFIT PLAN The Partnership has a cash or deferred profit sharing plan (the "Profit Sharing Plan") covering 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. The Partnership's contribution to the Profit Sharing Plan, as determined by management, is discretionary but may not exceed 15% of the annual aggregate compensation (as defined) paid to all participating employees. There were no contributions charged against operations of the Partnership for the Profit Sharing Plan in 1996, 1997 or 1998. NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES The Partnership has a management and service agreement with a wholly-owned subsidiary of the General Partner (the "Manager") for a monthly management fee of 5% of gross receipts, as defined, from the operations of the Partnership. Management fee expense was $262,200, $268,500 and $261,100 during 1996, 1997 and 1998, respectively. In addition to the monthly management fee, the Partnership reimburses the Manager for direct expenses incurred on behalf of the Partnership, and for the Partnership's allocable share of operational costs associated with services provided by the Manager. All cable television properties managed by the General Partner and its subsidiaries are charged a proportionate share of these expenses. The General Partner has contracted with FCLP and its affiliates to provide management services for the Partnership. 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 $295,200, $335,100 and $399,200 during 1996, 1997 and 1998, respectively. F-13 ENSTAR INCOME PROGRAM 1984-1, L.P. NOTES TO FINANCIAL STATEMENTS ================================== NOTE 9 - TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES (CONTINUED) Payments of management fees and reimbursed expenses were deferred in prior years pursuant to restrictions imposed by the Partnership's previous note payable agreement. The cumulative amount deferred was approximately $1,081,300. On September 30, 1997, the Partnership obtained new financing and subsequently used such borrowings and other available cash to pay $619,000 of previously deferred management fees and reimbursed expenses. The remainder of these deferred amounts was contributed as an equity contribution by the General Partner to EFC. In the normal course of business, the Partnership pays commitment fees to EFC. See Note 6. The Partnership also receives certain system operating management services from affiliates of the General Partner in addition to the Manager. The Partnership reimburses the affiliates for its allocable share of the affiliates' operational costs. The total amount charged to the Partnership for these costs approximated $118,100, $104,300 and $26,900 in 1996, 1997 and 1998, respectively. No management fee is payable to the affiliates 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. FCLP, in the normal course of business, purchases cable programming services from certain program suppliers owned in whole or in part by affiliates of an entity that became a general partner of FCLP on September 30, 1998. Such purchases of programming services are made on behalf of the Partnership and the other partnerships managed by the General Partner as well as for FCLP's own cable television operations. FCLP charges the Partnership for these costs based on an estimate of what the General Partner could negotiate for such programming services for the 15 partnerships managed by the General Partner as a group. The Partnership recorded programming fee expense of $1,172,500, $1,195,900 and $1,161,700 in 1996, 1997, and 1998, respectively. Programming fees are included in service costs in the statements of operations. NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended December 31, 1996, 1997 and 1998, cash paid for interest amounted to $189,300, $107,100 and $94,800, respectively. F-14 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3 The Sixteenth Amended and Restated Agreement of Limited Partnership of Enstar Income Program 1984-1, L.P., Dated as of August 1, 1988(3) 10.1 Management Agreement between Enstar Income Program 1984-1 and Enstar Cable Corporation(1) 10.2 Revolving Credit and Term Loan Agreement dated April 10, 1985, between Enstar Income Program 1984-1, L.P. and Rhode Island Hospital Trust National Bank, as amended(2) 10.3 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for Greene County, North Carolina(2) 10.4 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Hookerton, North Carolina(2) 10.5 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Kershaw, South Carolina(2) 10.6 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for York County, South Carolina(2) 10.7 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Covington, Tennessee(2) 10.8 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for Tipton County, Tennessee(2) 10.9 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Brownsville, Tennessee(2) 10.10 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Bolivar, Tennessee(2) 10.11 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the City of Riverhills, South Carolina(2) 10.12 Amendment No. 6 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1, L.P. and Rhode Island Hospital Trust National Bank, dated as of January 26, 1990(4) 10.13 Service Agreement between Enstar Communications Corporation, Enstar Cable Corporation and Falcon Holding Group, Inc. dated as of October 1, 1988(4) 10.14 Easement agreement and related documents thereto granting an agreement for the purpose of constructing, maintaining and operating a community antenna television system in River Hills Plantation, South Carolina.(5) 10.15 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for the Town of Heath Springs, South Carolina.(5) 10.16 Amendment No. 6 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated January 26, 1990.(5)
E-1 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.17 Amendment No. 7 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated November 30, 1990.(5) 10.18 Amendment No. 8 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated April 1, 1991.(6) 10.19 Franchise Ordinance and related documents thereto granting a non-exclusive community antenna television franchise for Hardeman County, Tennessee.(6) 10.20 Amendment No. 9 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated June 17, 1992.(7) 10.21 Amendment No. 10 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated March 29, 1993.(7) 10.22 Amendment No. 11 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated March 29, 1994. (8) 10.23 Amendment No. 12 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated March 31, 1995.(9) 10.24 Amendment No. 13 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated March 27, 1996.(10) 10.25 Amendment No. 14 to Revolving Credit and Term Loan Agreement dated April 10, 1985 between Enstar Income Program 1984-1 and Rhode Island Hospital Trust National Bank, dated October 31, 1996.(11) 10.26 Loan Agreement between Enstar Income Program 1984-1, L.P. and Enstar Finance Company, LLC dated September 30, 1997.(12) 10.27 Franchise Ordinance granting a non-exclusive community antenna television franchise for Greene County, North Carolina.(13) 10.28 Franchise Ordinance granting a non-exclusive community antenna television franchise for the Town of Grifton, North Carolina.(14) 10.29 Franchise Ordinance granting a non-exclusive community antenna television franchise for the Town of Heath Springs, the Town of Kershaw and Lancaster County, South Carolina.
E-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 21.1 Subsidiaries: None.
FOOTNOTE REFERENCES (1) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1986. (2) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1987. (3) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1988. (4) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1989. (5) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1990. (6) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1991. (7) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 0-13333 for the quarter ended June 30, 1993. (8) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1993. (9) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1994. (10) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-13333 for the fiscal year ended December 31, 1995. (11) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 0-13333 for the quarter ended September 30, 1996. (12) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 0-13333 for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 0-13333 for the quarter ended March 31, 1998. (14) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q, File No. 0-13333 for the quarter ended June 30, 1998. E-3 EX-10.29 2 EXHIBIT 10.29 EXHIBIT 10.29 SOUTHERN LANCASTER COUNTY SC FALCON CABLE TELEVISION FRANCHISE AGREEMENT TABLE OF CONTENTS
Page INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1. INTENT AND AUTHORITY 1 Finding (1); Authority to Grant Franchise (1) 2. DEFINITIONS 1 3. MISCELLANEOUS GENERAL PROVISIONS. 6 Short Title (6); Police Powers (6); Separability (6); Adjustment of Dollar Amounts (6); Applicability (6); Confidentiality (6); Notices (6) THE FRANCHISE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 4. INFORMATION REQUIRED/RECEIVED FROM GRANTEE 7 5. GRANT OF FRANCHISE 7 Consistency with Federal and State Laws (7); General Ordinances (8) 6. DURATION 8 Term (8); Renewal (9) 7. USE OF STREETS 9 8. SYSTEM UPGRADE 12 9. REMOVAL 14 10. RIGHT OF GRANTORS TO PURCHASE THE SYSTEM 15 SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11. UNIVERSAL SERVICE 16 Line Extension Policy (16) 12. GENERAL REQUIREMENTS 16 Repairs (17); Emergency Alert System (17) 13. CUSTOMER SERVICE 18 FCC Standards (18); Customer information (18); Grantee Rules (18); Local business office (18); 24-hour service (18); Prompt repair (18); Equipment maintenance (19); Deposits (19); Disconnection (19); Security deposit (19); Refunds (19); Late fees (20) 14. TECHNICAL STANDARDS 20 Color, Stereo, and VIT Signals (21) 15. COMMUNITY, EDUCATIONAL AND GOVERNMENTAL ACCESS 21 Grantee use of Unused Access Channel (21); Support for Use of Access (22) 16. SERVICE TO GRANTORS 22 17. PROGRAMMING 23
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 18. REGULATION OF THE FRANCHISE 23 19. TRANSFERS 24 20. BOND 25 21. INDEMNIFICATION 25 22. INSURANCE 26 23. REPORTS 27 Contemporaneous reports (27); Annual Report (27); Special reports (28) 24. RATES 28 Promotional rates (28) 25. FRANCHISE FEES 29 26. RECEIVERSHIP AND FORECLOSURE 30 27. ENFORCEMENT 31 Termination (31); Liquidated Damages (32); Forbearance (33); Force Majeure (33)
PAGE 1 KNOW ALL MEN BY THESE PRESENTS that the Town of Heath Springs, the Town of Kershaw, and Lancaster County, South Carolina, hereinafter singly and collectively the Grantors, and Enstar Income Program 1984-1, L.P. d.b.a. Falcon, hereinafter the Grantee, in order to provide to Grantee a non-exclusive franchise to operate a cable television system, do mutually agree as follows. INTRODUCTION 1. INTENT AND AUTHORITY a. Finding : The Grantors find that the development of communications systems such as cable television has the potential of having great benefit and impact upon the residents of Heath Springs, Kershaw, and Lancaster County. Because of the complex and rapidly changing technology associated with cable television, the Grantors further finds that the public convenience, safety and general welfare can best be served by reasonable regulations to attain the best possible public interest and public purpose in these matters. b. Authority to Grant Franchise: Grantors shall comply with any requirements of the State or Federal governments so as to maintain their authority to grant a Franchise. 2. DEFINITIONS For the purposes of this Franchise Agreement the following terms, phrases, words, and their derivations shall have the meaning given herein. When not inconsistent with the context, words used in the present tense include the future, words in the plural number include the singular number, words in the singular number include the plural number, and the use of any gender shall be applicable to all genders whenever the sense requires. The words "shall" and "will" are mandatory and the word "may" is permissive. Words not defined shall be given their common and ordinary meaning. a. "Area of dominant interest" has the same meaning given it in FCC regulations. b. "Cable Act" means the Cable Communications Policy Act of 1984 (Public Law No. 98-549, 47 USC 521 (Supp.)) as it may be amended or superseded. c. "Cable Communications System" or "System," also referred to as "Cable Television System," "Cable System," "CATV System," shall mean a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed and constructed for the purpose of providing cable service within the Franchise Area. PAGE 2 d. "Cable service" means the provision to subscribers of video programming or information Grantee makes available to all subscribers generally and subscriber interaction, if any, which is required for the selection of such programming or information. e. "Cable TV Administrator" shall mean the Mayor of Heath Springs, the Administrator of Kershaw, or the County Administrator, or their designee, as applicable, provided that the said administrator shall notify Grantee in writing the name of such designee(s). f. "Channel" means a portion of the electromagnetic frequency spectrum which is used in the cable system and which is capable of delivering a television channel as defined by the FCC to subscribers. g. "Community channel" or "community access channel" means any channel designated or dedicated for use by the general public or noncommercial organizations which is made available for use without charge on a first-come, first-served, nondiscriminatory basis. Such channels are identical to "public access channels" as defined in the Cable Act. h. "Educational channel" or "educational access channel" means any channel where educational programs are the only designated use. i. "Fair market value" means the price that a willing buyer would pay to a willing seller for a going concern. j. "FCC" means the Federal Communications Commission or any legally appointed or elected successor. k. "Franchise" shall mean the right granted by this agreement to erect, construct, reconstruct, operate, dismantle, test, use and maintain a cable communications system in the Grantors' jurisdictions. l. "Franchise Area" or "Service Area" shall mean the area within the present corporate limits of Heath Springs and Kershaw, and any area subsequently annexed by either of them, and the unincorporated portion of Lancaster County, unless Grantors shall approve a smaller area pursuant to section 12.(b). m. "Franchise fee" means any tax, fee or assessment of any kind imposed by a franchising authority or other governmental entity on a Grantee solely because of its status as such. The term "Franchise Fee" does not include: PAGE 3 (1) Any tax, business license, fee, or assessment of general applicability (including any such tax, license, fee, or assessment imposed on both utilities and cable operators or their services but not including a tax, fee or assessment which is unduly discriminatory against Grantee); (2) Capital costs which are required by the Franchise to be incurred by Grantee for community, educational or governmental access facilities; (3) Requirements or charges incidental to the awarding or enforcing of the Franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages; or (4) Any fee imposed under Title 17, United States Code. n. "Government channel" or "government access channel" means any channel specifically designated or dedicated for government use. o. "Grantee" shall mean Enstar Income Program 1984-1, L.P. d.b.a. Falcon, its agents, employees, lawful successors, transferees or assignees. p. "Grantors" shall mean the Town of Heath Springs, the Town of Kershaw, and Lancaster County of the State of South Carolina, or any one or two of them. The Grantors' Councils are the governing bodies of the Grantors. q. "Gross Revenues derived from the operation of the system" shall mean all cash, credits, property of any kind or nature or other consideration derived directly or indirectly by a Grantee, its affiliates, subsidiaries, parents, and any other person or entity in which the Grantee has a financial interest or which has a financial interest in the Grantee, including but not limited to: (1) revenue from all charges for cable services provided to subscribers (including leased access fees), less refunds but including the full amount recovered by any collection agency; (2) revenue from all charges for the insertion of commercial advertisements upon the Cable Television system; (3) revenue from all charges for the leased use of studios; (4) revenue from all charges for the installation, connection and reinstatement of equipment necessary for the utilization of the Cable Television System and the provision of subscriber and other services; (5) the sale, exchange or use or cable cast of any programming developed for community use or institutional users; PAGE 4 (6) valued at retail price levels, the value of any goods, services, or other remuneration in non-monetary form, received by the Grantee or others described above in consideration for performance by a Grantee or others described above of any advertising or other service in connection with the Cable Television System; and (7) revenues from any television programming or other services offered to the citizens of Grantors within the term of the Franchise by any means of delivery whatsoever where such programming or services are provided by means of the System or any part thereof. Such revenues shall be subject to a Franchise Fee once and only once and revenues transferred to a related entity shall not be subject to a Franchise Fee a subsequent time. This definition shall not operate to result in an amount for gross revenues that is less than the amount subject to South Carolina sales tax. The phrase "financial interest" as used in this definition shall include but not be limited to the following, if and to the extent derived from the operation of the cable system (a) Any contract in which the Grantee or any named owner thereof is to receive a percentage of the gross revenues and/or a percentage of the net income of the other party to the transaction by reason of the activities encompassed by said contract; (b) Any debt relationship in which the Grantee or any named owner thereof as debtor borrows funds at a rate more advantageous than that generally available to similarly situated entities of similar credit worthiness; (c) Any debt relationship in which the Grantee or any named owner thereof as creditor receives a rate of interest exceeding that which would otherwise be paid by a similarly situated debtor of similar credit worthiness; (d) Any debt relationship which has conversion privileges to a form of equity of the nature described in the preceding subsection. The phrase "derived from the system" as used in this definition shall not include: (a) business services provided to cable television entities to the extent such revenues are subject to another Franchise; (b) business services provided to non-cable television entities provided that Grantee receives reasonable consideration for such services; (c) any activity, product or service which cannot be provided by means of the system, provided that the value of use of the system for marketing or otherwise shall be included. r. "Installation" shall mean the connection of the system to subscribers' terminals. s. "Leased Access" shall mean the use on a fee-for-service basis of the Cable Television System by business enterprises (whether profit, nonprofit or governmental) to render services to the citizens of the Grantors and shall include without limitation all use pursuant to Section 612 of the Cable Act. PAGE 5 t. "Leased access channel" or "commercial leased channel" means any channel designated or dedicated for use by persons unaffiliated with the Grantee in accordance with the Cable Act. u. "Person" means any individual, corporation, partnership, association, joint venture or organization of any kind and the lawful trustee, successor, assignee, transferee or personal representative thereof. v. "Reasonable notice" shall be written notice addressed to either Grantors or Grantee at its respective principal office within the Grantors or such other office as the party has designated to the other as the address to which notice shall be transmitted to it, which notice shall be certified and postmarked not less than ten (10) business days prior to that day in which the party giving such notice shall commence any action which requires the giving of notice. In computing said five (5) days, holidays recognized by the Grantors shall be excluded. w. "Resident" means any person residing in the Franchise Area. x. "Sale" shall include any sale, exchange, barter or offer for sale. y. "School" means any public, private or nonprofit educational institution, including primary and secondary schools, colleges and universities. z. "Service area" means the "Franchise Area." aa. "State" means the State of South Carolina. bb. "Street" shall mean the public ways, including the surface of and the space above and below any public street, road, highway, freeway, easement, lane, path, alley, court, sidewalk, parkway, or driveway now or hereafter existing as such within the Franchise Area. cc. "Subscriber" means any person who legally receives any one or more of the services provided by the Cable Communications System. dd. "System" means "Cable Communications System." ee. "Upstream signal" means a signal originating from a terminal to another point in the cable television system, including video, audio or digital signals for any purpose. ff. "User" means a person or organization utilizing channel or equipment and facilities for the purpose of production and/or transmission of material, as contrasted with receipt thereof in a subscriber capacity. PAGE 6 3. MISCELLANEOUS GENERAL PROVISIONS a. Short Title: This agreement shall be known and may be cited as the "Falcon Cable TV Franchise Agreement." b. Police Powers: Nothing in this shall be construed as an abrogation by the Grantors of any of their police powers. c. Separability: If any Section, subsection, sentence, clause, phrase, or portion of this Franchise Agreement is for any reason held invalid or unconstitutional by any court of competent jurisdiction, such portion shall be deemed a separate, distinct, and independent provision and such holding shall not affect the validity of the remaining portions hereof. d. Adjustment of Dollar Amounts: All amounts stated in specific dollars in this agreement may be adjusted from time-to-time by Grantors Councils based upon the Consumer Price Index or some other reasonable method. e. Applicability: Grantee may not avoid compliance with the terms and provisions of this agreement by contracting for any service. Grantee shall not utilize an "open video system" or its equivalent to avoid application of the Franchise to Grantee's operations. f. Confidentiality: To the maximum extent permitted by applicable law, the Grantors shall disclose to only those Grantors officials whose positions reasonably require knowledge of such information and shall otherwise keep confidential any information specifically designated by Grantee in writing to be confidential. In the event that a request for disclosure is made pursuant to a Freedom of Information Act or otherwise reasonably requiring a response by the Grantors, the Grantors shall disclose the fact that the Grantee claims a right of confidentiality with respect to such information and shall promptly advise the Grantee regarding such request. The Grantors shall further resist such request only if the Grantee agrees in writing to bear the expense of such resistance. Failure of Grantee to agree to bear such expense in a timely fashion in order for Grantors to meet their legal obligation to the party requesting such information shall be construed as Grantee relinquishing any claim of confidentiality. g. Notices: All notices, requests, demands, or other communications hereunder shall be in writing and shall be deemed to have been duly given and delivered by mailing, first class, postage pre-paid, return receipt requested, as follows: (1) To Grantors: Mayor, Town of Heath Springs, P. O. Box 68, Heath Springs SC 29058; Administrator, Town of Kershaw, Box 145, Kershaw, SC 29067; Administrator, Lancaster County, P. O. Box 1809, Lancaster, SC 29721. PAGE 7 (2) To Grantee: Director of Government Relations, Enstar Income Program 1984-1, L.P., c/o Falcon, 10900 Wilshire Boulevard, 15th Floor, Los Angeles, CA 90034. THE FRANCHISE 4. INFORMATION REQUIRED/RECEIVED FROM GRANTEE Grantors acknowledge receipt and sufficiency of the following: a. a clear description of the identity of the Grantee including but not limited to the name of the Grantee, the address of the Grantee, the nature of the business entity, the name(s) and address(es) of each person owning one percent (1%) or more of the business entity, and evidence of the compliance of the business entity with all applicable law; b. an affidavit that the Grantee is not in collusion with any potential applicant for a Cable TV Franchise and that Grantee is not a participant in any other application for a cable TV Franchise by the Grantors; c. a non-refundable fee of $5,000. Information to be Public : Subject to the provisions of section 3.f, all information described in this section shall be available for public inspection at places designated by the Grantors. 5. GRANT OF FRANCHISE a. Grant : Grantors hereby grant to Grantee a nonexclusive, revocable Franchise to construct, operate, maintain, and reconstruct, a Cable Communications System within the Franchise Area. Said Franchise constitutes both a right and obligation to provide the services of a Cable Communications System. Grantors specifically reserve the right to grant, at any time, such additional Franchises for Cable Communications Systems as they deems appropriate, and issuance of one or more Franchises shall not be construed as limiting the Grantors' right to provide Cable Television services themselves or in concert with any other entity. b. Consistency with Federal and State Laws: The Franchise granted hereby is intended to be consistent with federal laws and regulations and state general laws and regulations. In the event of conflict between the terms and conditions of the Franchise and the terms and conditions on which the Grantors can grant a Franchise, the general law and/or statutory requirements shall, without exception, control. PAGE 8 c. General ordinances: The Franchise granted hereby is made subject to general ordinance provisions now in effect or hereafter made effective. Nothing in the Franchise shall be deemed to waive the requirements of the other codes and ordinances of the Grantors regarding permits, fees to be paid or manner of construction. Grantee shall be liable for all taxes, business licenses, fees, or other impositions as any other business having its place of business in the Grantors' jurisdiction. d. The franchise granted herein shall be terminated only as authorized and permitted by applicable federal and state law and this agreement and upon written notice given not less than 120 days prior to the effective date of termination. e. The Grantors shall not grant another franchise for cable television service in the franchise area, nor shall they undertake to provide cable television services in competition with Grantee, on terms or conditions more favorable or less burdensome to the operator than those applied to Grantee herein under this Franchise. In the event that Grantors provide cable service, they shall include in charges to their subscribers the equivalent of the franchise fees Grantee is required to pay pursuant to this Franchise. If Grantors grant another franchise for cable television service in the franchise that is less favorable or more burdensome to the operator than those applied to Grantee under this Franchise Agreement, Grantee shall become subject to such provisions in a reasonable time as determined by Grantors. 6. DURATION a. Term The term of this Franchise and all rights, privileges, obligations, and restrictions pertaining thereto shall be ten (10) years from March 15, 1998, which shall be the effective date hereof, unless terminated sooner or extended as hereinafter provided, and all Grantee's obligations, except the obligation to provide a Cable Communications System under section 5, shall survive expiration of the Franchise. During the final two years of the initial term of this Franchise, Grantors shall review the technology employed by Grantee to determine whether the technology is substantially equal to the technology employed by other systems of similar size managed by or affiliated at that time with Grantee, its general partner or management company in North or South Carolina. (1) Unless Grantors determine that the technology employed by Grantee at that time is not substantially equal to the technology employed by Grantee, its general partner or management company in North or South Carolina, the term of this franchise shall be automatically extended for an additional five (5) years. (2) In the event that Grantors reasonably determine that the technology employed by Grantee at that time is not substantially equal to the technology employed at that time by other systems managed by or affiliated with Grantee, its general partner or management company in North or PAGE 9 South Carolina, Grantee shall upgrade its technology to make it substantially equal to the technology employed by such other systems within eighteen (18) months of the notice to Grantee or within ten (10) years of the effective date hereof, whichever is later. The term of this franchise shall be extended to such deadline date. If Grantee completes the upgrade required by this subsection, then the term of this franchise shall be extended as provided in subsection (1) of this section. (3) If Grantee wishes to appeal the determination of Grantors described in subsection (1) of this section, its sole recourse shall be to a board of three members, all three of whom shall be experts in cable television franchising, one appointed by Grantee, one appointed by Grantors, and one selected by the other two members. Grantee shall initiate such appeal by appointing one such person and serving written notice upon Grantors of such appointment. Within forty-five (45) days after receipt of such notice, Grantors shall serve upon Grantee a notice of the appointment of a member. If Grantors shall fail to make such appointment or if the two members appointed by the parties shall fail to select a third member within thirty (30) days after the appointment of the second member, the Court of Common Pleas for Lancaster County may, upon application of either party, appoint any member or members not duly appointed in accordance with the foregoing. The board may obtain such records of Grantee as it may determine to be relevant to its assignment and shall make its determination within a reasonable time. Members of the board shall be entitled to reasonable compensation to be paid by the parties equally. b. Renewal: Upon expiration of the franchise term or any extension thereof, the right of Grantee respecting renewal shall be determined in accordance with applicable law in effect at that time. 7. USE OF STREETS a. For the purposes of operating and maintaining a Cable Communications System in the Franchise Area, Grantee may erect, install, construct, repair, replace, reconstruct and retain in, on, over, under, upon, across and along the streets within Grantors such lines, cables, conductors, ducts, conduits, vaults, manholes, amplifiers, appliances, pedestals, attachments and other property and equipment as are necessary and appurtenant to the operation of the Cable System, provided that all applicable permits are applied for and granted, all fees paid and all other of Grantors codes and ordinances are otherwise complied with. b. Plans to be approved : Prior to construction or alteration, Grantee shall in each case file plans with the Grantors and receive written approval of such plans. PAGE 10 c. Coordination : Construction, installation and maintenance of the Cable Television System shall be performed in an orderly and workmanlike manner, and in close coordination with public and private utilities serving the Franchise Area following accepted construction procedures and practices and working through existing coordinating committees and organizations or such organizations as may be established. All cable and wires shall be installed, where possible, parallel with electric and telephone lines, and multiple cable configurations shall be arranged in parallel and bundled with due respect for engineering considerations. d. All transmission and distribution structures, lines, and equipment erected by the Grantee within the Franchise Area shall be so located as to cause minimum interference with other proper uses of streets, alleys, and other public ways and places, and to cause minimum interference with the rights and reasonable convenience of property owners who adjoin any of the said streets, alleys or other public ways and places. Grantee shall make use of existing poles and other facilities available to Grantee. Grantee shall individually notify all residents significantly adversely affected by proposed construction prior to the commencement of that work. e. Notwithstanding the above grant to use streets, no street shall be used by Grantee if Grantors determine that such use is inconsistent with the terms, conditions or provisions by which such street was created or dedicated, or is presently used. f. Nothing in this Franchise shall be deemed to compel the Grantors to maintain or retain any of their property any longer than, or in any fashion other than, in the Grantors' judgment, their own business needs may require. The Grantors shall not be required to assume any responsibility for the securing of any rights-of-way or easements, nor shall the Grantors be responsible for securing any permits or agreements with other persons or utilities. g. In case of disturbance of any street, sidewalk, alley, public way, or paved area, the Grantee shall, at its own cost and expense and in a manner approved by the Grantors, replace and restore such street, sidewalk, alley, public way, or paved area in as good a condition as before the work involving such disturbance was done. h. Existing poles : Grantee shall use to the fullest extent possible existing poles or wire-holding structures. To that end Grantee is authorized to enter into pole-sharing agreements with other users of the public ways or to enter into agreements for other such entities to use portions of Grantee's space on shared poles or structures or to enter into agreements to use portions of other entity's space on shared poles or structures. PAGE 11 i. Erection of Poles : This Franchise shall not be deemed to expressly or by implication authorize the Grantee to construct or install poles or wire-holding structures within streets for the purpose of placing cables, wires, lines or otherwise, without the written consent of the Grantors. Such consent shall be given upon such terms and conditions as the Grantors may prescribe which shall include a requirement that the Grantee perform, at its sole expense, all tree trimming required to maintain the poles clear of obstructions. j. With respect to any poles or wire-holding structures which the Grantee is authorized to construct and install within streets, a public utility or public utility district serving the Grantors may, if denied the privilege of utilizing such poles or wire-holding structures by the Grantee, apply for such permission to the Grantors Council. If the Grantors Council finds that such use would enhance the public convenience and would not unduly interfere with the Grantee's operations, the Grantors Council may authorize such use subject to such terms and conditions as it deems appropriate. Such authorization shall include the condition that the public utility or public utility district pay to the Grantee any and all actual and necessary costs incurred by the Grantee in permitting such use. k. Grantee shall have the right to remove, trim, cut and keep clear of its poles, towers, wires and other overhead appliances and equipment, the trees in and along the streets within the Franchise Area; provided, however, that in the exercise of such right, Grantee shall not cut, remove, trim or otherwise injure such trees to any greater extent than is necessary for the installation, maintenance and use of such poles, towers, wires or other overhead appliances. l. With respect to any cables, wires and other like facilities constructed and installed by the Grantee above ground, the Grantee shall, at its sole expense, reconstruct and reinstall such cables, wires or other facilities underground pursuant to any project under which the cables, wires or other like facilities of all such utilities are placed underground within an area. m. Undergrounding : Except as hereinafter provided, in all areas of the Franchise Area where the cables, wires and other like facilities of any public utilities or public utility districts are placed underground, Grantee shall construct and install its cables, wires, and other facilities underground. Amplifier boxes and pedestal mounted terminal boxes may be placed above ground if existing technology reasonably requires, but shall be of such size and design and shall be so located as not to be unsightly or unsafe. In any area of the Grantors where there are certain cables, wires and other like facilities of a public utility or public utility district underground and at least one operable cable, wire or like facility of a public utility or public utility district suspended above the ground from poles the Grantee may construct and install its cables, wires, and other facilities from the same poles. PAGE 12 n. Relocation : If the Grantors or other public agency acting in concert with the Grantors elects to alter, repair, realign, abandon, improve, vacate, reroute or change the grade of any street or to replace, repair, install, maintain, or otherwise alter any above ground or underground cable, wire conduit, pipe, line, pole, wire-holding structure, structure, or other facility utilized for the provision of utility or other services or transportation of drainage, sewage or other liquids, the Grantee, shall, except as otherwise hereinafter provided, at its sole expense remove or relocate as necessary its poles, wires, cables, underground conduits, manholes and any other facilities which it has installed. If such removal or relocation is required within the subdivision in which all utility lines, including those for the Cable Television System were installed at the same time, the entities may decide among themselves who is to bear the cost of relocation; provided that the Grantors shall not be liable to the Grantee for such costs except to the extent specifically agreed to by the Grantors. Regardless of who bears the costs, the Grantee shall take action to remove or relocate at such time or times as are directed by the agency or company undertaking the work. Reasonable advance written notice shall be mailed to the Grantee advising the Grantee of the date or dates removal or relocation is to be undertaken. o. Movement of Buildings : Grantee shall, upon request by any person holding a building moving permit, Franchise or other approval issued by the Grantors, temporarily remove, raise or lower its wire to permit the movement of buildings. The expense of such removal, raising or lowering shall be paid by the person requesting same, and Grantee shall be authorized to require such payment in advance. Grantee shall be given not less than seven (7) days oral or written notice to arrange for such temporary wire changes. 8. SYSTEM UPGRADE a. Not later than June 30, 2000, Grantee shall upgrade its system to provide a minimum of sixty (60) channels, of which no less than 36 shall be activated for service to subscribers initially, with the capacity of expansion. Grantee may use a nodal architecture including fiber optics to the node or other technology and design that is more practicable both economically and technologically to achieve a system with the same minimum capacity and technical quality. Prior to commencing construction, Grantee shall submit a plan and schedule of construction reflected on maps at a scale of 1 inch to 200 feet showing by a logical geographic progression the sequence in which the entire franchise area will be served. PAGE 13 b. A Final Order of Completion for the upgrade shall be issued by the Grantors when: (1) construction of the Cable Television System has been completed within the entirety of the Franchise Area in compliance with construction standards, the approved plan, and the design and other requirements of this agreement; (2) cable television services have been made available in accordance with section 12 of this agreement to the Franchise Area. (3) any and all studio facilities, equipment, channels and other services, resources or benefits required for community, educational, and governmental access purposes pursuant to the provisions of this agreement have been completed and made available; (4) complete and accurate "as built" plans in electronic format compatible with Lancaster County GIS have been filed by the Grantee with the Grantors; and (5) a Notice of Completion has been filed by the Grantee as hereinafter provided. c. For purposes of this section, cable television service shall be deemed to be made available when cable television services are offered on a non-discriminatory basis for immediate provision to the owner or legal representative of the owner empowered to consent to use of the property of such individual dwelling units. d. For the purpose of determining completion under this Section, the total number of dwelling units within each Franchise Area shall be deemed to be the actual number of units available for occupancy as of a date forty-five (45) calendar days in advance of the date of filing by the Grantee of the Notice of Completion; provided that the Grantee files the Notice of Completion with a good faith belief that it has in fact achieved completion as of the date of filing. e. When Grantee asserts completion it shall file a written Notice of Completion with the Cable TV Administrator. The Notice of Completion shall state the total number of dwelling units available for occupancy within each Franchise Area forty-five (45) calendar days in advance of the filing of the Notice, the total number of dwelling units to which cable television service has been made available within each Franchise Area as of the date of filing, and shall otherwise certify completion as defined by the first paragraph in this Section. Neither the Notice of Completion nor the statements, assertions or certifications contained therein shall be deemed to be binding upon the Grantors. PAGE 14 f. During the period of upgrade construction and during the sixty (60) day period following filing of the Notice of Completion, all elements and components thereof, and all equipment and studio facilities required by this Franchise document shall be subject to inspection by Grantors' employees or authorized agents or representatives, for the purpose of determining whether the System and related facilities comply with the Franchise and the provisions of this agreement. The Grantee shall authorize such inspection and provide such information and cooperation as is required in order to permit an adequate investigation to determine the existence or nonexistence of such compliance. 9. REMOVAL a. Upon expiration or termination of a Franchise, if the Franchise is not renewed and if neither the Grantors nor an assignee purchase the Cable Television System, Grantee, at its sole cost and expense, (1) may remove any underground cable from the streets which has been installed in such a manner that it can be removed without trenching or other opening of the streets along the extension of cable to be removed. Grantee shall not remove any underground cable or conduit which requires trenching or other opening of the streets along the extension of cable to be removed, except as hereinafter provided. (2) shall remove any underground cable or conduit by trenching or opening of the streets along the extension thereof or otherwise which is ordered to be removed by the Grantors Council based upon a determination of the Council that removal is required in order to eliminate or prevent a hazardous condition or promote future utilization of the streets for public purposes. Any order by the Grantors Council to remove cable or conduit shall be mailed to the Grantee not later than thirty (30) calendar days following the date of expiration or termination of the Franchise. Grantee shall file written notice with the Grantors not later than thirty (30) calendar days following the date of expiration or termination of the Franchise of its intention voluntarily to remove cable intended to be removed and a schedule for removal by location. The schedule and timing of removal shall be subject to approval and regulation by the Grantors. Underground cable and conduit in the streets which is not removed shall be deemed abandoned and title thereto shall be vested in the Grantors. (3) shall remove from the streets all above ground elements of the Cable Television System, including but not limited to amplifier boxes, pedestal mounted terminal boxes, and cable attached to or suspended from poles or other structures. PAGE 15 b. Grantee shall apply for and obtain such encroachment permits, licenses, authorizations or other approvals and pay such fees and deposit such security as required by applicable ordinance of the Grantors, shall conduct and complete the work of removal in compliance with all such applicable ordinances, and shall restore the streets to the same condition they were in before the work of removal commenced. The work of removal shall be completed not later than twelve (12) months following final determination that the franchise has been terminated. 10. RIGHT OF GRANTORS TO PURCHASE THE SYSTEM a. In the event the Grantors revoke the Franchise pursuant to provisions of this agreement or upon non-renewal after the normal expiration of the Franchise term or extension thereof and if Grantee is willing to sell to any party, the Grantors shall have the first right, directly or as an intermediary, to purchase the cable communications system. The purchase price shall be the higher of any bonafide offer of purchase made by an unaffiliated third party or the fair market value of the system. b. The date of valuation shall be no earlier than the day following the date of expiration or revocation and no later than the date the Grantors make an appropriate offer for the system. c. The value of the cable system shall be determined by a board of three members, all three of whom shall be experts in the appraisal of cable television systems, one appointed by Grantee, one appointed by the Grantors, and one selected by those two. Either party may initiate the formation of the board by serving written notice upon the other of the appointment of a member. Within forty-five (45) days after receipt of such notice, the other party shall serve upon the first party a notice of the appointment of a member. If the second party shall fail to make such appointment or if the two members appointed by the parties shall fail to select a third member within thirty (30) days after the appointment of the second member, the Court of Common Pleas for Lancaster County may, upon application of either party, appoint any member or members not duly appointed in accordance with the foregoing. The board may obtain such records of Grantee as it may determine to be relevant to its assignment and shall make its determination of value within a reasonable time. Members of the board shall be entitled to reasonable compensation to be paid by the parties equally. d. Either party may invoke the provisions of this section by serving written notice upon the other. e. Nothing contained in this section shall preclude payment by the Grantors of a purchase price established by agreement between the Grantee and the Grantors at any time. PAGE 16 SERVICES 11. UNIVERSAL SERVICE a. Grantee shall provide equal and uniform cable television service to all dwelling units within incorporated portions of the Franchise Area; provided, that all permissions required from owners of property are reasonably available. Notice of the circumstances of each such unavailability shall be given to the Grantors. No charge shall be required of any subscriber or property owner for extension of distribution facilities except as provided in section 11.b. Grantee shall not discriminate in the offer of services or assessment, levy, charge, imposition or collection of rates on the basis of age, race, creed, color, religion, national origin, sex, marital status, or location within the Franchise Area. b. Line Extension Policy: Outside the portions of the franchise area which were inside the corporate limits of the Towns on March 15, 1998, Grantee shall extend its distribution facilities to any area contiguous to its existing system that is not served by a franchised cable company when there are 20 homes or 15 one-year commitments per mile of cable. Grantee may require subscribers to share the cost of extending distribution facilities to other areas. Grantee's rules for sharing such costs shall be subject to the provisions of sections 13 and 24 of this Franchise and shall be subject to approval of the Grantors. c. Service to new developments: Grantee shall provide service to new developments within the Franchise Area on a timely basis in coordination with utility providers in such areas, and subject to the provisions of subsection 11.b above. d. Service to Newly Annexed Areas: Within sixty (60) days of official notice of any annexation, unless Grantee is already providing cable service to the annexation area, Grantee shall submit a plan and schedule meeting the requirements of Section 9.1 showing how Grantee proposes to incorporate such annexed area into its System as quickly as is reasonably possible. 12. GENERAL REQUIREMENTS The Cable Television System shall, at minimum: a. Relay to subscriber terminals those signals required by the FCC. b. Make available upon request by any subscribers receiving channels showing premium services and pay per view events, a lockout device which prevents the unauthorized viewing of such channels. c. Make available to subscribers an RF switch (an A-B switch) permitting conversion from cable to reception from another source for each outlet. PAGE 17 d. Not, as a condition to providing cable communications service, require any subscriber or potential subscriber, to remove any existing antenna structures for the receipt of television signals nor prohibit any subscriber from installing such structures. e. Render efficient service, make repairs promptly, and interrupt service only for good cause and for the shortest time possible. Such interruptions, insofar as practical, shall be preceded by notice and shall occur during periods of minimum use of the System. In the event that any subscriber is interrupted for twenty-four (24) or more consecutive hours due to causes within Grantee's control, Grantee shall provide a prorated rebate of monthly fees to the affected subscriber. The rebate to an active subscriber may be in the form of a credit against the account of the subscriber. f. Effective with completion of the upgrade, Grantee shall include an "Emergency Alert System" which meets the requirements of the FCC for a video interrupt and audio alert message on all channels and EAS audio and video messages on at least one channel, without regard to the deadline in FCC rules. The Cable Television System shall include the capability to receive alerts from the Grantors' headquarters for Emergency Services. Grantors shall indemnify and hold Grantee harmless from any and all claims of loss or damage alleged to arise from the acts or omissions of Grantors in the use or failure to use such capability. g. Grantee shall interconnect its Cable Television System with other Cable Systems within the County, or provide direct connections to programming sources, so as to enable each system to carry and cablecast the community, educational, and governmental access programming of the other systems. It is recognized that this capability requires cooperation from other independent franchising authorities, cable operators, and others. Grantee shall cooperate with such other entities with a goal of achieving interconnection. Grantee's obligation under this section shall be as required by section 15.d and the following: Not later than June 30, 2001, Grantee shall present a plan developed with the other cable television companies operating in the county to accomplish the interconnection required by this section. Provided that there is live programming on the government channel at that time, or subsequently when such programming is being provided, and upon approval of such plan by Grantors, Grantee shall implement the plan up to a cost to Grantee of $10,000. PAGE 18 13. CUSTOMER SERVICE a. FCC Standards: Grantee shall provide customer service, at a minimum, equal to requirements adopted by the FCC or other federal agencies having jurisdiction over Grantee. A printed copy of the standards that are applicable shall be provided by Grantee to its customers on request without charge or made available by way of the cable system. b. Customer information: Grantee shall make available to its customers through one of its locally produced television channels or by such other methods as the Grantee may deem necessary information with regard to complaint procedures, channel offerings, rate schedules and discount packages. c. Grantee Rules: Grantee shall promulgate such rules, regulations, terms, and conditions governing the conduct of its business as shall be reasonably necessary to enable Grantee to exercise its rights and to perform its obligations under this Franchise and to assure an uninterrupted service to each and all of its customers; provided, however, that such rules, regulations, terms, and conditions shall not be in conflict with the provisions hereof, and shall have been submitted to the Grantors not less than (30) days prior to the proposed effective date thereof. d. Local business office: Grantee shall establish, operate, and maintain either with its own employees or by contract with a competent unrelated organization in one of the Towns or within eight (8) miles of both the Town Halls of Heath Springs and Kershaw a business office for the purpose of initiating, changing or discontinuing service, paying bills, and returning equipment. Such office shall be open during normal business hours and additional hours as Grantee determines. e. 24-hour service: Grantee shall have a listed toll-free telephone number for service calls and such telephone service shall be available twenty-four (24) hours a day, seven (7) days a week. f. Prompt repair: Grantee shall maintain adequate repair materials and technicians. Grantee shall make repairs affecting fewer than five (5) subscribers within 48 hours of initial notice by any subscriber. Grantee shall initiate repairs affecting five (5) or more subscribers within 24 hours of initial notice by any subscriber. Whenever such repairs cannot be completed within 72 hours of initiation, Grantee shall notify Grantors prior to the end of the 72-hour period of a time certain when the repairs shall be completed. All repairs shall restore the system to conform with plans previously submitted to the Grantors. Grantee shall credit the account of any subscriber without service beyond the limits in this section. In the event of a declared natural disaster or other major disruption affecting more than twenty-five percent of its subscribers, Grantee shall repair the system reasonably promptly and in coordination with Grantors and emergency authorities. PAGE 19 g. Equipment maintenance: Grantee shall service or replace without charge all equipment provided by it to the subscriber, provided, however, that Grantee may charge a subscriber for service to or replacement of any equipment damaged by a subscriber. This subparagraph does not apply to inside wiring not owned by Grantee. Grantee may remove obsolete equipment without providing a replacement. h. Deposits: Grantee may require all subscribers to pay for basic service not more than two (2) months in advance. Grantee shall require no other deposit or pre-payment for basic service, provided, however, that nothing herein shall be construed to prohibit a charge for installation of Cable Communications Services. i. Disconnection: In the event that a subscriber fails to pay as properly due and owing a fee or charge, the Grantee may disconnect the subscriber's service outlet, upon giving ten (10) days written notice thereof, and charge a reasonable reconnection fee. If a subscriber shall exercise his right to withhold payment under provisions of State law, Grantee shall strictly adhere to the requirements of said State law. Unless permitted by FCC regulations, Grantee shall neither impose nor collect any additional charge for the disconnection of any installation or outlet or level of service. j. Security deposit: Grantee shall not charge a security deposit greater than the actual cost to the Grantee of equipment for which the security deposit was collected. If Grantee's policy of requiring such deposits shall change to require a smaller or no deposit, Grantee shall refund all or the same proportion of previously-collected deposits for the same or substantially similar equipment immediately upon such change taking place. Such refund may be by credit on subscriber's bills. k. Refunds: Grantee shall establish and conform to the following policy regarding refunds to subscribers and users: (1) If the Grantee collects a deposit or advance charge on any service or equipment requested by a subscriber or user, Grantee shall provide such service or equipment within thirty (30) days of the collection of the deposit or charge or it shall refund such deposit or charge within forty-five (45) days after receipt thereof. (2) Nothing in this Section shall be construed to relieve the Grantee of any responsibility to subscribers or users under any contractual agreements into which it enters with them. (3) Nothing in this section shall be construed as limiting the Grantee's liability for fines or penalties which may be imposed under this Franchise for violation or breach of any of its provisions. PAGE 20 (4) Nothing in this section shall be construed to limit the Grantee's liability for damages because of its failure to provide the service for which the deposit or charge was made. (5) In the event that a subscriber terminates basic service prior to the end of a pre-paid period, the pro-rata portion of any pre-paid subscriber fee which represents payment for services which are no longer to be rendered shall be refunded promptly, but in no case more than forty-five (45) days after receipt of the request for termination. l. Late fees: Grantee may impose reasonable late fees. Grantee shall not assess a late fee on any amount paid in advance prior to the end of the period for which such advance payment was billed. 14. TECHNICAL STANDARDS a. Grantee shall construct, install and maintain its Cable Television System in a manner consistent and in compliance with all applicable laws, ordinances, construction standards, governmental requirements, and technical standards including those established by the FCC. b. Minimum Bandwidth : Grantee shall provide a minimum capacity of 60 channels on completion of the upgrade. c. Electrical and related Codes : Grantee shall at all times comply with the National Electrical Safety Code (National Bureau of Standards); National Electrical Code (National Bureau of Fire Underwriters); Applicable FCC and other federal, state and local regulations; and codes and other ordinances of the Grantors. d. In any event, the Cable Television System shall not endanger or interfere with the safety of persons or property within the Franchise Area or other areas where the Grantee may have equipment located. e. Antenna Structure(s): Any antenna structure used in the Cable Television System shall comply with construction, marking and lighting of antennae structures, required by the United States Department of Transportation, regardless of whether such structure is within the Grantors' jurisdiction. f. Grantors radio services: RF leakage shall be checked at specified fixed reception locations for emergency radio services to prove no interference with specified frequencies used by the Grantors are possible. The Grantors will specify in writing the locations and frequencies referred to in this subparagraph and provide reasonable notice of same to Grantee before any leakage tests other than those required by federal law or regulations shall be required. PAGE 21 g. Cable Ready consumer equipment: The Cable Television System shall be designed to be compatible with common features of consumer electronic equipment, in accordance with FCC regulations. h. Color, Stereo, and VIT Signals: Effective with the upgrade, the Cable Television System shall distribute television signals substantially as they are available to it, particularly including such information as color, Multi-Channel Television Sound (MTS, stereo), and vertical interval test (VIT) signals. Grantors may waive this requirement based on justification provided by Grantee in an application. i. Grantee shall include equipment capable of providing standby powering for head end, transportation and trunk amplifiers serving not less than 250 subscribers for a minimum of two (2) hours. The equipment shall be so constructed as to automatically notify the cable office when it is in operation and to automatically revert to the standby mode when the AC power returns. The system shall incorporate safeguards necessary to prevent injury to linemen resulting from a standby generator powering a "dead" utility line. Provision of standby power shall be illustrated on the system map on file at the Grantors. 15. COMMUNITY, EDUCATIONAL AND GOVERNMENTAL ACCESS a. Grantee shall provide, pursuant to the provisions of the Cable Communications Policy Act of 1984, Section 611 (47 USC 531), one (1) downstream channel for access by the Grantors and other government entities in Lancaster County; and upon written notice by the Grantors shall provide one (1) downstream channel for community access and/or one (1) downstream channel for educational access. Grantee shall activate the government access channel, including the provision of equipment required by Section 15.d and training of Grantors' staff, within 90 days of the effective date of this agreement. Other access channels required in this section shall be activated, after completion of the upgrade, within 60 days of written notice by Grantors. b. Grantee shall effect the availability of all access channels to viewers as a part of basic service. Any access channel requiring a converter or "cable-ready" consumer equipment shall not be scrambled or otherwise denied to customers. c. Grantee use of Unused Access Channel: In the event that Grantee desires to use any access channel in whole or in part for the provision of other services, Grantee shall apply to the Grantors for permission to do so and notify subscribers of the substance of the application. Grantee shall demonstrate in such application that the channel is not being used for the purpose designated. Based on such application and other information and following opportunity for public input, Grantors may permit Grantee to use such channel for other purposes. Whenever Grantors reasonably determine that conditions have changed so that the channel PAGE 22 should be returned to its designated purpose, Grantors shall notify Grantee. Grantee thereupon shall cease use of the channel and return it to its designated purpose. d. Support for Use of Access: Grantee shall provide necessary computer equipment, modem(s), and training so that the government access programming originated by the County and other jurisdictions may be transferred to Grantee's system for carriage on the government access channel. Nothing contained in this agreement shall be construed to limit the authority of the Grantee to make payments in support of the use of community, educational or governmental access channel(s). However, except for the computer equipment, such payments are expressly not a requirement of this Franchise and shall in no event be considered in the calculation of Franchise Fees pursuant hereto. e. Availability of Access Facilities: Grantee shall activate channels for community, educational and government access upon the Cable Television System pursuant to this section at all times and shall maintain such channels in operation the same as any other channel on the system. Grantee shall furnish and maintain all equipment necessary for transmitting signals from one location to the head end for each such channel. f. As to channels allocated for community and educational access, Grantee shall assist in the development and may assist in the operation of separate non-profit entities to manage such channels. g. Grantee shall make all reasonable efforts to coordinate the cable casting of community, educational and governmental access programming upon the Cable Television System at the same time and upon the same channel designations as such programming is cablecast upon other cable television systems within the community. 16. SERVICE TO GRANTORS Grantee, at its own expense within 45 days of the effective of date of this agreement, shall provide and maintain one connection to Grantors' existing office buildings, police stations, fire stations, fixed radio transmitter/receiver sites, recreational facilities, and any other of Grantors facilities within the Franchise Area as designated by the Grantors; provided, that Grantee shall not be responsible for providing the distribution system within any of such places. Further, no fees shall be charged for basic service to such places. Service shall be provided to newly established Grantors facilities of the type referred to above under the same terms and conditions within 30 days of notice by the Grantors. The requirement to serve any specific facility may be waived by the Grantors. PAGE 23 17. PROGRAMMING Community Needs: Grantee shall provide programming meeting the needs of the community, including programming devoted to minorities, sports, music, children, business and financial affairs, arts and culture, science, public affairs, foreign culture and language, and South Carolina. Grantee shall provide a diversity of programming about South Carolina, but Grantee shall be under no obligation to create original programming. REGULATION 18. REGULATION OF THE FRANCHISE a. The Grantors shall have the following regulatory responsibility: (1) Administration and enforcement of the provisions of this Franchise; (2) Renewal, extension or termination of this Franchise; (3) Approval prior to sale or transfer of the Franchise granted hereunder; (4) Performance evaluations pursuant to this Franchise. B. The Grantors also reserves the right to perform the following functions: (1) Develop objectives and coordinate activities related to the operation of community, educational and government channels; (2) Provide technical, programming and operational support to public agency users such as Grantors departments, schools and health care institutions; (3) Coordinate plans for interconnection of cable services; (4) Analyze the possibility of integrating cable communications with other city, state, or regional telecommunications networks; (5) Formulate and recommend long-range telecommunications policy for the Grantors and provide for the determination of future cable-related needs and interests of the community; (6) Provide the administrative effort necessary for the conduct of performance evaluations pursuant to this Franchise, and any other activities required for the administration of the Franchise; (7) Monitor the Grantee's process for handling citizen complaints and periodically inspect and analyze the records related to such complaints; PAGE 24 (8) Monitor the Grantee's adherence to operational procedures and line-extension policies; (9) Assure compliance with applicable laws and ordinances; (10) Arrange tests and analyses of equipment and performance; (11) Provide for reasonable continuity in service; (12) Receive for examination all data and reports required by this Franchise; and (13) Intervene in any suit or proceeding to which the Grantee is party, when the issues involved are relevant to the interest of the Grantors in the performance of Grantee's obligations under this agreement and when permitted by the court. 19. TRANSFERS a. The Franchise may not be sold, transferred, assigned, mortgaged, pledged, leased, sublet, or otherwise encumbered for any purpose whatsoever, nor shall title thereto, either legal or equitable, or any right or interest therein, pass to or vest in any party without Grantors approval, which shall be based upon a reasonable determination by the Grantors of the qualifications of the buyer or assignee in respect to technical, financial, legal, character, or other such requirements, which approval shall not be unreasonably withheld; and upon sale or assignment, the buyer or transferee shall be required to become a party to the terms of this Franchise. Notwithstanding the above, Grantee may hypothecate its assets including the Cable Television System or any part thereof to secure loans, except that such loans shall not be from cable television industry sources. b. A sale or transfer of control of Grantee to or among the present shareholders of Grantee, their spouses, children or grandchildren, or other entities owned or controlled by the shareholders of Grantee shall not be deemed a sale or assignment of the Franchise for the purposes of this section. c. The transfer, over the term of the Franchise, of more than fifty percent (50%) of voting control of Grantee pursuant to a sale or security agreement to persons other than the present shareholders of Grantee, their spouses, children or grandchildren, or other entities owned or controlled by the shareholders of Grantee shall create a presumption of a transfer of control of Grantee. d. Any change in the list of owners required by section 4.a that does not require approval of the Grantors shall be reported to the Grantors within thirty (30) days of the effective date thereof. PAGE 25 e. Any transfer or other encumbrance of whatever kind or nature made in violation of the provisions of this Section shall be void. 20. BOND Grantee shall furnish a franchise bond or irrevocable letter of credit guaranteeing performance of Grantee's obligations under this franchise in an amount of $25,000. Such security shall be maintained throughout the term of this Franchise, provided that the surety may be substituted at any time provided that the substituted surety is qualified, that the suretyship is not interrupted, and that notice of the proposed substitution is provided to Grantors not less than 60 days prior to the date of the proposed substitution. Grantors shall notify Grantee within 30 days of said notice if Grantors object to the proposed substitution. The bond or irrevocable letter of credit required herein shall be in a form satisfactory to the Grantors. Surety shall be licensed therefor by the State of South Carolina. An irrevocable letter of credit shall be issued by a bank subject to the jurisdiction of South Carolina courts and which meets the capital requirements of federal regulators. 21. INDEMNIFICATION Grantee shall, at its sole expense, fully indemnify, defend and hold harmless the Grantors, its officials, employees, agents, and volunteers, from and against any and all claims, suits, actions, liability and judgments for damages or otherwise: a. For actual or alleged injury to persons or property, including loss of use of property due to an occurrence, whether or not such property is physically damaged or destroyed, in any way arising out of or through or alleged to arise out of or through the acts or omissions of the Grantee or its officers, agents, employees, or contractors or to which the Grantee's or its officers', agents', employees' or contractors' acts or omissions in any way contribute; b. Arising out of or alleged to arise out of any claim for damages for invasion of the right of privacy, defamation of any person, firm or corporation, or the violation or infringement of any copyright, trade mark, trade name, service mark or patent, or of any other right of any person, firm or corporation; and c. Arising out of or alleged to arise out of Grantee's failure to comply with the provisions of any statute, regulation or ordinance of the United States, State of South Carolina, or any local agency applicable to the Grantee in its business. Grantee, however, shall not indemnify, defend or hold harmless the Grantors, its officials, employees, or volunteers to the extent that such claims are caused by such parties. PAGE 26 22. INSURANCE a. Grantee shall maintain in full force and effect at all times for the full term of the Franchise, insurance as described in this section. Such insurance shall protect the Grantors as an additional insured with respect to damages and defense of claims arising from activities performed by or on behalf of Grantee, products and completed operations of Grantee and premises owned, leased or used by the Grantee. b. All liability insurance required in this section shall be kept in full force and effect by the Grantee during the existence of the Franchise and until after the removal of all poles, wires, cables, underground conduits, manholes, and other conductors and fixtures installed by Grantee incident to the maintenance and operation of the cable communications system as defined in this Franchise. c. All insurance policies shall be written by insurers licensed to do business in South Carolina and be acceptable to the Grantors. All policies shall be endorsed to give the Grantors thirty (30) days written notice of the intent to amend, cancel or non-renew by either the Grantee or the insuring company. d. Grantee shall furnish the Grantors with certificates of insurance and with original endorsements affecting coverage required by this section. The certificates and endorsements for each insurance policy are to be signed by a person authorized by that insurer to bind coverage on its behalf. Certificates shall be on ACCORD Form 25-S or on forms approved by the Grantors. Endorsements shall be provided by Grantee using insurance industry standard forms or other forms approved by the Grantors, which approval shall not be unreasonably withheld. e. Insurance Coverages Required : A comprehensive general liability insurance policy protecting the Grantors against liability for loss or bodily injury and property damage occasioned by the installation, removal, maintenance or operation of the cable communication system by the Grantee in the following minimum amounts: (1) $5,000,000 combined single limit, bodily injury and for property damage in any one occurrence; (2) $5,000,000 aggregate. (3) A comprehensive automobile liability policy for all owned, non-owned, hired and leased vehicles operated by the Grantee with limits no less than five million dollars ($5,000,000) each accident, single limit, bodily injury and property damage combined, or evidence of self insurance. PAGE 27 (4) Worker's compensation and employer's liability, valid in the State, in the minimum amount of the statutory limit for worker's compensation, and $500,000 for employer's liability. 23. REPORTS a. Contemporaneous reports : (1) Regulatory communications. Copies of all written petitions, applications, letters, memoranda and reports submitted by Grantee to or received by Grantee from any Federal or State agency having jurisdiction in respect to any matters affecting construction or operation of a Cable Television System or services provided through such a System; provided, however, that materials exempt from disclosure under the Freedom of Information Act applicable to such agency shall not be subject to this requirement. (2) Notices to public. Copies of all written notices to subscribers, news releases, and other documents concerning operation of the system issued to the public or media shall be submitted to the Grantors not later than the time they are first mailed or delivered to any other person. b. Annual Report: Grantee shall file with the Grantors in January of each year, including the January following the expiration of this Franchise, an annual report consisting of: (1) Facilities report. A report describing plant construction and plant in operation during the previous year, including head end and production facilities. (2) Grantee rules. The Grantee's full schedule of all subscriber and user rates and all other charges including, but not limited to, premium, leased channel and pay per view services, contract or application forms of regular subscriber policy regarding the processing of subscriber complaints, delinquent subscriber disconnect and reconnect procedures and any other terms and conditions adopted as the Grantee's policy in connection with its system subscribers. (3) Proof of insurance. Written notice of payment of required premiums for insurance required by this Franchise. (4) Financial reports. The financial reports for the Grantee, which shall indicate income and expenses, assets and liabilities, and such other information that reasonably may be required. PAGE 28 (5) Grantee's annual proof of performance tests conducted pursuant to FCC standards and requirements. In the event that the FCC does not require a complete proof of performance, Grantee shall furnish such tests as are necessary to demonstrate that the system meets the technical standards required by section 14. (6) A summary of new services offered and services discontinued during the previous year with an explanation of the changes. (7) A summary of complaints received and handled which may be a list of types and number. (8) A report of the number and types of outages affecting five (5) or more subscribers simultaneously. (9) The number of subscribers by level of service subject to the Franchise, the total number of subscribers served from facilities located within the Franchise Area, a list of systems or franchises served from facilities located in the Franchise Area. (10) A report on programming provided pursuant to section 17. c. Special reports: Grantee shall prepare and furnish to the Grantors, at the times and in the form prescribed, such additional reports with respect to its operation, affairs, transactions or property as may be reasonably necessary and appropriate to the performance of any of the functions or duties of the Grantors in connection with the System. 24. RATES a. Rate regulation : Grantors expressly reserve the right to approve the rates which the Grantee charges its subscribers for such services as Grantors may be permitted to regulate by current or subsequent law. Grantee shall not deny, delay, interrupt or terminate cable communications services or the use of community communications facilities to subscribers or users because Grantors deny a request for a rate increase, provided, however, that nothing herein shall be construed to limit the Grantee's right to seek judicial review of the reasonableness of such action. No rate, fee or charge of any kind, which is within the approval authority of Grantors as set forth above, shall be charged or collected from subscribers by the Grantee without the written authorization of Grantors. Rate regulation shall be implemented according to applicable federal law and regulations. b. Promotional rates: Nothing in this Section shall be construed to prohibit the reduction or waiving of charges in conjunction with promotional campaigns for the purpose of attracting subscribers or users. PAGE 29 25. FRANCHISE FEES a. Purpose : For the use of the streets and for the purposes of providing revenue with which to defray the costs of regulation arising out of the granting of this Franchise and for promoting and assisting community, educational, and governmental access programming, the Grantee shall pay Franchise Fees in the amount in this Section. b. During the term of this Franchise, Grantee shall pay to the Grantors an amount equal to five percent (5%) each year of the Grantee's annual Gross Revenues derived from the operation of the system within the Franchise Area. Said fees shall be paid quarterly within 30 days of the end of each calendar quarter. Grantee agrees that no adjustment shall be necessary to represent the time value of money in the payment of franchise fees. c. The term "revenues derived from operation of the cable system in the Franchise Area" shall be construed to include only (1) those revenues derived by the Grantee from subscribers within the Franchise Area and (2) a portion of other revenues of the Grantee calculated by a formula or formulae which fairly allocate revenues attributable to the Franchise Area. In the absence of a more precise formula, the portion shall be calculated by multiplying such other revenues by a fraction whose numerator is the number of subscribers within the Franchise Area and whose denominator is the number of subscribers served by the head end facility of Grantee. d. Not later than March 31 of each year during the Franchise, and including the year following expiration of the Franchise, Grantee shall provide the Grantors with certification by an officer of Grantee of the accuracy of the Franchise fee paid and in detail the sources and amounts of revenues received by Grantee during the previous year. The Grantors may, in their sole discretion, retain the services of an independent certified public accountant to provide an opinion, prepared in accordance with generally accepted accounting standards, as to the accuracy of franchise fee paid. Expense of such audit will be paid by the Grantors unless such opinion establishes that the Franchise fee has been underpaid, in which case, the Grantee will reimburse the Grantors for expense of the opinion along with any unpaid fee, interest and penalty within 30 days of the opinion date. e. No acceptance of any payment shall be construed as an accord that the amount paid is, in fact, the correct amount, nor shall such acceptance of payment be construed as a release of any claim which the Grantors may have for further or additional sums payable under the provisions of this Section. PAGE 30 f. If the limitation on Franchise Fee contained in the Cable Act is raised, the fee required by this Franchise may be increased up to the new limit effective for fees paid after January 1 next following the effective date of such amendment to the Cable Act; provided that such increase is authorized by Grantors after a duly noticed public hearing. g. Interest: Any Franchise Fees which remain unpaid after the due date shall be delinquent and shall thereafter accrue interest at the then published prime rate. h. Franchise fees due hereunder shall be payable based on gross revenues received by the Grantee beginning on July 1, 1998, and thereafter, as required by this Section. Grantee shall obtain business licenses for the period beginning July 1, 1998, and thereafter in accordance with Grantors' business license ordinances. i. Inspection of books : Grantee shall make available for inspection by authorized representatives of the Grantors, its books, accounts, and all other financial records at reasonable times and upon reasonable notice. Such inspections shall not be limited to annually, as are audits. j. If for any reason, the Grantors refund any payment of franchise fee, Grantee shall credit such refund to subscribers in a reasonable manner to be approved by the Grantors. 26. RECEIVERSHIP AND FORECLOSURE a. The Franchise shall, at the option of the Grantors, cease and terminate one hundred twenty (120) days after the appointment of a receiver or receivers, or trustee or trustees, to take over and conduct the business of the Grantee, whether in a receivership, reorganization, or other action or proceeding, unless such receivership or trusteeship shall have been vacated prior to the expiration of said one hundred twenty (120) days, or unless such receivers or trustees shall have, within one hundred twenty (120) days after their election or appointment, fully complied with all the terms and provisions of this Franchise, and the receivers or trustees, within said one hundred twenty (120) days, shall have remedied all defaults under the Franchise; and such receivers or trustees shall, within said one hundred twenty (120) days, execute an agreement, duly approved by the court having jurisdiction of the premises, whereby such receivers or trustees assume and agree to be bound by each and every term, provisions and limitation of this Franchise. b. In the case of a foreclosure or other judicial sale or transfer in lieu thereof of the plant, property and equipment of the Grantee or any part thereof, including or excluding the Franchise, the Grantors may serve notice of termination upon the Grantee and the successful bidder at such sale or proposed transferee, in which event the Franchise and all rights and privileges of the Grantee granted hereunder PAGE 31 shall cease and terminate one hundred twenty (120) days after service of such notice unless the Grantors shall have approved the transfer of the Franchise pursuant to section 19. Provided, however, that if such transferee is a prior secured party pursuant to section 19.a to whom the transfer has been made in lieu of foreclosure or as a result of a foreclosure or other judicial sale or is a successful bidder at foreclosure or other judicial sale whom the Grantors has not approved pursuant to Section 19, the transferee shall be permitted to continue operating the system for twelve months from the date of such transfer, while actively seeking another operator meeting Grantors' requirements for approval, if the transferee shall have covenanted and agreed with the Grantors to assume and be bound by all of the terms and conditions of the Franchise reasonably applicable under the conditions and circumstances existing during said twelve month period. 27. ENFORCEMENT a. Procedure for Remedying Franchise Violations by Termination: In the event that the Grantors determine that Grantee has violated any material provision of this Franchise, Grantors may make a written demand on Grantee that it remedy such violation. If the violation is not remedied, or in the process of being remedied, to the reasonable satisfaction of the Grantors within sixty (60) days following such demands, Grantors shall determine whether or not such violation by Grantee was excusable or inexcusable, in accordance with the Administrative Procedures Act commencing at Section 1-23-310 of the Code of South Carolina of 1976 or any successor legislative amendment, to the extent that it may be applicable. Upon such determination, the Grantors Council shall adopt a decision which includes findings of fact and conclusions. If the decision by the Grantors Council is that there are grounds for termination of the Franchise and that the Franchise shall be terminated, the Council may adopt a resolution which terminates the Franchise and includes its decision. The effective date of termination shall be such date as is reasonably prescribed by the Grantors Council, in the resolution. b. Alternative Remedies: Any enforcement action or remedy provided by this Franchise shall not be deemed exclusive but shall be alternative or cumulative in nature. No provision of this Franchise shall be deemed to bar the right of either party to seek or obtain judicial relief from a violation of any provision of this Franchise or any rule, regulation, requirement or directive promulgated thereunder. Neither the existence of other remedies identified in this Franchise nor the exercise thereof shall be deemed to bar or otherwise limit the right of the either party to recover monetary damages (except where liquidated damages are otherwise prescribed) for such violation or judicial enforcement of either party's obligations by means of specific performance, injunctive relief or mandate, or any other judicial remedy at law or in equity. PAGE 32 Liquidated Damages: (1) Grantee understands and agrees that failure to comply with any time and performance requirements as stipulated in this Franchise will result in damage to the Grantors, and that it may be impracticable to determine the actual amount of such damage in the event of delay or non-performance. (2) If the Grantors conclude that Grantee is liable for liquidated damages pursuant to this Section, they shall issue to Grantee by certified mail a notice of Intention to Assess Liquidated Damages. The notice shall set forth the basis for the assessment, and shall inform the Grantee that liquidated damages will be assessed from the date of the notice unless such violation shall have been cured within 10 days of the date of notice or the assessment notice is appealed. On appeal the Grantors may determine (1) that the violation has been corrected, or (2) that an extension of time or other relief should be granted. Unless the Grantors indicates to the contrary, said liquidated damages shall be assessed beginning with the date on which the Grantors sent the notice of the intention to assess liquidated damages and continuing thereafter until such time as the violation ceases, as determined by the Grantors. (3) The following liquidated damages amounts are established: (a) For failure to pay any monetary amount due to Grantors when due, in addition to any interest due on such amount, an amount equal to five percent of such monetary amount. (b) For failure to provide within a reasonable time after written request any data, documents, reports, or other information required by the Franchise, $50 per day that such violation continues. (c) For failure to complete the upgrade, $100 per day that such violation continues. (d) For failure to provide an emergency alert system pursuant to Section 12.f, $100 per day that such violation continues. (e) For failure to provide service to Grantors pursuant to Section 16, $25 per site per day that such violation continues. (f) For failure to activate any access channel pursuant to Section 15, $100 per day that such violation continues. (g) For failure to complete repairs promptly as required by section 13.f, $25 per subscriber per day until repairs are completed. PAGE 33 (h) For failure to comply with Customer Service Standards as required by section 13 except subsection 13.f, $50 per day that such violation continues. (i) For failure to comply with Technical Standards required by section 14, $50 per day that such violation continues. (j) For failure to file reports as required by section 23, $100 per day that such violation continues. (k) For failure to test, analyze and report on the performance of the system following a written request, $100 per day that such violation continues. (l) For failure to obtain any permit or permission of the Grantors required by this Franchise, $100 or an amount equal to the associated fee, whichever is greater. d. Forbearance by Grantors: Grantee shall not be relieved of any obligation to comply with any of the provisions of this Franchise or any rule, regulation, requirement or directive promulgated thereunder by reason of any failure of the Grantors or their officers, agents or employees to enforce prompt compliance. e. Force Majeure: Notwithstanding anything to the contrary in this Franchise, the Grantors shall not impose any penalty upon the Grantee where either violation or failure to cure the same result from force majeure, labor dispute, declaration of war or other hostilities, Act of God, or any other reason beyond the control of the Grantee. For and in consideration of the promises, covenants, grant of franchise, obligations, fees and provision of services, the Grantors and Grantee agree to be bound by the terms of this franchise agreement, acknowledge that it is their entire agreement and that is binding on them, their successors and assigns. PAGE 34 IN TESTIMONY WHEREOF, the parties hereto have executed this Agreement as of the 13th day of October, 1998. TOWN OF HEATH SPRINGS Enstar Income Program 1984-1, L.P. d.b.a. Falcon By /S/ ANN S. TAYLOR ----------------- Mayor By: /S/ HOWARD GAN ------------------ ATTEST: /S/ THEE BAKER Its: V.P. --------------- ----------------- Its: CLERK / TREASURER ATTEST: /S/ LAURA DAINKO ------------------- ---------------- TOWN OF KERSHAW Its: ADMIN ASST ------------- By /S/ W. R. CLYBURN ----------------- Mayor ATTEST: /S/ ERNEST GREEN ----------------- Administrator COUNTY OF LANCASTER By /S/ RAY E. GARDENER ----------------------- County Council chairman ATTEST: /S/ CHAPPEL HURST ----------------- County Administrator EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT DECEMBER 31, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 1,036,000 0 33,300 5,500 0 0 15,143,200 11,094,500 5,417,400 1,315,700 0 0 0 0 0 5,417,400 0 5,221,100 0 3,932,300 245,300 132,200 103,900 939,600 0 939,600 0 0 0 939,600 31.07 0
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