The company that manages the city's cable television system owes the city $501,689 and has been put on legal notice that its operating lease is in jeopardy.
Melvin Matthews, owner of Kinneloa Television Systems of Pasadena, has 10 days after the notice is officially delivered to come up with the money before the city can take legal action against him.
However, city officials suggested at a City Council meeting Tuesday that the operating lease could be renegotiated so that Matthews could defer some payments and continue operating the system.
"I hope an agreement can be worked out because I like the way Kinneloa is running the system," said Bob Wight, chairman of Duarte's Cable Commission.
"But we have to protect the city's investment, and if we fail to act, we are condoning the situation. Once it's acknowledged, we can seek remedies," Wight said.
The council action was recommended by the city's Cable Commission, which has been studying financial problems that have arisen since Duarte decided in 1984 to build its own system.
Although the system has operated only one year, Duarte has had to spend $500,000 from its reserve fund to pay the interest on $4.7 million in bonds it floated to wire a large part of the city for cable.
Kinneloa had agreed to reimburse the city $35,793 a month for the first two years of operation, plus 7% of its gross revenue. At the beginning of the third year, the payments were to have risen to $47,000 a month, plus 7% of gross revenue. The money was to be used to pay off the bonds.
But for a variety of reasons, including a one-year delay in construction, overestimation of the number of potential subscribers and sale of the bonds at a higher interest rate than expected, Kinneloa has fallen $501,689 behind in its payments, the city said.
Matthews said he paid the city $48,434 in 1987, an amount representing his firm's entire profit for the Duarte operation for the year.
The council agreed to hire an attorney to represent the city in the complex matter. Matthews called that action unnecessary because "it establishes an unneeded adversarial relationship, which is totally out of character with the amicable partnership we have had since 1984."
But Councilman John Van Doren said the city has to protect its investment, and Councilman Terry Michaelis added that placing Matthews on legal notice was the correct procedure.
Matthews said earlier this month that he wants to continue operating the system, which now has 1,748 subscribers out of a potential 5,000 customers.
He acknowledged that he has not been able to reimburse the city all that he owes but said he will be able to in the future. In the meantime, he said, the lease agreement can be renegotiated to establish a different pay schedule.
Kinneloa was selected to manage the Duarte system because it had the technical expertise to operate a small system and had a successful record of customer service, said City Manager Jesse Duff. Kinneloa, a family-owned business, has served an area of east Pasadena and Altadena for 18 years.
Customer service was a high priority for Duarte, which had spent years fielding complaints from residents upset about poor and, in some cases, nonexistent service.
In a memorandum to Duff last June outlining the financial problems connected with the cable operation, Donald Pruyn, director of community services, reviewed the history that led Duarte to become one of only three California cities to own its cable system.
Pruyn noted that the first cable television franchise was granted in 1967 because residents in the foothills had to have cable to get any kind of television reception.
The system was sold several times, and, said Pruyn, each sale resulted in unfulfilled promises of more and better service.
By the time the system was sold to Acton Communications Co. in 1983, the equipment was outdated.
Rather than risk another round of empty promises and citizen unrest, Duarte decided to buy the system from Acton and build and lease its own equipment.
Pruyn said the city now can renegotiate Kinneloa's contract and continue to subsidize the system, sell it or find another operator who can generate more income.