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HomeMy WebLinkAbout4H - Cable TV ReportCONSENT AGENDA #: PREPARED BY: SUBJECT: DATE: 4 (h) RALPH TESCHNER FINANCE DIRECTOR CONSIDER APPROVAL CABLE TELEVISION REPORT APRIL 18, 1994 INTRODUCTION: The purpose for this agenda item is for the City Council to consider for information purposes only, the attached revenue audit report prepared by Malloy, Karnowski, Radosevich & Co., P.A. The charge of the report was to review the cable franchise fees credited to the City of Prior Lake over the course of a one-year period. The purpose was to provide verification that all possible revenues are being properly accounted for by Midwest Cablevision which provides the base for the City's 5% franchise fee. BACKGROUND: Due to the fact that the cable franchise for Prior Lake, Savage and adjoining townships was recently transferred to Midwest Cablevision in 1992 it seemed appropriate to review their revenue stream to assure that it was appropriately calculated. Therefore, on 10/4/93 the City Council authorized a joint revenue audit on behalf of the cities of Savage and Prior Lake. The cost estimate was not to exceed $1,900 plus out-of-pocket expenses which was to be shared equally between our two cities. DISCUSSION: Schedule A within the report indicates that an additional $1,040.95 is due Prior Lake because certain pay-per-view revenues and late fees were omitted. Prior Lake was also underpaid by $275.51 because of miscellaneous advertising commissions that were not factored into the overall revenue base (see Schedule B). On the negative side, it was discovered that a total of 33 active subscribers outside of our municipal boundaries were being credited to our account (see Schedule C). The correction of these mis-allocated subscribers will result in an estimated annual franchise fee loss of $497.30. A summary of these revenue adjustments is listed as follows: SOURCE Schedule A $1,040.95 Schedule B $275.51 Schedule C <497.30> Net Gain $819.16 As indicated above, the City will recover approximately $800.00 which will nearly offset Prior Lake's estimated $1000 share of the audit cost. While this savings on the surface appears less than significant, compounding this amount over time will have more than justified the exp~.nse. 4629 Dakota St. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245 AN EQUAL OPPORTUNITY E~PLOYER RECOMMENDATION: ACTION REQUIRED: Midwest Cablevision has been notified of the audit results. They have stated their intent to cooperate'and change their financial reporting to correct these deficiencies in the future. Staff believes that for the most part the shortage in the franchise fee was basically inadvertent and that no willful omissions occurred on behalf of Midwest Cablevision. The audit was performed as a financial management practice and may again be implemented on a periodical basis to assure the City's cable franchise fee amount. A motion as part of the consent agenda to accept the cable television report as submitted. CITY OF PRIOR LAKE, MINNESOTA Cable Television Study February 8, 1994 INDEPENDENT ACCOUNTANTS' REPORT City Council, Cable Commission, and Management City of Prior Lake Prior Lake, Minnesota At your request, we have applied the procedures enumerated in Schedules A through D with respect to the financial and accounting records of the City's cable television franchisee, Intermedia Partners (dba Midwest Cablevision). It is understood that this report is solely for your information and is not to be referred to for any purpose or distributed to anyone who is not a member of the City's governing body, cable commission, or management. Our procedures and findings are described in Schedules A through D of this report. Because the procedures described in Schedules A through D do not constitute an audit made in accordance with generally accepted auditing standards, we do not express an opinion on any of the accounts or items referred to above. In connection with the procedures we applied, no matters came to our attention that caused us to believe that the accounts or items specified in these schedules should be adjusted other than as described in Schedules A through D. Had we performed additional procedures or had we made an audit of lntermedia Partners' financial statements in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This report relates only to the accounts and items specified in Schedules A through D and does not extend to any financial statements of Intermedia Partners taken as a whole. February 8, 1994 Schedule A City Council, Cable Commission, and Management City of Prior Lake Prior Lake, Minnesota We reviewed the cable franchise fees credited to the City of Prior Lake by lntermedia Partners for the one-year period from July 1, 1992 to June 30, 1993. We traced the gross revenues used for the franchise fee calculations to monthly financial summary reports provided by Intermedia Partners. We then recalculated the franchise fees due to the City of Prior Lake for the year ended June 30, 1993. The following differences were noted: Calculated Reported Franchise Franchise Month Fee Fee Difference July 1992 $ 3,374.08 $ 3,298.23 $ 75.85 August 1992 3,438.47 3,309.98 128.49 September 1992 3,436.14 3,335.74 100.40 October 1992 3,416.58 3,336.19 80.39 November 1992 3,455.97 3,351.23 104.74 December 1992 3,485.16 3,408.21 76.95 January 1993 3,766.51 3,672.92 93.59 February 1993 3,699.92 3,610.98 88.94 March 1993 3,615.21 3,542.81 72.40 April 1993 3,720.07 3,657.22 62.85 May 1993 3,786.48 3,717.04 69.44 June 1993 3,826.65 3,739.74 86.91 $43,021.2~4 $41,980.2~9 $1,040.9~5 As the table above indicates, errors were noted in the calculation of the cable franchise fee for the year ended June 30, 1993 that caused the City of Prior Lake to be underpaid by $1,040.95. The differences above were all the result of certain pay-per-view revenues and late charges having been omitted from the gross revenues used to calculate franchise fees. In addition, the City of Prior Lake was underpaid by $275.51 due to shared system revenues from advertising and home shopping network commissions (see Schedule B). In total, franchise fees paid to the City of Prior Lake for the fiscal year ended June 30, 1993, were underpaid by a total of $1,316.46. (continued) $cbedule A (continued) We also reviewed the financial summary repons used in the process described above. While our procedures detected no errors in these reports, our ability to verify the summary information included in the reports was limited due to the lack of detailed, historical subscriber information retained by the franchisee. Individual subscriber records are kept on the computer only, and individual account information included in these records goes back only a few months. As the period we were examining ended more than seven months ago, the records available did not allow us to verify the subscriber numbers included in the summary reports. If the City wishes to have the ability to verify historical subscriber numbers by tracking them to a detailed subscriber listing, we recommend the City request the franchisee to create and retain such a listing on a periodic basis in the future. Schedule B City Council, Cable Commission, and Management City of Prior Lake Prior Lake, Minnesota We reviewed financial information provided to us and made inquiry of Intermedia Partners to determine if any additional revenues being collected by Intermedia Partners (or any other related party as defined in the franchise agreement) should be included in the gross revenues used to calculate franchise fees due to the City of Prior Lake. For the year ended June 30, 1993, the following miscellaneous revenues were omitted that we believe should have been included in gross revenues (as defmed by the franchise agreement), resulting in the City of Prior Lake being underpaid by $275.51: Month Ads on QVC Home Prior Lake Cable Shopping Total 5 % Advertising Network Miscellaneous Franchise Commissions Commissions Revenue Fee July1992 $ - (1) $ - (3) $ - $ - August 1992 557.63 - (3) 557.63 27.88 September 1992 688.68 - (3) 688.68 34.43 October 1992 479.46 - (3) 479.46 23.97 November 1992 547.54 - (3) 547.54 27.38 December 1992 ' 414.67 72.23 486.90 24.35 January 1993 361.90 244.46 606.36 30.32 February 1993 382.82 208.42 591.24 29.56 March 1993 600.96 302.21 903.17 45.16 April 1993 - (2) 223.29 223.29 11.16 May 1993 - (2) 241.69 241.69 12.08 June 1993 - (2) 184.25 184.25 9.21 $4,033.66 $ 1,476.55 $ 5,510.21 $ 275.51 (1) Ads on cable advertising commissions for July 1992 were remiued to the previous cable franchisee. (2) Ads on cable advertising commissions for April, May, and June 1993 have not yet been received by Midwest Cablevision. (3) The QVC Home Shopping Network was not operating on the Prior Lake/Savage cable system during these months. Schedule C City Council, Cable Commission, and Management City of Prior Lake Prior Lake, Minnesota In order to test the allocation of cable revenues to the City of Prior Lake, we selected two random samples of individual cable subscribers to determine if they were being credited to the appropriate *agent. N The first sample included 200 subscribers selected from all of the agents being serviced by the Lake City Office of Midwest Cablevision. Of the 200 items tested, two exceptions were noted, both of which related to the City of Prior Lake. The second sample included 100 subscribers selected from Savage and Prior Lake agent customers only. Of the 100 items tested, three exceptions were noted, all of which related to the City of Prior Lake. All errors except one were subscribers residing in townships bordering Prior Lake with Prior Lake postal addresses. A Midwest Cablevision employee reviewed all addresses in the area immediately surrounding the exceptions found in the sample, finding additional incorrectly allocated subscribers. The following table summarizes the errors found: Current Correct Address Agent Agent Status 16161 Creek'wood Dr. Prior Lake Credit Rv. Twp. A 16165 Creekwood Ct. Prior Lake Credit Ry. Twp. A 16200 Creekwood Dr. Prior Lake Credit Rv. Twp. A 16205 Creekwood Cr. Prior Lake Credit Rv. TWP. A 16211 Creekwood Cr. Prior Lake Credit Rv. Twp. A 16215 Suel Ln. Prior Lake Credit Ry. TWP. A 16260 Creekwood Dr. Prior Lake Credit Ry. Twp. A 16291 Suel Cr. Prior Lake Credit Rv. Twp. A 17274 Hemming Ln. Prior Lake Credit Ry. Twp. A 17300 Flemming Ln. Prior Lake Credit Ry. Twp. A 1951 Lake View Dr. Prior Lake Spring Lk. Twp. A 4495 Lynn Ct. Prior Lake Savage A 6016 White Dr. Prior Lake Credit Ry. Twp. A 6018 White Dr. Prior Lake Credit Ry. Twp. A 6065 White Dr. Prior Lake Credit Rv. Twp. A Current Correct Address Agent Agent Status Schedule C (continued) 6067 White Dr. Prior Lake Credit Rv. Twp. A 6096 White Dr. Prior Lake Credit Ry. Twp. A 6121 Sue Ann Ln. Prior Lake Credit Rv. Twp. A 6127 Sue Ann Ln. Prior Lake Credit Ry. TWP. A 6150 Sue Ann Ln. Prior Lake Credit Ry. Twp. A 6250 Sue Ann Ln. Prior Lake Credit Rv, Twp. A 6290 Sue Ann Ln. Prior Lake Credit Ry. Twp. A 6330 Sue Ann Ln. Prior Lake Credit Ry. Twp. A 6331 Sue Ann Ln. Prior Lake Credit Ry. Twp. A 6714 Flemming Rd. Prior Lake Credit Ry. Twp. A 6766 Flemming Rd. Prior Lake Credit Ry. Twp. A 6818 Flemming Ct. Prior Lake Credit Ry. TWP. A 6821 Flemming Ct. Prior Lake Credit Ry. TWP. A 6850 l:lemming Ct. Prior Lake Credit Ry. Twp. A 6880 Flemming Ct. Prior Lake Credit Ry. Twp. A 6954 Flemming Rd. Prior Lake Credit Ry. Twp. A 7115 Creekwood Ln. Prior Lake Credit Ry. Twp. A 7151 Creekwood Ln. Prior Lake Credit Ry. TWP. A 16180 Creek-wood Ct. Prior Lake Credit Ry. TWP. D 16287 Suel Ct. Prior Lake Credit Ry. Twp. D 16311 Suel Ln. Prior Lake Credit Ry. Twp. D 6025 White Dr. Prior Lake Credit Ry. TWP. D 6127 Sue Ann Ln. Prior Lake Credit Ry. TWP. D 6132 White Dr. Prior Lake Credit Ry. TWP. D 6145 White Dr. Prior Lake Credit Rv. TWP. D 6315 White Dr. Prior Lake Credit Ry. TWP. D 6326 White Dr. Prior Lake Credit Ry. Twp. D 6649 Flemming Rd. Prior Lake Credit Ry. Twp. D 6701 Flemming Rd. Prior Lake Credit Ry. Twp. D 16151 Suel Ln, Prior Lake Credit Rv. Twp. N 16240 Suel Ln. Prior Lake Credit Ry. TWP. N 16250 Suel Ln. Prior Lake Credit Ry. Twp. N 16275 Suel Ln. Prior Lake Credit Ry. Twp. N 16305 Suel Ln. Prior Lake Credit Ry. Twp. N 17281 Flemming Ln. Prior Lake Credit Ry. Twp. N 17306 Flemming Ln. Prior Lake Credit Rv. Twp. N 6015 White Dr. Prior Lake Credit Rv. TWP. N 6076 White Dr. Prior Lake Credit Ry. Twp. N 6118 Sue Ann Ln, Prior Lake Credit Ry. Twp. N 6121 White Dr. Prior Lake Credit Ry. Twp. N 6127 White Dr. Prior Lake Credit Ry. Twp. N 6130 White Dr. Prior Lake Credit Ry. Twp. N 6190 Sue Ann Ln. Prior Lake Credit Ry. Twp. N 6200 Sue Ann Ln. Prior Lake Credit Ry. Twp. N 6240 White Dr. Prior Lake Credit Ry. Twp. N Address Curr~nt Agent Correct Agent Schedule C (continued) Status 6270 Sue Ann Ln. 6333 Sue Ann Ln. 6817 Flemrrdng Cr. 6840 Flemming Cr. 6875 Hemming Rd. 6943 Flemming Rd. Prior Lake Prior Lake Prior Lake Prior Lake Prior Lake Prior Lake Credit Rv. Twp. Credit Rv. Twp. Credit Ry. Twp. Credit Ry. Twp. Credit Rv. Twp. Credit Ry. TWP, N N N N N N Status A - Active Subscriber D - Disconnected N - Nonsubscriber In all, a total of 33 active subscribers, 11 former subscribers, and 22 nonsubscribers were found to be allocated incorrectly to Prior Lake. All errors identified in this process will be corrected by Midwest Cablevision. The estimated franchise fee revenue that will be lost over the next year by Prior Lake due to the reassignment of the 33 active subscribers identified above is as follows: Estimated Number of Monthly Monthly Gross Service Subscribers Fee Revenue Loss Basic Cablevision 33 $ 22.00 $ 726.00 Remote Converter 10 $ 1.96 19.60 Addressable Converter 1 $ 3.47 3.47 Wire Maintenance 1 $ 1.95 1.95 Pay Guide 1 $ 1.00 1.00 Converter w/o Remote 2 $ 1.58 3.16 HBO/Encore Package I $ 11.95 11.95 Showtime/TMC Package I $ 10.95 10.95 TMC/Disney Package 2 $ 10.95 21.90 Family Package 1 $ 19.95 19.95 Disney I $ 4.95 4.95 Encore 1 $ 3.95 3.95 Total estimated monthly gross revenue loss Estimated annual gross revenue loss Estimated annual franchise fee loss 828.83 x 12 9,945.96 x .05 $ 497.30 Schedule D City Council, Cable Commission, and Management City of Prior Lake Prior Lake, Minnesota Finally, we were asked to develop a reporting format to be used by Intermedia Partners for furore franchise fee calculations. Based on how the franchise fees are currently calculated, we developed the following format for reporting. However, we were informed by a representative of lntermedia Partners that they are in the process of changing their internal and external financial reporting system, which may significantly alter how and from what reports gross revenue information would be summarized. Intermedia Partners believes its new reports will provide its franchisors with adequate financial and subscriber information, and they are resistant to having specialized reporting formats for individual franchisors due to the large number of cable franchises they service. (continued)