1
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, 1996
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: 0-18266
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-4200409
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Name of each exchange
Title of each Class on which registered
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity
securities held by non-affiliates of the registrant: all of the registrant's
71,879 Units of limited partnership interests, its only class of equity
securities, are held by non-affiliates. There is no public trading market for
the Units and transfers of Units are subject to certain restrictions;
accordingly, the registrant is unable to state the market value of the Units
held by non-affiliates.
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The Exhibit Index is located at Page E-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Falcon Classic Cable Income Properties, L.P. (the
"Partnership") is a California limited partnership engaged in the ownership,
operation and development of non-urban cable television systems in small to
medium sized communities and suburban and rural areas (the "Systems"). Such
cable television systems generally are located in areas that do not receive a
wide variety of clear broadcast television reception because of distance from
broadcasters or interference by mountains or other geographic features. The
Partnership offers cable service in five regions in Oregon, North Carolina,
Kentucky, California and Maryland. The Oregon region centers around Redmond,
Oregon, serving customers in central Oregon. The North Carolina region
provides service to Burke County and other communities in central North
Carolina. The Kentucky region provides service to Somerset, Kentucky and
surrounding communities, the California region provides service to California
City, California, and the Maryland region is based in Centreville, Maryland,
and provides service to customers on the Upper Eastern Shore of Chesapeake Bay.
As of December 31, 1996, the Partnership had approximately 67,500 Subscribers(1)
and served approximately 47,600 homes subscribing to cable service in 56
communities located in these five states. See "Description of the
Partnership's Systems."
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 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 WTBS
and 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 offer "premium" television services to their
customers. These services (such as Home Box Office ("HBO"), Showtime and
selected regional sports networks) 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."
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(1) The Partnership reports subscribers for the Systems on an equivalent
subscriber basis and, unless otherwise indicated, the term "SUBSCRIBERS" means
equivalent subscribers, calculated by dividing aggregate basic service revenues
by the average basic service rate within an operating entity, adjusted to
reflect the impact of regulation. Basic service revenues include charges for
basic programming, bulk and commercial accounts and certain specialized
"packaged programming" services, including the appropriate components of new
product tier revenue, and excluding premium television and non-subscription
services. Consistent with past practices, Subscribers is an analytically
derived number which is reported in order to provide a basis of comparison to
previously reported data. The computation of Subscribers has been impacted by
changes in service offerings made in response to the 1992 Cable Act. See
"Description of the Partnership's Systems" for additional information about
Subscribers and homes subscribing to cable service.
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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 additional fees paid by customers for
pay-per-view programming of movies and special events and from the sale of
available advertising spots on advertiser-supported programming. The Systems
also offer to their customers home shopping services, which pay the Partnership
a share of revenues from sales of products in the System's service areas, in
addition to paying the system a separate fee in return for carrying their
shopping service. Certain other new channels have also recently offered the
Systems fees in return for carrying their service. Due to a lack of channel
capacity available for adding new channels, the Systems' 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 was formed on February 17, 1989, began
offering Units of limited partnership interests ("Units") for sale on May 15,
1989, and continued the offering through May 8, 1990. The Partnership sold a
total of 71,879 Units. Prior to March 1993, the general partner of the General
Partner was Falcon Holding Group, Inc., a California corporation ("FHGI"). In
March 1993, a newly-formed entity, Falcon Holding Group, L.P. ("FHGLP"), was
organized to effect the consolidation of the ownership of various cable
television businesses previously operated by FHGI. In such consolidation,
FHGLP became the general partner of the Partnership's sole general partner,
Falcon Classic Cable Investors, L.P., (the "General Partner"), succeeding FHGI
in that role. The management of FHGLP is substantially the same as that of
FHGI. See Item 13., "Certain Relationships and Related Transactions."
The General Partner receives a management fee from the
Partnership for managing the Partnership's cable television operations. See
Item 11., "Executive Compensation." For more detailed information, see the
Amended and Restated Agreement of Limited Partnership of the Partnership dated
as of May 15, 1989, as amended by the first amendment thereto (hereinafter
collectively referred to as the "Partnership Agreement"), which are exhibits to
this Annual Report on Form 10-K.
Led by Chairman of the Board and Chief Executive Officer, Marc
B. Nathanson, and President and Chief Operating Officer, Frank J. Intiso, the
Partnership's senior management has on average over eighteen years of
experience in the industry and has worked together for over a decade. Mr.
Nathanson, a 27-year veteran of the cable business, is a member of the
Executive Committee of the Board of Directors of the National Cable Television
Association and a past winner of the prestigious Vanguard Award from the
National Cable Television Association for outstanding contributions to the
growth and development of the cable television industry. Mr. Intiso is an
18-year veteran of the cable industry. He is also Chairman of the California
Cable Television Association and is active in various industry boards including
the Board of the Community Antenna Television Association ("CATA"). The
principal executive offices of the Partnership, and its general partner, FHGLP,
are located at 10900 Wilshire Boulevard, 15th Floor, Los Angeles, California
90024, and their telephone number is (310) 824-9990.
RECENT DEVELOPMENTS
As previously disclosed in prior filings with the Securities
and Exchange Commission (the "Commission"), the Partnership may, in the sole
discretion of its General Partner, sell individual Systems and may also sell all
or substantially all of the Partnership's assets to the General Partner or its
affiliates. The Partnership Agreement provides that any such sale of
Partnership assets to the General Partner or any of its affiliates must be made
in cash pursuant to the "Appraisal Process." As previously reported, the
Partnership commenced the Appraisal Process in August 1996 and received the
results of the related appraisals in February 1997. As of the date of this
Report, the General Partner has not made a decision as to whether or not it will
further pursue the acquisition of any Partnership assets at this time. These
matters are discussed more fully under the caption Item 13., "Certain
Relationships and Related Transactions -- Appraisal Process" and
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in the Partnership's Current Reports on Form 8-K dated August 27, 1996, October
17, 1996 and February 6, 1997. Unitholders are urged to review the referenced
materials carefully.
BUSINESS STRATEGY
The Partnership's business strategy has focused on serving
small to medium-sized communities that have favorable demographic
characteristics. The Partnership believes that given a similar technical
profile, its cable television systems generally involve less risk of increased
competition than systems in large urban cities. Cable television service is
necessary in many of the Partnership's markets to receive a wide variety of
broadcast and other television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. As a
result, the Partnership's cable television systems generally have a more stable
customer base than systems in 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"). 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
The Partnership has invested in the rebuilding and upgrading
of its Systems through prudent capital expenditure programs, to the extent
financing and regulatory conditions have permitted. These rebuilds and upgrades
have consisted primarily of replacing low capacity cable plant with new higher
capacity fiber-optic trunk and feeder lines, adding headend electronics to
increase channel capacity and addressable converters to permit system
addressability, and reducing the number of headends in various regions through
microwave network transmission links, fiber optic super trunk and improved
reception equipment. However, as noted in "Description of the Partnership's
Systems," many of the regions have almost no available channel capacity with
which to add new channels or to further expand their use of 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.
As discussed in prior reports, the Partnership postponed a
number of rebuild and upgrade projects that were planned for 1994, 1995 and
1996 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. The Partnership is also constrained in a material respect by the
limitation on aggregate borrowing imposed by the Partnership Agreement. As a
result of these factors, the Partnership's Systems are presently significantly
less technically advanced than had been expected prior to the implementation of
re-regulation. The Partnership believes that the delays in upgrading many of
its Systems will, under present market conditions, most likely have
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an adverse effect on the value of those Systems compared to systems that have
been rebuilt to a higher technical standard. Currently the Partnership's
Systems have an average channel capacity of 46 channels, (substantially all of
which is presently utilized), and approximately 62% of its customers are served
by Systems that utilize addressable technology. The Partnership's management
has selected a technical standard that incorporates a 750 MHz fiber to the
feeder architecture for the majority of all its Systems that are to be rebuilt.
A system built to a 750 MHz standard can provide approximately 95 channels of
analog service. Such a system will also permit the introduction of high speed
data transmission and telephony services in the future after incurring
incremental capital expenditures related to these services. As currently
structured, however, the Partnership does not have access to the capital
required to engage in any significant rebuild program. See "Technological
Developments," "Legislation and Regulation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Decentralized Management
The Partnership's five regions are managed on a decentralized
basis. The Partnership 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.
Marketing
The Partnership has made substantial changes in the way in
which it packages and sells its services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Historically, the Partnership had offered four programming packages in its
upgraded addressable systems. These packages combined services at a lower rate
than the aggregate rates for such services purchased individually on an "a la
carte" basis. The new rules require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus
a reasonable profit. On November 10, 1994, the FCC announced the adoption of
further significant amendments to its rules. One amendment allows cable
operators to create new tiers of program services which the FCC has chosen to
exclude from rate regulation, so long as the programming is new to the system.
However, in applying this new policy to packages such as those already offered
by the Partnership and numerous other cable operators, the FCC decided that
where only a few services were moved from regulated tiers to a non-premium "new
product tier" package, the package will be treated as if it were a tier of new
program services as discussed above. Substantially all of the new product tier
packages offered by the Partnership have received this desirable treatment. In
addition, the FCC decided that discounted packages of non-premium programming
services will be subject to rate regulation in the future. These amendments to
the FCC's rules have allowed the Partnership to resume its core marketing
strategy and reintroduce programmed service packaging. As a result, 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 on
either an a la carte or a discounted packaged basis. See "Legislation and
Regulation."
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 many 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 that
reinforces the value associated with the initial decision to subscribe and that
encourages customers to purchase higher service levels.
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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
on-going basis, and a portion of the regional managers' compensation is tied to
achieving customer service targets. The Partnership also 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. 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.
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DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The Partnership's Systems are located as follows: Redmond,
Oregon; Burke County, North Carolina; Somerset, Kentucky; Centreville,
Maryland; and California City, California. The table below sets forth certain
operating statistics as of December 31, 1996:
Average
Monthly
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
Region Passed1 Service Penetration2 Units3 Penetration4 Service5 Subscribers6
- ------ ------ ------- ----------- ----- ----------- ------- -----------
Redmond, OR 7,252 3,516 48.5% 706 20.1% $ 35.42 5,604
Burke County, NC 18,986 10,516 55.4% 4,614 43.9% $ 39.50 15,615
Somerset, KY 22,060 19,296 87.5% 3,914 20.3% $ 30.68 26,119
Centreville, MD 23,857 12,325 51.7% 7,440 60.4% $ 36.77 18,197
California City, CA 2,858 1,922 67.2% 839 43.7% $ 31.24 2,004
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Total 75,013 47,575 63.4% 17,513 36.8% $ 34.59 67,539
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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 Homes subscribing to cable service 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. Prior to July 1, 1996, The Disney Channel
was offered as a premium service. Effective July 1, 1996, it was offered as
part of an unregulated tier of services. As a result, the number of reported
premium service units was artificially reduced by this service offering change.
The number of Disney Channel premium service units at June 30, 1996 was 1,688.
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 home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1996.
6 The Partnership reports subscribers for the Systems on an equivalent
subscriber basis and, unless otherwise indicated, the term "SUBSCRIBERS" means
equivalent subscribers, calculated by dividing aggregate basic service revenues
by the average basic service rate within an operating entity, adjusted to
reflect the impact of regulation. Basic service revenues include charges for
basic programming, bulk and commercial accounts and certain specialized
"packaged programming" services, including the appropriate components of new
product tier revenue, and excluding premium television and non-subscription
services. Consistent with past practices, Subscribers is an analytically
derived number which is reported in order to provide a basis of comparison to
previously reported data. The computation of Subscribers has been impacted by
changes in service offerings made in response to the 1992 Cable Act.
REDMOND, OREGON
The Redmond system serves the communities of Redmond and
Terrebonne in Central Oregon and is the hub of the three cities in the
tri-county region including Bend, Princeville and Madras, Oregon. The basic
industries in the area include wood products, manufacturing, agriculture,
tourism and recreation. Mt. Bachelor, a highly acclaimed ski resort, is located
just outside of Bend. The trade area of the Redmond market district includes
approximately 15,000 people. Expansion of the Redmond airport terminal was
completed during 1993 and Wal-Mart opened a new facility in the community in
August 1994. Ten thousand people live within the Redmond city limits and 96,000
live within the tri- county region. During 1995 and 1996, 26 and 24 miles,
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respectively, of cable plant were built in the region. During 1997, the
Partnership intends to build 29 miles of new cable plant in this region. The
growth in homes subscribing to cable service from the construction of plant
passing new homes has, however, been offset by the loss of homes subscribing to
cable service due to competition, primarily from a multi-channel multipoint
distribution system, resulting in a net decrease in homes subscribing to cable
service in 1995 and 1996. See " - Competition."
At December 31, 1996, the Redmond system had 3,516 homes
subscribing to cable service and addressable technology was available to 100%
of the customers of this region. The System offers 32 channels of programming
which is 100% of capacity.
BURKE COUNTY, NORTH CAROLINA
The Burke system's service area extends along the Interstate
40 corridor of central North Carolina, approximately 70 miles northwest of
Charlotte and 40 miles east of Asheville. The areas served by this system
include unincorporated Burke County and the towns of Connelly Springs, Drexel,
Glen Alpine, Rutherford College and Valdese. Certain portions of the System's
service area are overbuilt with two other cable operators, giving rise to a
highly competitive market. The primary industries in the area are furniture
manufacturing and textiles, with other industries providing a diversified
economic base.
In 1993, 24 hour pay-per-view was implemented in the Burke
County system and local ad insertion capability was increased to four channels.
In 1994, four more local ad insertion channels were added. In 1993, the System
and the Burke County franchise authority joined forces and created a new
informative program about the county to air on the Community Channel. In
February 1994, taping of the program increased from two times a month to
weekly.
At December 31, 1996, the Burke County System had 10,516 homes
subscribing to cable service. This region is fed from one headend, and
addressable technology is available to all customers. The System offers 43
channels of programming which are 100% utilized. During each of 1995 and 1996,
three miles of cable plant were built in the region. The Partnership intends
to add eight additional miles of cable plant in this region in 1997.
A fiber optic overlay project was completed in Burke County
during 1995. This investment has improved picture quality and decreased
service interruptions from power outages. Additional technical improvements
have been made in plant electronics and converter reliability.
SOMERSET, KENTUCKY
The Somerset region serves the communities of Somerset,
Burnside, Columbia, Eubank, McKinney, Ferguson, Science Hill and Laurel County,
Kentucky. The adjacent communities of Somerset and Burnside, in Pulaski
County, are considered to be the hub of commerce, industry, transportation and
recreation in the region. The Kentucky office of tourism boasts the Lake
Cumberland and Big South Fork National Recreation areas as a "water wonderland
of vacation and fun." In addition to the local recreation and resort industry,
many other industries located in the area provide for a well diversified
economic base. They include pressed glassware, wood working, food processing,
clothing manufacturing, compressor/air conditioning, charcoal briquettes
manufacturing and boat manufacturing. Somerset is also home to the newly-
opened Rural Development Center complex, associated with the University of
Kentucky, which coordinates numerous activities, promotes linkages for local
businesses to world-wide markets and provides a community cultural gathering
place.
At December 31, 1996, the Somerset System had 19,296 homes
subscribing to cable service and addressable technology was available to
approximately 71% of the customers of this region. Approximately 20% of this
System utilized approximately 72% of their available channel capacity; the
remaining operations have fully utilized all of their channel capacity.
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Fiber overlay projects have been completed in Columbia,
Somerset and Burnside. The Somerset and Burnside operations have been tied
together with fiber, thereby eliminating the Burnside head-end.
CENTREVILLE, MARYLAND
The Centreville, Maryland System serves Kent, Queen Anne's and
Talbot Counties, located on the Upper Eastern Shore region of Chesapeake Bay.
This region, known for its seafood and fishing industry, is also the ocean
gateway to nearby resorts such as the Delaware beaches and Ocean City,
Maryland. New residents continue to be attracted to this area by the peaceful
setting and the many recreational activities the area has to offer. Many of
these residents commute to nearby Annapolis or Baltimore, Maryland and
Washington, D.C. During 1995, the regional office was relocated from
Centreville to Grasonville, a community approximately 10 miles away. This new
location offers the System greater access to its customers.
The cable system serving this area was built in 1982 and
upgraded during 1990 and 1991. The System has one headend, six microwave sites,
650 miles of cable plant and 12,325 homes subscribing to cable service.
Channel capacity is approximately 61 channels, and the System offers 46
channels, including five premium channels. Addressable technology is not
presently available to the customers of this region. The Partnership added an
additional six miles of new cable plant in 1995 and 11 miles in 1996. During
1997, the Partnership intends to build five miles of new cable plant in this
region.
Fiber overlay projects have been completed in Kent and Queen
Annes County.
CALIFORNIA CITY, CALIFORNIA
The California City System is located 30 miles from the cities
of Palmdale and Lancaster in the high desert of Southern California. The
region is managed and operated by an affiliated company and is serviced out of
the affiliate's satellite office located 15 miles from the System in the city
of Mojave. At December 31, 1996, the System had 1,922 homes subscribing to
cable service.
The Partnership added 10 miles of new cable plant during 1993,
an additional 11 miles of plant in 1994, five miles of plant in 1995 and plans
to add two miles of plant in 1997. In July of 1993, the Partnership completed
a twelve mile fiber optic interconnect from the nearby North Edwards System
(owned by the affiliated entity) to eliminate the previous California City
headend. After the completion of the fiber optic interconnect, 20 channels
were added and addressability was introduced to the region. The System offers
41 channels of programming which is 100% of capacity.
During 1994, previously purchased studio equipment was
activated to bring live city council meetings as well as other government
information to the customers of the community.
OTHER ACTIVITIES
The Partnership is engaged primarily in the business of
owning, operating and developing cable television systems. The Partnership did
not participate in any other activities in 1994, 1995 or 1996 and, based on its
limited access to capital and the beginning of the Appraisal Process, does not
anticipate undertaking any such activities in the foreseeable future. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
CUSTOMER RATES AND SERVICES
The Partnership's 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
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Disney Channel) and certain information and public access channels. For an
extra monthly charge, the Systems provide certain premium television services,
such as HBO, Showtime and regional sports networks. The Partnership also
offers other cable television services to its customers, including pay-per-view
programming and, in certain test markets, the Sega Channel. For additional
charges, in most of the 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.
Prior to the adoption of the 1992 Cable Act, the Systems
generally were not subject to any rate regulation, i.e., they were adjudged to
be subject to effective competition under then-effective FCC regulations. The
1992 Cable Act, however, substantially changed the statutory and FCC rate
regulation standards. Under the definition of effective competition provided
for in the 1992 Cable Act, nearly all cable television systems in the United
States have become subject to local rate regulation of basic service. The 1996
Telecom Act expanded the definition of effective competition to include
situations in which a local telephone company, or anyone using its facilities,
offers comparable video service by any means except direct broadcast satellite.
In addition, the 1992 Cable Act eliminated the 5% annual basic rate increases
previously allowed by the 1984 Cable Act without local approval; allows the FCC
to review rates for nonbasic service tiers other than premium services in
response to complaints filed by franchising authorities and/or cable customers;
prohibits cable television systems from requiring customers to purchase service
tiers above basic service in order to purchase premium services if the system
is technically capable of doing so; and adopted regulations to establish, on
the basis of actual costs, the price for installation of cable television
service, remote controls, converter boxes and additional outlets. The FCC
implemented these rate regulation provisions on September 1, 1993, affecting
all of the Partnership's Systems not deemed to be subject to effective
competition under the FCC's definition. The FCC substantially amended its rate
regulation rules on February 22, 1994 and again on November 10, 1994. The FCC
will have to conduct a number of additional rule making proceedings in order to
implement many of the provisions of the 1996 Telecom Act. See "Legislation and
Regulation."
At December 31, 1996, the Partnership's monthly rates for
basic cable service for residential customers of the Systems, excluding special
senior citizen discount rates, ranged from $15.80 to $22.97 and premium service
rates ranged from $10.95 to $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. Prior to
September 1, 1993, the Partnership generally charged monthly fees for
additional outlets, converters, program guides and descrambling and remote
control tuning devices. As described above, these charges have either been
eliminated or altered by the implementation of rate regulation. Substantially
all the Partnership's customers received a decrease in their monthly charges in
July 1994 upon implementation of the FCC's amended rules. 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
At February 7, 1997, the Partnership had 89 full-time
employees and 6 part-time employees, all of whom work in the regional offices.
The Partnership believes that its relations with its employees are good.
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TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership
emphasizes high technical standards and prudently seeks to apply technological
advances in the cable television industry to its 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 46, and many of the Systems have fully used
their present capacity. 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 compression. However, as previously discussed, the
Partnership remains significantly limited in the number of Systems that can be
rebuilt or upgraded due to, among other things, the adverse impact of the 1992
Cable Act on the Partnership's business and its access to capital. As a
result, the Partnership expects to incur additional delays in the
implementation of its technological development plan on a wide scale. 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 in substantially all rebuild projects which it undertakes.
The benefits of fiber optic technology over traditional coaxial cable
distribution plant include lower per mile rebuild costs due to a reduction in
the number of required amplifiers, the elimination of headends, lower ongoing
maintenance and power costs and improved picture quality and reliability.
As of December 31, 1996, approximately 62% of the
Partnership's customers were served by Systems that utilize addressable
technology. Addressable technology permits the cable operator to activate from
a central control point the cable television services to be delivered to a
customer if that customer has also been supplied with an addressable converter
box. To date, the Partnership has supplied addressable converter boxes to
customers of the Systems utilizing addressable technology who subscribe to one
or more premium services and, in selected regions, to customers who subscribe
to certain new product tiers. As a result, if the System utilizes addressable
technology and the customer has been supplied with an addressable converter
box, the Partnership can upgrade or downgrade services immediately, without the
delay or expense associated with dispatching a technician to the home.
Addressable technology also reduces pay service theft, is an effective
enforcement tool in collecting delinquent payments and allows the Partnership
to offer pay-per-view services.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in
the area of digital compression, a technology which is expected to 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. The Partnership believes that the
utilization of digital compression technology in the future could enable the
Partnership to increase channel capacity in certain Systems in a manner that
could be more cost efficient than rebuilding such Systems with higher capacity
distribution plant. The use of digital compression in the Systems also could
expand the number and types of services these Systems offer and enhance the
development of current and future revenue sources in these Systems. Equipment
vendors are beginning to market products to provide this technology, but the
Partnership's management has no plans to install it at this time based on the
current technological profile of its Systems and its present understanding of
the costs as compared to the benefits of the digital equipment currently
available. This issue is under frequent management review.
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PROGRAMMING
The Partnership has various contracts to obtain basic and
premium programming for its Systems from program suppliers whose compensation
is generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership.
Certain other new channels have also recently offered 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. The Partnership's
programming contracts are generally for a fixed period of time and are subject
to negotiated renewal. The Partnership does not have long-term programming
contracts for the supply of a substantial amount of its programming.
Accordingly, no assurance can be given that the Partnership's programming costs
will not increase substantially, or that other materially adverse terms will
not be added to the Partnership's programming contracts. Management believes,
however, that the Partnership'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, the requirements to carry
channels under retransmission carriage agreements entered into with certain
programming sources, increased costs to produce or purchase cable programming
generally, inflationary increases and other factors. The 1996 retransmission
carriage agreement negotiations resulted in the Partnership agreeing to carry
one new service in its Somerset System, for which it will 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
rate regulations, increases in programming costs for regulated cable services
occurring after the earlier of March 1, 1994, or the date a system's basic
cable service became regulated, may be passed through to customers. 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 1984 Cable Act, the 1992
Cable Act and the 1996 Telecom Act. See "Legislation and Regulation."
As of December 31, 1996, the Partnership held 36 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's systems range up to 5% of the gross revenues generated by a
system. The 1984 Cable Act prohibits franchising authorities from imposing
franchise fees in excess of 5% of gross revenues and also permits the cable
system operator to seek renegotiation and modification of franchise
requirements if warranted by changed circumstances.
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The following table groups the franchises of the Partnership's
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, 1996.
Number of Percentage
Homes of Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
-------------------- ----------- ------------- -------------
Prior to 1998 4 10,848 22.8%
1998-2002 13 21,889 46.0%
2003 and after 19 13,642 28.7%
-- ------ ----
Total 36 46,379 97.5%
== ====== ====
The Partnership operates cable television systems which serve
multiple communities and, in some circumstances, portions of such Systems
extend into jurisdictions for which the Partnership believes no franchise is
necessary. In the aggregate, approximately 1,196 homes subscribing to cable
service, comprising approximately 2.5% of the Partnership's customers, are
served by unfranchised portions of such Systems. In general, the Partnership
does not believe that the loss of any single franchise would cause a
substantial reduction in the economies of scale discussed above. In certain
instances, however, 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 believes that it has satisfactory relationships with substantially
all of its franchising authorities. 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 withheld, the franchise authority must
pay the operator the "fair market value" for the system covered by such
franchise. In addition, the 1984 Cable Act establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. See "Legislation and Regulation."
COMPETITION
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. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. 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
videodisk 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
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alternative delivery sources. In addition, certain provisions of the 1992
Cable Act and the 1996 Telecom Act are expected to increase competition
significantly in the cable industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth
stations, which allow the direct reception of satellite-delivered 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. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home Viewer Copyright Act of 1988, which became
effective January 1, 1989 for an initial six-year period. This Act establishes
a statutory compulsory license for certain transmissions made by satellite
owners to home satellite dishes, for which carriers are required to pay a
royalty fee to the Copyright Office. This Act has been extended by Congress
until December 31, 1999. 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 multiple satellites are placed in
the same orbital position. Video compression technology may also be used by
cable operators in the future to similarly increase their channel capacity.
DBS service can be received virtually anywhere in the 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.
Multichannel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS 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 these so-called "wireless" cable services to compete with
cable television systems has been limited by channel capacity constraints and
the need for unobstructed line-of-sight over-the-air transmission. Although
relatively few MMDS systems in the United States are currently in operation or
under construction, virtually all markets have been licensed or tentatively
licensed. The FCC has taken a series of actions intended to facilitate the
development of MMDS and other wireless cable systems as alternative means of
distributing video programming, including reallocating certain frequencies to
these services and expanding the permissible use and eligibility requirements
for certain channels reserved for educational purposes. The FCC's actions
enable a single entity to develop an MMDS system with a potential of up to 35
channels that could compete effectively with cable television. MMDS systems
qualify for the statutory compulsory copyright license for the retransmission
of television and radio broadcast stations. Several of the Regional Bell
Operating Companies have begun to enter the MMDS business as a way of breaking
into video programming delivery.
Additional competition may come from private cable television
systems servicing 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
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right granted by the 1984 Cable Act, particularly with respect to easements
located entirely on private property. Further, while a franchised cable
television system typically is obligated to extend service to all areas of a
community regardless of population density or economic risk, a SMATV system may
confine its operation to small areas that are easy to serve and more likely to
be profitable. 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. In some
cases, SMATV operators may be able to charge a lower price than could a cable
system providing comparable services and the FCC's regulations implementing the
1992 Cable Act limit a cable operator's ability to reduce its rates to meet
this competition. Furthermore, the U.S. Copyright Office has tentatively
concluded that SMATV systems are "cable systems" for purposes of qualifying for
the compulsory copyright license established for cable systems by federal law.
The FCC has authorized 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 will
provide an alternative means for DBS systems and other video programming
distributors, including television stations, to initiate the new interactive
television services. This service may also be used by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking
toward the allocation of frequencies in the 28 Ghz range for a new
multi-channel wireless video service which could make 98 video channels
available in a single market. It cannot be predicted at this time whether
competitors will emerge utilizing such frequencies or whether such competition
would have a material impact on the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against
ownership 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, MMDS,
SMATV or as traditional franchised cable system operators. Alternatively, the
1996 Telecom Act authorizes local telephone companies to operate "open video
systems" 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. The open video system concept
replaces the FCC's video dialtone rules. The 1996 Telecom Act also includes
numerous provisions designed to make it easier for cable operators and others
to compete directly with local exchange telephone carriers. With certain
limited exceptions, neither a local exchange carrier nor a cable operator can
acquire more than 10% of the other entity operating within its own service
area.
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 effect that ongoing or
future developments might have on the cable industry. The ability of cable
systems to compete with present, emerging and future distribution media will
depend to a great extent on obtaining attractive programming. The availability
and exclusive use of a sufficient amount of quality programming may in turn be
affected by developments in regulation or copyright law. See "Legislation and
Regulation."
The cable television industry competes with radio, television
and print media for advertising revenues. As the cable television industry
continues to develop programming designed specifically for distribution by
cable, advertising revenues may increase. 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.
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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 the Congress and various federal agencies have in the past, 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.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984.
This federal statute, which amended the Communications Act of 1934 (the
"Communications Act"), created uniform national standards and guidelines for
the regulation of cable television systems. Violations by a cable television
system operator of provisions of the Communications Act, as well as of FCC
regulations, can subject the operator to substantial monetary penalties and
other sanctions. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable television systems from operating
without a franchise in such jurisdictions. In connection with new franchises,
the 1984 Cable Act provides that in granting or renewing franchises,
franchising authorities may establish requirements for cable- related
facilities and equipment, but may not establish or enforce requirements for
video programming or information services other than in broad categories. The
1984 Cable Act grandfathered, for the remaining term of existing franchises,
many but not all of the provisions in existing franchises which would not be
permitted in franchises entered into or renewed after the effective date of the
1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This
legislation has effected significant changes to the legislative and regulatory
environment in which the cable industry operates. It amends the 1984 Cable Act
in many respects. The 1992 Cable Act became effective on December 4, 1992,
although certain provisions, most notably those dealing with rate regulation
and retransmission consent, became effective at later dates. The legislation
required the FCC to conduct a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation of the cable industry with respect to, among other things:
(i) cable system rates for both basic and certain nonbasic services; (ii)
programming access and exclusivity arrangements; (iii) access to cable channels
by unaffiliated programming services; (iv) leased access terms and conditions;
(v) horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x) customer
privacy; (xi) consumer protection issues; (xii) cable equipment compatibility;
(xiii) obscene or indecent programming; and (xiv) requiring subscribers to
subscribe to tiers of service other than basic service as a condition of
purchasing premium services. Additionally, the legislation encourages
competition with existing cable television systems by allowing municipalities
to own and operate their own cable television systems without having to obtain
a franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area; and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precludes video programmers affiliated with cable television companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors.
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A constitutional challenge to the must-carry provisions of the
1992 Cable Act is still ongoing. On April 8, 1993, a three- judge district
court panel granted summary judgment for the government upholding the
must-carry provisions. That decision was appealed directly to the U.S. Supreme
Court which remanded the case back to the district court to determine whether
there was adequate evidence that the provisions were needed and whether the
restrictions chosen were the least intrusive. On December 12, 1995, the
district court again upheld the must-carry provisions. The Supreme Court is
reviewing the district court's decision.
On September 16, 1993, a constitutional challenge to the
balance of the 1992 Cable Act provisions was rejected by the U.S. District
Court in the District of Columbia which upheld the constitutionality of all but
three provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set-asides for DBS operators). On August 30, 1996, the U.S. Court of Appeals
for the District of Columbia Circuit sustained the constitutionality of all
provisions except for the multiple ownership limits and the limits on the
number of channels which can be occupied by programmers affiliated with the
cable operator, both of which are being challenged in a separate appeal.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the 1996 Telecom Act
into law. This statute substantially amended the Communications Act by, among
other things, removing barriers to competition in the cable television and
telephone markets and reducing the regulation of cable television rates. As it
pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain nonbasic programming services in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC is in the process of conducting a number
of additional rulemaking proceedings in order to implement many of the
provisions of the 1996 Telecom Act. See "Business - Competition" and "Federal
Regulation-Rate Regulation."
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has heretofore promulgated regulations
covering such areas as the registration of cable television systems,
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, consumer education
and lockbox enforcement, origination cablecasting and sponsorship
identification, children's programming, the regulation of basic cable service
rates in areas where cable television systems are not subject to effective
competition, signal leakage and frequency use, technical performance,
maintenance of various records, equal employment opportunity, and antenna
structure notification, marking and lighting. 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. The 1992 Cable Act required the FCC to adopt additional
regulations covering, among other things, cable rates, signal carriage,
consumer protection and customer service, leased access, indecent programming,
programmer access to cable television systems, programming agreements,
technical standards, consumer electronics equipment compatibility, ownership of
home wiring, program exclusivity, equal employment opportunity, and various
aspects of direct broadcast satellite system ownership and operation. The 1996
Telecom Act requires certain changes to various of these regulations. A brief
summary of certain of these federal regulations as adopted to date follows.
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RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional nonbasic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable
Act substantially changed the previous statutory and FCC rate regulation
standards. The 1992 Cable Act replaced the FCC's old 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 expands the definition of effective competition to cover
situations where a local telephone company or its affiliate, or any
multichannel video provider using telephone company facilities, offers
comparable video service by any means except DBS. Satisfaction of this test
deregulates both basic and nonbasic tiers. Additionally, the 1992 Cable Act
required the FCC to adopt a formula, for franchising authorities to enforce, 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 allows 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 adopted rules designed to implement the 1992 Cable
Act's rate regulation provisions on April 1, 1993, and then significantly
amended them on February 22 and November 10, 1994. The FCC's regulations
contain standards for the regulation of basic and nonbasic cable service rates
(other than per-channel or per-program services). The rules have been further
amended several times. 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 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
associated basic cable service equipment. In addition, three of the
Partnership's franchising authorities have filed complaints with the FCC
regarding the rates charged for nonbasic cable service.
The Partnership has adjusted its regulated programming service
rates and related equipment and installation charges in substantially all of
its systems so as to bring these rates and charges into compliance with the
applicable benchmark or equipment and installation cost levels. The
Partnership also
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implemented a program in substantially all of its systems under which a number
of the Partnership's satellite-delivered and premium services are now offered
individually on a per channel (i.e., a la carte) basis, or as a group at a
discounted price. A la carte services were not subject to the FCC's rate
regulations under the rules originally issued to implement the 1992 Cable Act.
The FCC, in its reconsideration of the original rate
regulations, stated that it was going to take a harder look at the regulatory
treatment of such a la carte packages on an ad hoc basis. Such packages which
are determined to be evasions of rate regulation rather than true enhancements
of subscriber choice will be treated as regulated tiers and, therefore, subject
to rate regulation. There have been no FCC rulings related to systems owned by
the Partnership. There have been three rulings, however, on such packages
offered by affiliated partnerships managed by FHGLP. In one case, the FCC's
Cable Services Bureau ruled that a nine-channel a la carte package was an
evasion of rate regulation and ordered this package to be treated as a
regulated tier. In the second case, a seven-channel a la carte package was
ordered to be treated as a regulated tier. In the third case, a six-channel
package was held not to be an evasion, but rather is to be considered an
unregulated new product tier under the FCC's November 10, 1994 rule amendments.
The deciding factor in all of the FCC's decisions related to a la carte tiers
appears to be the number of channels moved from regulated tiers, with six or
fewer channels being deemed not to be an evasion. Almost all of the
Partnership's systems moved six or fewer channels to a la carte packages. Under
the November 10, 1994 amendments, any new a la carte package created after that
date will be treated as a regulated tier, except for packages involving
traditional premium services (e.g., HBO).
On March 11, 1993, the FCC adopted regulations pursuant to the
1992 Act which 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, this
exemption from compliance with the statute 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.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contained new signal 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 will have
to 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 WTBS. 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 its Somerset System 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.
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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 a distant station when
such programming has also been contracted for by the local station on an
exclusive basis.
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
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. The
FCC also has commenced a proceeding to determine whether to relax or abolish
the geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution
rights entirely by contract, and to determine whether such exclusivity rights
should be extended to noncommercial educational stations. It is possible that
the outcome of these proceedings will increase the amount of programming that
cable operators are requested to black out. Finally, the FCC has declined to
impose equivalent syndicated exclusivity rules on satellite carriers who
provide services to the owners of home satellite dishes similar to those
provided by cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees
under the 1984 Cable Act, 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. Franchising authorities are also empowered in awarding new
franchises or renewing existing franchises to require cable operators to
provide cable-related facilities and equipment and to enforce compliance with
voluntary commitments. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
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
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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, 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
Questions concerning the ability of municipalities to award a
single cable television franchise and to impose certain franchise restrictions
upon cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be uncertain. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
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" without obtaining a local cable franchise. See "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. Common ownership or control has historically also been prohibited by the
FCC (but not by the 1984 Cable Act) between a cable system and a national
television network. The 1996 Telecom Act eliminated this prohibition. 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 MMDS 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
MMDS 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.
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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 and
general partnership interests. The FCC has stayed the effectiveness of these
rules pending the outcome of the appeal from the 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.
EEO
The 1984 Cable Act includes provisions to ensure that
minorities and women are provided equal employment opportunities within the
cable television industry. The statute requires the FCC to adopt reporting and
certification rules that apply to all cable system operators with more than
five full-time employees. Pursuant to the requirements of the 1992 Cable Act,
the FCC has imposed more detailed annual EEO reporting requirements on cable
operators and has expanded those requirements to all multichannel video service
distributors. Failure to comply with the EEO requirements can result in the
imposition of fines and/or other administrative sanctions, or may, in certain
circumstances, be cited by a franchising authority as a reason for denying a
franchisee's renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the
manner in which cable system operators can collect and disclose data about
individual system customers. The statute also requires that the system
operator periodically provide all customers with written information about its
policies regarding the collection and handling of data about customers, their
privacy rights under federal law and their enforcement rights. In the event
that a cable operator is found to have violated the customer privacy provisions
of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and
other costs. Under the 1992 Cable Act, the privacy requirements are
strengthened to require that cable operators take such actions as are necessary
to prevent unauthorized access to personally identifiable information.
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.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all
cable television systems must file a registration statement with the FCC
listing the broadcast signals they will carry and certain other information.
Additionally, cable operators periodically are required to file various
informational reports with the FCC.
TECHNICAL REQUIREMENTS
Historically, 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
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were in conflict with or more restrictive than those established by the FCC.
The FCC has revised such standards and made them applicable to all classes of
channels which carry downstream National Television System Committee (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. These regulations, inter alia, generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
This latter requirement could make it more difficult or costly for cable
operators to upgrade their customer premises equipment and the FCC has been
asked to reconsider its regulations. 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 the marketplace. The FCC must adopt
rules to assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
systems and other multichannel video programming distributors.
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. A number of states and the
District of Columbia have certified to the FCC that they regulate the rates,
terms and conditions for 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 Telecom Act directs the FCC to adopt a new rate
formula for any attaching party, including cable systems, which offer
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems which choose to offer such services.
OTHER MATTERS
FCC regulation pursuant to the Communications Act, as amended,
also includes matters regarding a cable system's carriage of local sports
programming; restrictions on origination and cablecasting by cable system
operators; application of the fairness doctrine and rules governing political
broadcasts; customer service; obscenity and indecency; home wiring and
limitations on advertising contained in nonbroadcast children's programming.
The 1996 Telecom Act establishes a process for the creation
and implementation of a "voluntary" system of ratings for video programming
containing sexual, violent or other "indecent" material and directs the FCC to
adopt rules requiring most television sets manufactured in the United States or
shipped in interstate commerce to be technologically capable of blocking the
display of programs with a common rating. The 1996 Telecom Act also requires
video programming distributors to employ technology to restrict the reception
of programming by persons not subscribing to those channels. In the case of
channels primarily dedicated to sexually-oriented programming, the distributor
must fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide
such programming during a "safe harbor" period when children are not likely to
be in the audience, as determined by the FCC. This provision has been
temporarily stayed while certain programmers seek Supreme Court review on
constitutional grounds. With respect to other kinds of channels, the 1996
Telecom Act only
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requires that the audio and video portions of the channel be fully blocked, at
no charge, upon request of the person not subscribing to the channel.
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.
The Copyright Office has commenced a proceeding aimed at
examining its policies governing the consolidated reporting of commonly owned
and contiguous cable television systems. The present policies governing the
consolidated reporting of certain cable television systems have often led to
substantial increases in the amount of copyright fees owed by the systems
affected. These situations have most frequently arisen in the context of cable
television system mergers and acquisitions. While it is not possible to
predict the outcome of this proceeding, any changes adopted by the Copyright
Office in its current policies may have the effect of reducing the copyright
impact of certain transactions involving cable company mergers and cable
television system acquisitions.
Various bills have been introduced into Congress over the past
several years that would eliminate or modify the cable television compulsory
license. Without the compulsory license, cable operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable systems. Such negotiated agreements would
likely increase the cost to cable operators of carrying broadcast signals. The
1992 Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television broadcast stations and
cable operators do not obviate the need for cable operators to obtain a
copyright license for the programming carried on each broadcaster's signal.
Copyrighted music performed 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, 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.
Copyrighted music performed by cable systems themselves on
local origination channels, in advertisements inserted locally on cable
networks, et cetera, must also be licensed. A blanket license is available
from BMI. Cable industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. State and/or
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
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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.
Franchises usually call for the payment of fees, often based on a percentage of
the system's gross customer revenues, to the granting authority. 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
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. The 1992 Cable Act also
allows franchising authorities to operate their own multichannel video
distribution system without having to obtain a franchise and permits states or
local franchising authorities to adopt certain restrictions on the ownership of
cable television systems. 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.
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 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.
Various proposals have been introduced at the state and local
levels with regard to the regulation of cable television systems, and a number
of states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The foregoing does not purport to describe all present and
proposed federal, state and local regulations and legislation relating to the
cable television industry. Other 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.
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ITEM 2. PROPERTIES
The Partnership owns substantially all of the assets related
to its cable television operations, including its program production equipment,
headend equipment (towers, antennae, electronic equipment and satellite earth
stations), cable plant (distribution equipment, amplifiers, customer drops and
hardware), converters, test equipment, tools and maintenance equipment and
vehicles.
The Partnership generally leases the real estate on which its
business offices, microwave receiving antennae, microwave towers, warehouses,
headend facilities and other related equipment are located. Management believes
that the Partnership's leased properties are suitable for such purposes. The
Partnership paid approximately $91,000 pursuant to all such leases for the year
ended December 31, 1996, which leases expire at various dates through 2008.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is 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
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following summarizes certain provisions of the Partnership
Agreement. All statements made below and elsewhere in this Report on Form 10-K
with respect to the Partnership Agreement are qualified in their entirety by
reference to the Partnership Agreement, a copy of which is filed as an exhibit
hereto. Capitalized terms that are not otherwise defined are used as defined in
the Partnership Agreement.
LIQUIDITY
While the Partnership's equity securities, which consist of
Units of limited partnership interests, are publicly held, there is no
established trading market for the Units and it is not expected that such a
market will develop. The approximate number of equity security holders of
record was 6,206 as of February 1, 1997. In addition to restrictions on the
transferability of Units contained in the Partnership Agreement, the
transferability of Units is affected by restrictions on resales imposed by
federal or state law.
DISTRIBUTIONS
The Partnership will distribute all Cash Available for
Distributions, if any, within 45 days after the end of each calendar month.
The limited partners will receive 99% and the General Partner will receive 1%
of all Cash Available for Distributions. "Cash Available for Distributions"
means for any month (i) the sum of Gross Revenues for such month, (ii) less the
sum of all expenses for such month (prior to the deduction of interest and
depreciation and amortization expenses but including management fees and
general partner expenses) calculated in accordance with generally accepted
accounting principles, (iii) less any reasonable increase in amounts reserved
(or plus any decrease in amounts reserved) for payment by the General Partner
for capital expenditures of the Partnership, (iv) less amounts accrued by the
General Partner for such month for interest on borrowings of the Partnership
and (v) less increases in reserves (or plus decreases in reserves) established
by the General Partner in such month for principal payments on borrowings of
for obligations or other contingent liabilities of the Partnership. No such
distributions have been made since April 15, 1994. See Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Distributions of Other Distributable Funds, if any, will be
made 45 days after the end of each calendar month for which there are Other
Distributable Funds. Distributions of Other Distributable Funds will be made
99% to limited partners who own Units which have been issued and outstanding
for at least one year and 1% to the General Partner. Such distributions to
limited partners will be made pro rata based on the number of such Units held
by each limited partner. "Other Distributable Funds" for any month means any
borrowings designated by the General Partner to fund cash distributions to
Partners for such month.
The average distributions to Unitholders amounted to $99.09
per Unit in 1991, $100.28 per Unit in 1992, $84.86 per Unit in 1993 and $11.31
per Unit in 1994. The distributions made during 1993 consisted of
approximately $5.7 million of Cash Available for Distributions (described
above) and $476,000 from borrowings. There were no borrowings required to fund
any portion of the distributions paid in 1994. Cash Available for Distributions
differs from cash provided by operating activities due to increases and
decreases, over the prior year, of receivables, payables, and other assets and
liabilities.
The limited partners will receive 99% and the General Partner
will receive 1% of distributions of Available Sale Proceeds until the limited
partners have received Payback. After the limited partners have received
Payback, the limited partners will receive 75% and the General Partner will
receive 25% of Available Sale Proceeds. The term "Available Sales Proceeds"
means all cash receipts of the Partnership, net of any repayments of
outstanding indebtedness, from any sale or refinancing of Partnership assets
less such amounts
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deemed necessary by the General Partner for payments of or reserves for any
expenses, contingencies, obligations or capital expenditures of the Partnership
and less any proceeds reinvested pursuant to the terms of the Partnership
Agreement. "Payback" means, with respect to any limited partner, aggregate cash
distributions to the limited partner equal to such limited partner's capital
contributions plus the 11% Preferred Return per year computed on such limited
partner's Adjusted Capital Contribution. The term "11% Preferred Return" means
an 11% per annum (cumulative but not compounded) cash return based on each
limited partner's Adjusted Capital Contribution and calculated with respect to
any Units from the date of the closing in which such Units were first issued by
the Partnership.
The "Adjusted Capital Contribution" of a limited partner on
which the Payback and the 11% Preferred Return are calculated is the limited
partner's capital contribution reduced by the aggregate of cash distributions
distributed to the limited partners which is in excess of the amount required
to satisfy any 11% Preferred Return. To the extent the Partnership generates
cash in excess of the 11% Preferred Return, which is not presently expected,
the General Partner intends to apply such excess to retirement of debt. With
respect to any limited partner, the 11% Preferred Return will be calculated
from the date of the closing of the sale of Units in which such limited
partner's Units were first issued by the Partnership.
The Partnership Agreement limits borrowings incurred to make
distributions to partners to not more than 10% of Gross Proceeds (as defined)
from the public offering of the Units (approximately $7.2 million). As of
December 31, 1996, the Partnership had incurred an aggregate of approximately
$5.4 million in borrowings to make distributions to partners. As noted above,
the Partnership suspended distributions subsequent to the April 15, 1994
payment.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership
for the five years ended December 31, 1996. 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 1992 1993 1994 1995 1996
------- ------- ------- -------- --------
Revenues $14,496 $16,785 $17,382 $ 18,363 $ 19,826
Costs and expenses (7,923) (9,578) (9,497) (10,100) (10,316)
Depreciation and amortization (7,942) (8,404) (8,924) (8,526) (7,712)
------- ------- ------- -------- --------
Operating income (loss) (1,369) (1,197) (1,039) (263) 1,798
Interest expense, net (1,026) (1,519) (1,776) (2,010) (1,813)
Other expense - - 4 - -
------- ------- ------- -------- --------
Net loss $(2,395) $(2,716) $(2,811) $ (2,273) $ (15)
======= ======= ======= ======== ========
Distributions to partners $ 7,281 $ 6,163 $ 821 $ - $ -
======== ======= ======= ======= ========
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Net loss $ (32.98) $(37.41) $(38.71) $(31.30) $ (0.21)
======== ======= ======= ======= ========
Distributions $100.28 $ 84.86 $ 11.31 $ - $ -
======== ======= ======= ======= ========
OTHER OPERATING DATA
Net cash provided by operating
activities $5,822 $ 6,169 $ 6,090 $ 6,486 $ 6,747
EBITDA(1) 6,573 7,207 7,885 8,263 9,510
EBITDA to revenues 45.3% 42.9% 45.4% 45.0% 48.0%
Total debt to EBITDA 2.7x 3.1x 2.9x 3.3x 2.6x
Capital expenditures $5,115 $ 3,889 $ 3,982 $ 5,713 $ 3,033
As of December 31,
------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
------------------------------------------------------------------------
Total assets $67,936 $63,807 $60,060 $62,959 $59,334
Total long-term debt 18,000 22,300 22,500 27,000 24,300
Total liabilities 22,344 27,062 26,939 32,111 28,501
Partners' equity 45,592 36,745 33,121 30,848 30,833
- -----------------
(1) Operating income before depreciation and amortization. The
Partnership measures its financial performance by its EBITDA, among other
items. 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. This is evidenced by the covenants in the primary debt instruments of
the Partnership, in which EBITDA-derived calculations are used as a measure of
financial performance. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the
1996 Telecom Act. This statute substantially changed the competitive and
regulatory environment for telecommunications providers by significantly
amending the Communications Act, including certain of the rate regulation
provisions previously imposed by the 1992 Cable Act. Compliance with those
rate regulations has had a negative impact on the Partnership's revenues and
cash flow. However, in accordance with the FCC's regulations, the Partnership
will be able to increase regulated service rates in the future in response to
inflation and specified historical and anticipated cost increases, although
certain costs may continue to rise at a rate in excess of that which the
Partnership will be permitted to pass on to its customers. The 1996 Telecom Act
provides that certain of the rate regulations will be phased-out altogether in
1999. Further, the regulatory environment will continue to change pending,
among other things, the outcome of legal challenges and FCC rulemaking and
enforcement activity in respect of the 1992 Cable Act and the 1996 Telecom Act.
There can be no assurance as to what, if any, future 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. See "Legislation and Regulation" and "- Liquidity and Capital
Resources."
This Report includes certain forward looking statements
regarding, among other things, future results of operations, regulatory
requirements, competition, capital needs, the possible sale of assets by the
Partnership 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.
RECENT DEVELOPMENTS
As previously reported, the Partnership commenced the
Appraisal Process in August 1996 and received the results of the related
appraisals in February 1997. As of the date of this Report, the General
Partner has not made a decision as to whether or not it will further pursue the
acquisition of any Partnership assets at this time. These matters are
discussed more fully under the caption Item 13., "Certain Relationships and
Related Transactions -- Appraisal Process" and in the Partnership's Current
Reports on Form 8-K dated August 27, 1997, October 17, 1997 and February 6,
1997. Unitholders are urged to review the referenced materials carefully.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The Partnership's revenue increased from $18.4 million to
$19.8 million, or by 8.0%, during 1996 compared to 1995. Of the $1.4 million
increase, approximately $1.2 million was due to increases in regulated service
rates implemented in the second quarter of 1995 and throughout 1996, $215,000
was due to the restructuring of The Disney Channel from a premium channel to a
tier channel on July 1, 1996, $219,000 was due to programmer incentives and
$93,000 was due to increases in advertising sales. These increases were
partially offset by revenue decreases of $264,000, primarily due to reductions
in the number of subscriptions for premium cable services. As of December 31,
1996, the Partnership had approximately 47,580 homes subscribing to cable
service and 17,510 premium service units. The decrease of 5,400 premium units
from December 31, 1995 was due in part to approximately 1,700 Disney premium
units that became tier subscriptions under the restructuring discussed above.
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Service costs remained relatively unchanged at approximately
$6 million during 1996 compared to 1995. Service costs represent costs
directly attributable to providing cable services to customers.
General and administrative expenses increased from $2.6
million to $2.7 million, or by 4.9%, during 1996 compared with 1995. Of the
$128,000 increase, $51,000 was due to increases in insurance cost, $30,000 was
due to increases in compliance costs associated with re- regulation by the FCC
and $47,000 was due to increases in other expenses.
General Partner management fees and reimbursed expenses
remained constant as a percent of revenue at 8.0%, and increased from $1.5
million to $1.6 million during 1996 compared with 1995.
Depreciation an amortization expenses decreased from $8.5
million to $7.7 million, or by 9.5%, during 1996 compared with 1995. The
$814,000 decrease was due primarily to certain assets becoming fully amortized
in 1996.
An operating loss of $263,000 for 1995 became operating income
of $1.8 million for 1996. The $2.1 million increase in operating income during
1996 compared with 1995 was due primarily to increased revenues and decreases
in depreciation an amortization expense.
Net interest expense, including the effects of interest rate
hedging agreements, decreased from $2 million to $1.8 million, or by 9.8%,
during 1996 compared to 1995. The $197,000 decrease was due primarily to
interest income earned on higher cash balances offset by an increase in
interest expense due to higher average debt balances (because the $5.6 million
borrowed on December 29, 1995 was not outstanding during 1995). The hedging
agreements resulted in higher interest expense of $19,000 and $117,000 for the
years ended December 31, 1995 and 1996, respectively.
Due to the factors described above, the Partnership's net loss
decreased from $2.3 million to $15,000 during 1996 compared to 1995.
1995 COMPARED TO 1994
The Partnership's revenues increased from $17.4 million to
$18.4 million, or by 5.6%, during 1995 compared to 1994. Of the $981,000
increase, approximately $691,000 was due to increases in the number of
subscriptions for services, $414,000 was due to an increase in regulated
service rates implemented during April 1995, $73,000 was due to an increase in
premium service rates implemented during December 1994, $38,000 was due to
increases in advertising sales and $28,000 was due to commissions earned from
the Home Shopping Network. These increases were partially offset by rate
decreases implemented in 1994 to comply with the 1992 Cable Act, estimated by
the Partnership to be approximately $279,000. As of December 31, 1995, the
Partnership had approximately 47,960 homes subscribing to cable service and
22,920 premium service units.
Service costs increased from $5.3 million to $6 million, or by
14.4%, during 1995 compared to 1994. Service costs represent costs directly
attributable to providing cable services to customers. The $761,000 increase
in service costs was primarily related to an increase of $529,000 in
programming (including primary satellite fees), an increase of $156,000 in
property taxes, an increase of $49,000 in copyright fees and an increase of
$42,000 in franchise fees. The increase in programming expense was due to a
combination of higher rates charged by program suppliers and expanded
programming usage relating to channel line-up restructuring and retransmission
consent arrangements implemented to comply with the 1992 Cable Act.
General and administrative expenses decreased from $2.8
million to $2.6 million, or by 8.4%, during 1995 compared with 1994. The
$236,000 decrease was primarily related to decreases of $121,000 in costs
associated with marketing activities, decreases of $54,000 in costs associated
with advertising sales and decreases of $50,000 in bad debts.
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General Partner management fees and reimbursed expenses
remained constant as a percent of revenue (8%), and increased from $1.4 million
to $1.5 million during 1995 compared with 1994.
Depreciation and amortization expenses decreased from $8.9
million to $8.5 million, or by 4.5%, during 1995 compared with 1994. The
$398,000 decrease was primarily due to the acceleration of depreciation on
certain assets retired in 1994.
Operating loss decreased from $1.0 million to $263,000, or by
74.7%, during 1995 compared with 1994. The $776,000 decrease was due primarily
to increased revenues and to decreases in costs associated with marketing
activities and in reduced depreciation and amortization expenses, partially
offset by increases in programming fees and property taxes.
Net interest expense, including the effects of interest rate
hedging agreements, increased from $1.8 million to $2 million, or by 13.2%,
during 1995 compared to 1994. The $234,000 increase was due primarily to
higher interest rates. The hedging agreements resulted in additional interest
expense of $82,000 and $19,000 for the years ended December 31, 1994 and 1995,
respectively.
Due to the factors described above, the Partnership's net loss
decreased from $2.8 million to $2.3 million during 1995 compared to 1994.
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 generated from operations and proceeds from the sale of
cable systems, if any, after providing for expenses, debt service and capital
requirements relating to possible improvement and upgrade of its Systems. The
Partnership relies upon the availability of cash generated from operations and
possible borrowings to fund its ongoing capital requirements. In general, these
requirements involve expansion, improvement and upgrade of the Partnership's
existing Systems. The Partnership has encountered liquidity difficulties due
in part to the adverse effects of the 1992 Cable Act and new competitive
pressures resulting from both technological advances as well as from the 1996
Telecom Act which will require that material amounts of capital be invested in
the Partnership's Systems. As previously reported, in response to the FCC's
amended rate regulation rules, distributions to Unitholders were discontinued
subsequent to the April 15, 1994 payment in order to preserve cash resources.
The Partnership also delayed the majority of its rebuild and upgrade capital
expenditure programs that had been scheduled for 1994, 1995 and 1996 in order
to preserve liquidity. See "Legislation and Regulation."
The Partnership's access to capital remains severely
constrained primarily due to the limitations imposed by the Partnership
Agreement. This limitation on indebtedness, which is discussed below, is at
odds with the need to increase leverage and to spend approximately $35 million
to rebuild and upgrade the Partnership's Systems (of which approximately
$650,000 is mandated by franchise agreements). The Partnership spent an
aggregate of approximately $3 million in 1996 for all capital expenditures,
including approximately $220,000 to begin the upgrade of a portion of one
System, which represented the minimum level of expenditures that management
believes were necessary in 1996 to comply with franchise authority and FCC
technical requirements. As a result, the Partnership's Systems are
significantly less technically advanced than had been expected prior to the
implementation of re-regulation. The Partnership believes that the delays in
upgrading many of its systems will, under present market conditions, most
likely have an adverse affect on the value of those systems compared to systems
that have been rebuilt to a higher technical standard.
On December 29, 1995, the Partnership borrowed $5.6 million
under its Bank Credit Agreement because the revolving credit portion of that
facility was scheduled to convert to a term loan on December 31, 1995. The
Partnership's management believes that the Partnership's anticipated cash
resources and cash flow
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from operations in 1997 will be sufficient to fund its capital expenditure
plans (as adjusted) and the required principal payments on its debt of $4.1
million scheduled for 1997.
As of December 31, 1996, the amount outstanding under the
Partnership's amended Bank Credit Agreement was $24.3 million. As discussed
above, the Partnership had no additional borrowings available to it. At
December 31, 1996, such borrowings bore interest at an average rate of 7.8%
(including the effect of interest rate swap transactions). The Bank Credit
Agreement also contains various restrictions relating to, among other things,
mergers and acquisitions, investments, capital expenditures, a change in
control and the incurrence of additional indebtedness and also requires
compliance with certain financial covenants. Management believes that the
Partnership was in compliance with all such requirements as of December 31,
1996. The Bank Credit Agreement requires principal repayments of $4.1 million
in 1997 and $5.4 million in 1998.
The Partnership Agreement provides that without the approval
of a majority of interests of limited partners, the Partnership may not incur
any borrowings unless the amount of such borrowings together with all
outstanding borrowings does not exceed 30% of the greater of the aggregate cost
or current fair market value of the Partnership's assets as determined by the
General Partner. As discussed above, in order to spend the appropriate amount
of capital to rebuild and upgrade the Partnership's systems, this provision of
the Partnership Agreement would need to be amended to significantly increase
the Partnership's leverage because the Partnership's management does not
believe that it will be able to fund future rebuild requirements entirely from
cash resources and operating cash flow.
The Partnership's management agreement with the General
Partner requires deferral of the payment of up to 50% of the management fees,
without interest, unless Adjusted Operating Cash (as defined) for such month
exceeds a 10% annualized return calculated with respect to outstanding
Partnership Units. To the extent that Adjusted Operating Cash exceeds such
amount, the General Partner may recover previously deferred fees, without
interest. In compliance with these provisions, the General Partner received
its standard management fee for 1996 and recovered $900,000 in previously
deferred management fees. The Partnership presently anticipates that Adjusted
Operating Cash in the first quarter of 1997 will exceed the 10% requirement
thereby permitting the Partnership to pay the remaining $276,000 deferred fees
to the General Partner.
The Partnership Agreement also limits borrowings incurred to
make distributions to partners to not more than 10% of Gross Proceeds from the
public offering of the Units (approximately $7.2 million). As of December 31,
1996, the Partnership had incurred an aggregate of approximately $5.4 million
in borrowings to make distributions to partners. The Partnership discontinued
distributions subsequent to the April 15, 1994 payments.
1996 VS 1995
Cash provided by operating activities increased from $6.5
million to $6.7 million, or by $261,000, for the year ended December 31, 1996
compared to 1995. The increase resulted from a decrease in the net loss of
$2.3 million, $814,000 of which resulted from a decrease in non-cash
depreciation and amortization; and from a decrease of $1.2 million in other
operating items (receivables, prepaid expenses and other assets, cable
materials, equipment and supplies, payables, accrued expenses and customer
deposits and prepayments), which includes the $900,000 decrease in deferred
management fees discussed above.
Cash used in investing activities decreased by $2.8 million
during 1996 compared to 1995, primarily due to a decrease in capital
expenditures. Cash used by financing activities increased $7.2 million because
of increased net repayment of debt of $2.7 million during 1996 compared to net
borrowings of $4.5 million during 1995.
Operating income before depreciation and amortization (EBITDA)
as a percentage of revenues increased from 45.0% to 48.0% during 1996 compared
to 1995. The increase was primarily caused by increased
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revenues, as described above. EBITDA increased from $8.3 million to $9.5
million, or by 15.1%, during 1996 compared to 1995.
1995 VS. 1994
Cash provided by operating activities increased from $6.1
million to $6.5 million, or by $396,000, for the year ended December 31, 1995
compared to 1994. The increase resulted from an increase of $248,000 in other
operating items (receivables, prepaid assets, cable materials, equipment and
supplies, payables, accrued expenses and customer deposits and prepayments) and
a decrease of $538,000 in the net loss partially reduced by a decrease in
non-cash depreciation and amortization charges of $390,000.
Cash used in investing activities increased by $1.9 million
during 1995 compared to 1994, due to a $1.7 million increase in capital
expenditures and a $132,000 increase in intangible assets. Cash provided by
financing activities increased $6 million due to a $4.3 million increase in net
borrowings and the absence of any distributions paid to partners in 1995 versus
the $1.7 million paid in 1994.
Operating income before depreciation and amortization (EBITDA)
as a percentage of revenues decreased from 45.4% to 45.0% during 1995 compared
to 1994. The decrease was primarily caused by increases in programming costs
and other expenses in excess of increased revenues, as described above. EBITDA
increased from $7.9 million to $8.3 million during 1995 compared to 1994.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. In such cases, impairment losses are to be
recorded, based on estimated fair value, which would generally approximate
discounted cash flows. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Partnership adopted
Statement 121 in the first quarter of 1996, the effects of which were not
material.
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 it is able to increase its service
rates periodically, of which there can be no assurance. See "Legislation and
Regulation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL 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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership Agreement provides that the General Partner
shall manage the business and affairs of the Partnership. The business and
affairs of the General Partner are managed by its general partner, FHGLP. FHGI
serves as the sole general partner of FHGLP. As such, FGHI is responsible for
the management of the business and operations of the Partnership. The officers
and directors are subject to certain conflicts of interest relating to time and
services devoted to the Partnership. See Item 13., "Certain Relationships and
Related Transactions - Conflicts of Interest."
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of FHGI and Falcon Cable
Group, the operating division of FHGLP, are:
Name Age Position
- ----------------- --- -----------------------------------------------------------
Marc B. Nathanson 51 Chairman of the Board, Chief Executive Officer and Director
of FHGI
Frank J. Intiso 50 President and Chief Operating Officer
Stanley S. Itskowitch 58 Executive Vice President, General Counsel and Director of
FHGI
Michael K. Menerey 45 Chief Financial Officer and Secretary
Joe A. Johnson 52 Executive Vice President - Operations
Jon W. Lunsford 37 Vice President - Finance and Corporate Development
The following sets forth certain biographical information with
respect to the directors and executive officers of FHGI and Falcon Cable Group:
MARC B. NATHANSON, 51, 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. Prior to 1975, Mr. Nathanson was Vice President
of Marketing for Teleprompter Corporation, then the largest MSO 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 serves on
its Executive Committee. 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 27-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 has
also served as Chairman of the Board, Chief Executive Officer and President of
Enstar Communications Corporation ("Enstar") since October 1988. Mr. Nathanson
is also a Director of T.V. Por Cable Nacional, S.A. de C.V. and Chairman of the
Board and Chief Executive Officer of Falcon International Communications, LLC
("FIC"), a separately capitalized affiliated company whose members and
management also include certain limited partners and management of FHGLP. Mr.
Nathanson was appointed by President Clinton and confirmed by the U.S. Senate
for a three year term on the Board of Governors of International Broadcasting
of the United States Information Agency.
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FRANK J. INTISO, 50, was appointed President and Chief Operating Officer of
FHGI in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. Mr. Intiso is responsible
for the day-to-day operations of all cable television systems under the
management of Falcon Cable Group, and has served as President and Chief
Operating Officer of Falcon Cable Group since its inception, and has also
served as Executive Vice President and as a Director of Enstar since October
1988. Mr. Intiso has a Masters Degree in Business Administration from the
University of California, Los Angeles and is a Certified Public Accountant. He
serves as Chair of the California Cable Television Association and is on the
boards of the Cable Advertising Bureau, Cable in the Classroom, Community
Antenna Television Association and 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, 58, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. 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 has also served as Senior Vice President or Executive Vice President
and as a Director of Enstar since October 1988. Mr. Itskowitch is also
Executive Vice President and General Counsel of FIC.
MICHAEL K. MENEREY, 45, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984 and has been Chief Financial Officer and
Secretary of Falcon Cable Group since its inception. 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. Mr. Menerey has also served as Chief
Financial Officer, Secretary and as a Director of Enstar since October 1988.
JOE A. JOHNSON, 52, has been Executive Vice President of Operations of FHGI
since September 1995, and between January 1992 and that date was a Senior Vice
President of Falcon Cable Group. He was a Divisional Vice President of FHGI
between 1989 and 1992 and a Divisional Vice President of Falcon Cable Group
from its inception until 1992. 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.
JON W. LUNSFORD, 37, has been Vice President - Finance and Corporate
Development of FHGI since September 1994. From 1991 to 1994, he served as
Director of Corporate Finance at Continental Cablevision, Inc. Prior to 1991,
Mr. Lunsford was a Vice President with Crestar Bank.
OTHER OFFICERS OF FALCON
The following sets forth, as of December 31, 1995, certain biographical
information with respect to additional members of the management of Falcon
Cable Group:
LYNNE A. BUENING, 43, has been Vice President of Programming of Falcon Cable
Group 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, 43, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
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Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
ABEL CRESPO, 37, has been Controller of Falcon Cable Group since January 1997.
Mr. Crespo joined Falcon in December 1984 and has held various accounting
positions during that time, most recently that of Senior Assistant Controller.
Mr. Crespo holds a Bachelor of Science degree in Business Administration from
California State University, Los Angeles.
HOWARD J. GAN, 50, has been Vice President of Regulatory Affairs of FHGI and
its predecessors since 1988 and Vice President of Regulatory Affairs of Falcon
Cable Group since its inception. He was General Counsel at Malarkey-Taylor
Associates, a Washington, D.C.-based telecommunications consulting firm, from
1986 to 1988. Mr. Gan was Vice President and General Counsel at the Cable
Television Information Center 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 1975 to 1978.
R.W. ("SKIP") HARRIS, 49, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television Committee.
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.
JOAN SCULLY, 61, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources Falcon Cable
Group since its inception. 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.
MICHAEL D. SINGPIEL, 49, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992, Mr.
Singpiel was Vice President of C-Tec Cable Systems in Michigan. Mr. Singpiel
held various positions with Comcast in New Jersey and Michigan from 1980 to
1990.
RAYMOND J. TYNDALL, 49, has been Vice President of Engineering of Falcon Cable
Group 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.
In addition, Falcon Cable Group has six Divisional Vice
Presidents who are based in the field. They are Ron L. Hall, Michael E. Kemph,
Nicholas A. Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
ADVISORY COMMITTEE AND CONFLICTS COMMITTEE
The General Partner has formed an eight member Advisory
Committee, members of which are non-employees. Members of the Advisory
Committee are appointed by the General Partner and can be removed only by a
vote of a majority of the Advisory Committee. Members meet periodically to
review the operations of the Partnership and to advise management. The
unaffiliated members of the Advisory Committee constitute the Conflicts
Committee and may be called upon from time to time to review activities,
policies and practices of the Partnership dealing with all matters about which
conflicts of interest may arise.
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The following individuals have been appointed to the Advisory
Committee:
Marc B. Nathanson. Mr. Nathanson has been Chairman of the
Board and Chief Executive Officer of FHGI or its predecessors since 1975, and
prior to September 19, 1995 also served as President.
Frank J. Intiso. Mr. Intiso was appointed President and Chief
Operating Officer of FHGI in 1995 and between 1982 and that date he held the
positions of Executive Vice President and Chief Operating Officer of FHGI or
its predecessors.
Burt I. Harris. Mr. Harris is President and Chief Executive
Officer of Harriscope Corporation, which controls the ownership and operations
of KWHY-TV, Los Angeles, California. He is a former President and Chairman of
Harris Cable Corporation and a former Vice- Chairman of Warner Cable. He has
been a member of the National Cable Television Association (NCTA) for over 25
years and was Chairman of the NCTA from 1976 to 1977. In 1979, he was
presented with "The Vanguard Award," the highest recognition of an individual
in the cable television industry. He is also a director of various corporations
and, prior to its dissolution in August 1996, was also a member of the Advisory
Committee for Falcon Cable Systems Company.
Henry Winkler. Mr. Winkler is a principal of Winkler/Daniels
Productions, as well as an actor and a director. Mr. Winkler earned popular
and critical acclaim for his portrayal of "The Fonz" on ABC-TV's "Happy Days"
for ten seasons (1974-84). Since 1979, he has been involved with several
different entities, including Winkler/Daniels, which produces feature films and
television programming, including the hit series "Sightings." Additionally,
Mr. Winkler has been honorary chairman of United Friends of the Children and
national chairman of the annual Toys for Tots campaign. He holds a Bachelor of
Arts degree from Emerson College and a Master of Fine Arts degree from the Yale
School of Drama.
Peter L. S. Currie. Mr. Currie is Senior Vice President and
Chief Financial Officer of Netscape Communications Corporation. Prior to
joining Netscape, Mr. Currie served as Executive Vice President and Chief
Financial Officer of McCaw Cellular Communications, a leading provider of
wireless communications services. Before that, he was a principal in the
Investment Banking Division of Morgan Stanley & Co., Incorporated.
Mark E. Buchman. Mr. Buchman, a business consultant, was
President and Chief Executive Officer of Liberty Bank, Honolulu, Hawaii, until
July 1994. Previously he was President and Chief Executive Officer of the Bank
of Los Angeles. Mr. Buchman was appointed President and Chief Executive
Officer of the Government National Mortgage Association by President Reagan and
served in this capacity from 1988 to 1989. Mr. Buchman served as Executive Vice
President/Division Manager, Corporate Banking for Union Bank from 1982 to 1988.
Mr. Buchman was associated with Manufacturers Hanover Bank for twenty years,
the majority of which he spent in the International Division in the
Asian/Pacific area. While at Manufacturers Hanover, Mr. Buchman's positions
included serving as the bank's Far Eastern Representative in Tokyo and the
Asian Banking Group's Senior Vice President and Division Manager. Mr. Buchman
is a graduate of the University of Pennsylvania and completed the Advanced
Management Program at the Harvard Graduate School of Business Administration.
John K. Van de Kamp. Mr. Van de Kamp is of counsel in the Los
Angeles office of the Law Firm of Dewey Ballantine and is a member of the
California Bar. He is also President of the Thoroughbred Owners of California.
From 1983 to 1991, Mr. Van de Kamp served as the California Attorney General.
From 1975 to 1983, Mr. Van de Kamp served as Los Angeles County District
Attorney. From 1971 to 1975, Mr. Van de Kamp served as first Federal Public
Defender, Central District of California, Los Angeles. In 1970, Mr. Van de
Kamp served as Special Assistant to the President's Commission on Campus Unrest
(the Scranton Commission). From 1966 to 1967, Mr. Van de Kamp served as United
States Attorney, Central District of California, Los Angeles. From 1960 to
1966, Mr. Van de Kamp served as Assistant United States Attorney, Chief of the
Criminal Division, Chief Assistant U.S. Attorney, Los Angeles. Mr. Van de Kamp
is a graduate of Dartmouth College. Mr. Van de Kamp received a J. D. degree
from the Stanford University School of Law.
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Ned S. Robertson. Mr. Robertson has been an attorney since
1971 and is currently a partner in the law firm of Aronberg Goldgehn Davis &
Garmisa in Chicago, Illinois. Mr. Robertson received a bachelor of arts degree
from Hobart College in 1967, majoring in political science, and his Juris
doctorate from IIT Chicago-Kent College of Law in 1971. He has published
several articles on estate planning and family business issues and has lectured
on these subjects. He is a past chairman of the Medical Research Institute
Council, an organization that raised substantial funds for research at Michael
Reese Hospital and Medical Center, Chicago, Illinois. Mr. Robertson is a
member of the Illinois State Bar Association, the Chicago Bar Association and
the Chicago Estate Planning Council. He is also Chairman of Division 1 of the
Trust Law Committee of the Chicago Bar Association and a member of the
Franchise Advisory Board to the Illinois Attorney General. Mr. Robertson's law
firm has provided legal counsel to affiliates of Falcon.
The Partnership Agreement provides that members of the
Advisory Committee will not be liable to the Partnership or the Limited
Partners for certain acts or omissions. See Item 13., "Certain Relationships
and Related Transactions-Fiduciary Responsibility and Indemnification of the
General Partner." Non-employee members of the Advisory Committee are paid
$5,000 per annum, plus reimbursement of expenses.
ITEM 11. EXECUTIVE COMPENSATION
The following summarizes compensation, fees and distributions
that may or will be paid by the Partnership to the General Partner and FHGLP.
For more detailed information, see the Partnership Agreement.
MANAGEMENT FEE
FHGLP, pursuant to the Partnership Agreement, manages all
aspects of daily operations of the Partnership's systems, including
engineering, maintenance, programming, advertising, marketing and sales
programs, preparation of financial reports, budgets and reports to governmental
and regulatory agencies and liaison with federal, state and local government
officials. FHGLP is entitled to receive a management fee (the "Management
Fee") equal to 5% of the Partnership's Gross Operating Revenues. "Gross
Operating Revenues" means the total revenues derived by the Partnership but
does not include interest income or Available Sale Proceeds. However, during
any month commencing after 18 months from the initial closing of the sale of
Units, up to 50% of the Management Fee will not be paid currently unless
Adjusted Operating Cash for the month exceeds the Subordination Amount for that
month. "Adjusted Operating Cash" means for any month (i) the sum of gross
revenues for such month, (ii) less the sum of all expenses of the Partnership
for such month (other than depreciation and amortization expenses, the
Management Fee and interest expense) calculated in accordance with generally
accepted accounting principles, (iii) less, for any month beginning with the
first full calendar month commencing 42 months after the initial closing of the
sale of Units, interest accrued by the General Partner for such month for all
interest on borrowings of the Partnership and (iv) less 50% of the Management
Fee attributable to such month.
"Subordination Amount" means for any month, a 10% annualized
return, calculated with respect to Units in each month by determining 0.833% of
the Adjusted Capital Contribution attributable to each Unit on the last day of
such month, but calculated only with respect to Units issued and outstanding
for more than 12 months. To the extent Adjusted Operating Cash for any month
exceeds the Subordination Amount for that month, FHGLP will be entitled to
recover deferred Management Fees, if any. In addition, if Payback is achieved
(which is not presently expected), then the Partnership may pay the unpaid
balance of Management Fees for all prior periods. If Payback is not achieved,
the Partnership will not be required to pay the unpaid Management Fees. For
the year ended December 31, 1996, the management fees and reimbursed expenses
totaled $1.6 million, all of which was paid currently in cash in accordance
with the Partnership Agreement. In addition, in accordance with the
Partnership Agreement the Partnership also paid $900,000 of fees to the General
Partner that had been deferred in prior years to give effect to the amount of
Adjusted Operating Cash realized.
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PARTICIPATION IN DISTRIBUTIONS
The General Partner is entitled to share in distributions
from, and profits and losses in, the Partnership. See Item 5, "Market for
Registrant's Common Equity and Related Stockholder Matters."
DISPOSITION FEES AND EXPENSES
A disposition fee equal to 1% of the sale price received by
the Partnership for the sale of cable systems to unaffiliated third parties is
payable to FHGLP provided that no such fee shall be paid unless and until the
Limited Partners have received a return of their total capital contributions
and a cumulative (but not compounded) six percent annual return on their
Adjusted Capital Contributions. The Partnership will reimburse the General
Partner and FHGLP for certain disposition expenses whether or not a cable
system is, in fact, disposed of and regardless of the limit on General Partner
Expenses, except that certain expenses of the General Partner itself may be
subject to limitations on reimbursement. In case of cable systems disposed of
by the Partnership in exchange for other cable systems and cash, the
disposition fee will be paid only with respect to the cash (or cash equivalents
such as promissory notes) portion of the sale price. No disposition fee will
be paid on sales of cable systems to the General Partner or any of its
affiliates.
ACQUISITION FEES AND EXPENSES
An acquisition fee equal to 1% of the purchase price paid to
sellers of cable systems acquired by the Partnership from unaffiliated third
parties is payable to FHGLP. The Partnership will reimburse the General
Partner and FHGLP for acquisition expenses incurred in connection with the
investigation and analysis of acquisitions whether or not a cable system is, in
fact, acquired and regardless of any limit on General Partner Expenses. No
acquisition fee will be paid with respect to acquisitions made with reinvested
Available Sale Proceeds. "Available Sales Proceeds" means all cash receipts of
the Partnership, net of any repayments of outstanding indebtedness, from any
sale or refinancing of partnership assets less such amounts deemed necessary by
the General Partner for payments of or reserves for any expenses,
contingencies, obligations or capital expenditures of the Partnership and less
any proceeds reinvested pursuant to the terms of the Partnership Agreement. In
the case of cable systems acquired by the Partnership in exchange for other
cable systems and cash, the acquisition fee will be paid only with respect to
the cash (or cash equivalents such as Partnership promissory notes) portion of
the purchase price.
GENERAL PARTNER EXPENSES AND MANAGEMENT EXPENSES
The Partnership will reimburse the General Partner and FHGLP
for certain direct and indirect expenses incurred on behalf of the Partnership
in connection with the administration of the Partnership and management of the
Partnership's cable systems in an amount up to 3% of Gross Operating Revenues.
The foregoing cumulative limitation on General Partner Expenses and Management
Expenses does not apply to Acquisition Expenses or Disposition Expenses. The
expenses subject to reimbursement include all direct and indirect expenses
(including legal and accounting fees, overhead and travel and communication
expenses) incurred by FHGLP in connection with the management of the cable
systems of the Partnership, or any successor manager of such systems.
"Acquisition Expenses" means expenses, including any brokerage fees or
commissions, legal fees or expenses, the cost of any credit reports,
appraisals, consulting fees or miscellaneous expenses (including travel and
communications expenses) incurred by the General Partner or FHGLP in connection
with services rendered in acquiring cable systems, whether or not acquired,
pursuant to the Partnership Agreement or the Management Agreement.
"Disposition Expenses" means any brokerage fees or commissions, legal fees or
expenses, the cost of any credit reports, appraisals, consulting fees or
miscellaneous expenses (including travel and communications expenses) incurred
by the General Partner or FHGLP in connection with services rendered in
disposing of or refinancing cable systems pursuant to the Partnership
Agreement. General Partner Expenses and Management Expenses reimbursed by the
Partnership will be usual and customary expenses for services provided.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1997, 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. In 1989, FHGI issued to
Hellman & Friedman Capital Partners, A California Limited Partnership ("H&F"),
a $1,293,357 convertible debenture due 1999 convertible under certain
circumstances into ten percent of the common stock of FHGI and entitling H&F to
elect one director to the board of directors of FHGI. H&F elected Marc B.
Nathanson pursuant to such right. In 1991 FHGI issued to Hellman & Friedman
Capital Partners II, A California Limited Partnership ("H&FII"), additional
convertible debentures due 1999 in the aggregate amount of $2,006,198
convertible under certain circumstances into approximately 6.3% of the common
stock of FHGI and entitling H&FII to elect one director to the board of
directors of FHGI. As of March 3, 1997, H&FII had not exercised this right.
FHGLP also held 12.1% of the interests in the General Partner, and Falcon Cable
Trust, Frank Intiso and H&FII held 58.9%, 12.1% and 16.3% of the General
Partner, respectively. Such interests entitle the holders thereof to an
allocable share of cash distributions and profits and losses of the General
Partner in proportion to their ownership. Greg A. Nathanson is Marc B.
Nathanson's brother.
As of March 3, 1997, Marc B. Nathanson and members of his
family owned, directly or indirectly, outstanding partnership interests
(comprising both general partner interests and limited partner interests)
aggregating approximately 2.58% of Falcon Video Communications and representing
0.46% of the Partnership. In accordance with the respective partnership
agreements of these partnerships, after the return of capital to and the
receipt of certain preferred returns by the limited partners of such
partnerships, FHGLP and certain of its officers and directors had rights to
future profits greater than their ownership interests of capital in such
partnerships.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
FHGLP and its affiliates, including Marc B. Nathanson and
other members of the senior management team, currently own varying interests in
and operate additional cable television systems, currently manage additional
cable television systems for the accounts of others, and, subject to the terms
of the Partnership Agreement, may form, jointly or separately, other limited
partnerships or entities to acquire, develop and operate other cable television
systems. The current management activities of FHGLP's senior management are
primarily on behalf of certain affiliated cable television partnerships, for
which FHGLP receives management fees. As a result of such relationships,
however, conflicts of interest may arise at various stages with respect to the
allocation of time, personnel and other resources of FHGLP and such other
affiliates and members of senior management.
FHGLP has leased certain office space for its corporate
financial center (located in Pasadena, California) from a partnership owned by
Marc B. Nathanson and his wife. The lease commenced on October 1, 1990 and has
been extended through September 30, 2005. The rent is currently approximately
$33,000 per month and is indexed for inflation. The terms of the current lease
have been negotiated on an arm's length basis. It is expected that any future
modifications to the leasing agreement will be approved by the members of the
Board of Representatives of FHGLP other than Marc B. Nathanson.
APPRAISAL PROCESS
As previously disclosed in prior filings with the Commission,
the Partnership may, in the sole discretion of its General Partner, sell
individual cable Systems and may also sell all or substantially all of the
Partnership's assets to the General Partner or its affiliates, which include
FHGLP. Any such sale would be
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subject to certain terms and conditions set forth in the Partnership Agreement
and summarized below and in prior filings with the Commission. The Partnership
has stated in its prior filings with the Commission that the General Partner
and its affiliates may consider and otherwise investigate the exercise of the
purchase rights provided to them under the Partnership Agreement from time to
time at their discretion.
The Partnership Agreement provides that any sale of
Partnership assets to the General Partner or any of its affiliates must be made
in cash pursuant to the "Appraisal Process." "Appraisal Process" is defined in
the Partnership Agreement as an appraisal undertaken by three independent
nationally recognized experts in the cable television field to determine the
fair market value of the cable systems to be appraised. One such appraiser
must be appointed by the General Partner, one by the Partnership's Conflicts
Committee and the third by the first two appraisers acting jointly. The
Partnership Agreement specifies that the Conflicts Committee be comprised of
the independent members of the Advisory Committee (i.e., the members of the
Advisory Committee that are not affiliates of, or otherwise have certain
material business or professional relationships with, the General Partner or
its affiliates). The appraised value pursuant to the Appraisal Process will be
deemed to be the median of the three appraised values and, if any appraised
value is expressed as a range, then in calculating the median, the mean amount
of the range of such appraised value shall be used. No appraisals arising in
affiliated transactions may be conducted at the Partnership's expense.
Appraisers selected pursuant to the Appraisal Process may not have any interest
in, nor any material business or professional relationship with, the
Partnership, the General Partner or any of its affiliates. For the purposes of
determining whether or not the business or professional relationship or joint
investment is material, the gross revenue derived by the appraiser from the
Partnership, the General Partner or any affiliate shall not exceed 5% of the
annual gross revenue derived by the appraiser from all sources. Except under
certain circumstances, sales of assets by the Partnership to the General
Partner or its affiliates prior to January 1, 1997 would have required an
affirmative vote of a majority of limited partner interests outstanding and not
owned by the General Partner or its affiliates. No such vote is required or
will be sought in the future.
If the limited partners propose to sell Partnership assets
without the approval of the General Partner, the General Partner has a right of
first refusal to purchase such assets on the same terms and conditions as
agreed to by the prospective purchaser. The General Partner also has a right to
purchase Partnership assets without a vote of the limited partners if the
General Partner is removed without cause.
Though the General Partner is not required to purchase the
Partnership's cable systems, it or one of its affiliates may determine to do so
subject to the foregoing restrictions. Limited partners will not be entitled
to share in any profits of the General Partner or its affiliates from the
operation or sale of any cable systems subsequent to the sale of such systems
to the General Partner or any of its affiliates.
As previously disclosed, in a meeting held in Los Angeles on
August 27, 1996, the General Partner formally advised the Partnership's
Advisory Committee and Conflicts Committee that it desired to explore on a
preliminary basis the possibility of exercising the purchase rights contained
in the Partnership Agreement and summarized above. Accordingly, the General
Partner requested that the Appraisal Process be commenced and that, in
compliance therewith, the Conflicts Committee select an independent nationally
recognized expert in the cable television field to determine the fair market
value of each of the Partnership's cable Systems. Pursuant to the Partnership
Agreement, the sole obligation of the Conflicts Committee in connection with
the Appraisal Process is to select one of the three appraisers. The Conflicts
Committee selected Arthur Andersen, LLP; the General Partner selected Kane
Reece Associates, Inc.; and those two appraisers selected Communications Equity
Associates (the "Appraisers").
Each of the Appraisers is a nationally recognized cable system
appraisal firm and is continually engaged in the valuation of cable systems.
Each of the Appraisers, other than Arthur Andersen LLP, has from time to time
provided valuation services to the Partnership and its affiliates for which
they have received customary compensation.
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On February 6, 1997, each of the Appraisers delivered
summaries of the results of their appraisals (the "Appraisals"), and
subsequently delivered their reports to the Partnership. The reports are filed
as exhibits to this Annual Report on Form 10-K. These Appraisals address the
value of the appraised Partnership assets and do not give effect to any debt or
other liabilities of the Partnership. As noted elsewhere in the Report, the
Partnership has significant amounts of debt outstanding under its Bank Credit
Agreement. Based solely upon the Appraisals, as of December 31, 1996, the
Partnership understands the appraised values of the five cable Systems owned by
the Partnership to be as follows (dollars in thousands):
Communications
Equity
Kane Reece Arthur Associates, Inc.
----------------
Associates, Inc. Andersen LLP (MEDIAN)
---------------- ------------ --------
Redmond, OR $ 7,680 $ 5,882 $ 6,200
Burke County, NC 20,570 17,685 19,000
Somerset, KY 33,590 30,277 31,000
Centreville, MD 23,980 20,445 23,000
California City, CA 3,500 2,791 2,800
---------
Total $82,000
=======
As noted above, the Appraisal Process dictates that the
appraised value of an asset to be appraised shall be the median Appraisal for
such asset.
The reports related to each Appraisal set forth certain
matters considered by the respective Appraisers. In connection with rendering
their Appraisals, the Appraisers performed a variety of financial analyses
which are summarized in the respective Appraisals. No limitations were imposed
by the Partnership with respect to the investigations made or the procedures
followed by the Appraisers in rendering their Appraisals. The General Partner
is under no obligation to exercise its purchase right in full or in part, nor
can there be any assurance that the Partnership would otherwise be able to sell
all or any portion of its assets at prices consistent with the Appraisals.
Actual sales in the marketplace could be at valuations materially above or
below those reflected by the Appraisals. Such Appraisals should accordingly
not be assumed to be a representation as to the implied value of limited
partnership interests in the Partnership, nor as to the proceeds that might be
realized by the Partnership in connection with a sale or other disposition of
all or any portion of the assets of the Partnership, whether to the General
Partner, an affiliate or otherwise.
The Appraisals, by their respective terms, are based upon
numerous sources of information including data supplied by the General Partner,
which included certain projections regarding 1997 operating results for the
Partnership prepared in the ordinary course of its business. The Partnership
does not as a matter of course make public any forecasts as to its future
financial performance. The 1997 projections were prepared solely for internal
use and not with a view to public disclosure or compliance with the published
guidelines of the Commission or the American Institute of Certified Public
Accountants regarding projections and were not prepared with the assistance of,
or reviewed by, independent accountants. Such 1997 projections were provided
to the Appraisers solely for the purposes of their Appraisals. NONE OF THE
GENERAL PARTNER, THE PARTNERSHIP, ANY AFFILIATE OR ANY PARTY TO WHOM THE
PROJECTIONS WERE PROVIDED ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY,
REASONABLENESS, ACCURACY OR COMPLETENESS OF THE 1997 PROJECTIONS. While
presented with numerical specificity, the 1997 projections were based on a
variety of assumptions relating to the businesses of the Partnership, industry
performance, general business and economic conditions and other matters which
are subject to significant uncertainties and contingencies, many of which are
beyond the Partnership's control, and, therefore, such 1997 projections are
inherently imprecise and there can be no assurance that they will be realized.
Also, actual future results may vary materially from those shown in the
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1997 projections. The Partnership is not under any obligation to update the
1997 projections at any future time.
Based upon the aggregate of the median Appraisals of the
Partnership's cable Systems (the "Aggregate Appraised Valuation") and assuming
a hypothetical liquidation of the Partnership on December 31, 1996 involving
the sale of those Systems on that date for an amount equal to the Aggregate
Appraised Valuation, the estimated cash distribution to unitholders would have
been approximately $851 per limited partnership unit (the "Hypothetical
Estimated Per Unit Distribution") (based upon 71,879 units outstanding). The
Hypothetical Estimated Per Unit Distribution was calculated assuming net
liabilities on the balance sheet of the Partnership, excluding property, plant
and equipment and intangible assets ("Net Liabilities"), of approximately $20.2
million (as of December 31, 1996). The Hypothetical Estimated Per Unit
Distribution assumes that the Net Liabilities as of December 31, 1996 represent
the only payments, other than certain reserved expenses, that would have been
required to be made by the Partnership prior to the distribution of cash to the
unitholders. This assumption will likely prove to be invalid. Specifically,
this method assumes all of the cable systems are sold in a single transaction.
If the Partnership sells the assets over time in separate transactions, for
example, it could incur significant transaction costs and there would be a
significant delay in the distribution of funds to limited partners. Further,
even if sold in a single transaction to the General Partner, the transfer of
the related franchises would require certain approvals of local franchise
authorities that may require a significant period of time to be obtained.
Accordingly, the Hypothetical Estimated Per Unit Distribution is presented for
illustrative purposes only and does not necessarily represent amounts the
Partnership could have distributed to unitholders on December 31, 1996 or any
date thereafter. In the event any of the Partnership's cable systems are sold,
the actual timing and amount of any related distribution to partners cannot be
predicted at this time.
The General Partner has made no decision whether to purchase
any or all of the Partnership's five cable television Systems. Any decision by
the General Partner will, as permitted by the Partnership Agreement, be made on
a System-by-System basis. Any decision by the General Partner or its
affiliates to acquire any of the Partnership's Systems will further be subject
to, among other things, (i) the availability of the necessary financing on
terms acceptable to the acquiring affiliate; (ii) the relative attractiveness
of available alternative and investment opportunities; (iii) the receipt of any
necessary regulatory approvals and consents; and (iv) other future developments
relating to the Partnership and the cable television industry, general economic
conditions and other future developments.
Although the foregoing reflects activities which the General
Partner and certain of its affiliates are currently exploring with respect to
the Partnership, the foregoing is subject to change at any time. Accordingly,
there can be no assurance that the sale of the cable television Systems of the
Partnership in accordance with the rights of the General Partner and its
affiliates under the terms of the Partnership Agreement as described above or
otherwise will be pursued, or if pursued, when and if any of them will be
successfully consummated. The foregoing description of the Appraisal Process
and the resulting appraisal values is qualified by reference to the more
complete information and the related qualifications provided or referred to in
the Partnership's Current Reports on Form 8-K dated August 27, 1996, October
17, 1996 and February 6, 1997, and the full text of the Partnership Agreement
and related Appraisals filed as exhibits hereto.
Forward-looking statements in this Report including, in
particular, the statements made above under the caption "Appraisal Process,"
are made pursuant to the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that such
forward-looking statements involve risks and uncertainties including, without
limitation, the effects of legislative and regulatory changes; the potential of
increased levels of competition for the Partnership; technological changes; the
Partnership's dependence upon third-party programming; the potential exercise
of the purchase right as described above; the absence of Unitholder
participation in the governance and management of the Partnership; limitations
on borrowings by the Partnership contained in the Partnership Agreement; the
management fees payable to the General Partner; the exoneration and
indemnification provisions contained in the Partnership Agreement
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relating to the General Partner and other; potential conflicts of interest
involving that General Partner and its affiliates; the potential liability of
Unitholders to creditors of the partnership to the extent of any distribution
made to such Unitholder if, immediately after such distribution (whether or not
the Partnership continues to exist), the remaining assets of the Partnership
are not sufficient to pay its then outstanding liabilities of the Partnership;
and other risks detailed from time to time in the Partnership's periodic
reports filed with the Commission.
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management
services operations of FHGI. Effective March 29, 1993, FHGLP began receiving
management fees and reimbursed expenses which had previously been paid by the
Partnership, as well as certain other affiliated entities, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages domestic and international cable operations
owned by it as well as the operations of the Partnership, Falcon Video
Communications and, through its management of the operation of Falcon
Cablevision (a subsidiary of FHGLP), the partnerships of which Enstar
Communications Corporation is the corporate general partner. On September 30,
1988, Falcon Cablevision acquired all of the outstanding stock of Enstar
Communications Corporation. Certain members of management of the General
Partner have also been involved in the management of other cable ventures,
including recent international cable ventures that FHGLP has entered into or
been associated with. FHGLP contemplates entering into other cable ventures,
including ventures similar to the Partnership.
These affiliations subject FHGI, FHGLP and the General Partner
and their management and affiliates to certain conflicts of interest. Such
conflicts of interest relate to the time and services management will devote 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. 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 or
disposition opportunities are preserved for which partnerships.
The Partnership has entered into a management agreement with
FHGLP and may enter into future agreements, including joint ventures and
agreements relating to programming services with the General Partner, FHGLP or
their respective affiliates. Thus, a conflict of interest could arise among
the General Partner, FHGLP or their respective affiliates and the Partnership.
Although any such agreements will not be negotiated at arm's length, the
General Partner will cause the terms of all such transactions among the
Partnership and the General Partner, FHGLP and their respective affiliates to
be no less favorable to the Partnership than those which could be obtained by
the Partnership from independent third parties.
Substantial fees are payable to the General Partner and FHGLP
in connection with the Partnership. See Item 11., "Executive Compensation."
The Partnership may also enter into joint ventures with FHGLP
or its affiliates, provided that (i) such joint venturer has substantially
identical investment objectives as the Partnership, (ii) there are no duplicate
fees, (iii) the compensation to the sponsor of such joint venturer is
substantially identical, (iv) each joint venturer has a right of first refusal
as to the other's interest in the joint venture and (v) the investment of each
joint venturer is on substantially the same terms and conditions.
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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 15701 of the California Corporations Code provides that any
limited partner may bring a class action on behalf of all or a class of limited
partners to enforce any claim common to those limited partners against a
limited partnership or any or all of its general partners, without regard to
the number of those limited partners, and such action shall be governed by the
law governing class actions generally.
Section 15702 of the California Corporations Code also allows
a partner to maintain a partnership derivative action if certain conditions are
met. 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
and its affiliates will not be liable to the Partnership or its limited
partners for, and shall be indemnified by the Partnership for any act or
omission of the General Partner or its officers, directors or affiliates in
good faith on behalf of the Partnership and in a manner reasonably believed by
such Person to be within the scope of the authority granted to the General
Partner by the Partnership Agreement and in the best interests of the
Partnership, except for acts or omissions constituting negligence, misconduct
or breach of fiduciary duty. Therefore, limited partners will have a more
limited right of action than they would have absent the limitations in the
Partnership Agreement. In addition, the Partnership Agreement provides that
the members of the Advisory Committee who are not affiliated with the General
Partner will not be liable to the Partnership or its limited partners, and
shall be indemnified by the Partnership for any liability they incur on account
of, any act performed or omitted by such indemnitee in good faith and if the
indemnitee's conduct did not amount to gross negligence or fraud. Affiliated
members will be subject to the same liability and indemnification standards as
other affiliates of the General Partner. In addition, the Partnership
maintains insurance on behalf of the General Partner, members of the Advisory
Committee and such other persons as the General Partner shall determine against
any liability that may be asserted against or expense that may be incurred by
such person and against which the Partnership would be entitled to indemnify
such person pursuant to the Partnership Agreement. 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.
The foregoing summary describes in general terms the remedies
available under state and federal law to limited partners for breach of
fiduciary duty by a general partner and is based on statutes, rules and
decisions as of the date of this Report on Form 10-K. As this is a rapidly
developing and changing area of the law, limited partners who believe that a
breach of fiduciary duty by the General Partner has occurred should consult
their own counsel as to the evaluation of the status of the law at such time.
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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 and Schedules on page F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial
Statements and Schedules 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
1. October 17, 1996 (Selection of Appraisers)
2. October 24, 1996 (JJJ Group Tender)
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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 this 25th
day of March 1997.
FALCON CLASSIC CABLE INCOME
PROPERTIES, L.P.
By Falcon Classic Cable Investors, L.P.
Managing General Partner
By Falcon Holding Group, L.P.
General Partner
By Falcon Holding Group, Inc.
General Partner
By /s/ Michael K. Menerey
-----------------------------
Michael K. Menerey
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 25th day of March 1997.
Signature Title
- --------- -----
Director of Falcon Holding Group, Inc.
and Chief Executive Officer of the Registrant
/s/ Marc B. Nathanson (Principal Executive Officer)
- -----------------------------
Marc B. Nathanson
Chief Financial Officer and
Secretary of the Registrant
/s/ Michael K. Menerey (Principal Financial and Accounting Officer)
- -----------------------------
Michael K. Menerey
/s/ Stanley S. Itskowitch Director of Falcon Holding Group, Inc.
- -----------------------------
Stanley S. Itskowitch
-48-
49
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Auditors F-2
Balance Sheets - December 31, 1995 and 1996 F-3
Financial Statements for each of the three years
in the period ended December 31, 1996:
Statements of Operations F-4
Statements of Partners' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-17
All other schedules have been omitted because they are either not required,
not applicable or the information has otherwise been supplied.
F-1
50
REPORT OF INDEPENDENT AUDITORS
Partners
Falcon Classic Cable Income Properties, L.P.
We have audited the accompanying balance sheets of Falcon
Classic Cable Income Properties, L.P. (a California limited partnership) as of
December 31, 1995 and 1996, and the related statements of operations, partners'
equity, and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedule listed in
the index at Item 14(a)2. These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule 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 Falcon
Classic Cable Income Properties, L.P. at December 31, 1995 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-2
51
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
BALANCE SHEETS
============================================
December 31,
---------------------
1995 1996
------- -------
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $6,137 $7,126
Receivables, less allowance of $40,000
and $31,000 for possible losses 657 660
Prepaid expenses and other 713 463
Cable materials, equipment and supplies 740 1,053
Property, plant and equipment, less accumulated
depreciation and amortization 31,986 30,655
Franchise cost and goodwill, less accumulated
amortization of $12,358,000 and $15,029,000 20,056 17,409
Customer lists and other intangible costs, less
accumulated amortization of $5,928,000 and $2,684,000 2,670 1,968
------- -------
$62,959 $59,334
======= =======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Notes payable $27,000 $24,300
Accounts payable 499 542
Accrued expenses 3,062 2,509
Payable to general partner 1,401 1,006
Customer deposits and prepayments 149 144
------- -------
TOTAL LIABILITIES 32,111 28,501
------- -------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
General partner 401 401
Limited partners 30,669 30,654
Notes receivable from general partner (222) (222)
------- -------
TOTAL PARTNERS' EQUITY 30,848 30,833
------- -------
$62,959 $59,334
======= =======
See accompanying
notes to financial statements.
F-3
52
FALCON CLASSIC INCOME PROPERTIES, L.P.
STATEMENTS OF OPERATIONS
--------------------------------------
Year ended December 31,
----------------------------------------
1994 1995 1996
-------- -------- --------
(Dollars in thousands, except net
loss per limited partnership units)
REVENUES $17,382 $18,363 $19,826
-------- -------- --------
EXPENSES:
Service costs 5,281 6,042 6,013
General and administrative expenses 2,825 2,589 2,717
Management fees and reimbursed expenses 1,391 1,469 1,586
Depreciation and amortization 8,924 8,526 7,712
-------- -------- --------
Total expenses 18,421 18,626 18,028
-------- -------- --------
Operating income (loss) (1,039) (263) 1,798
OTHER INCOME (EXPENSE)
Interest income 20 41 314
Interest expense (1,796) (2,051) (2,127)
Other income 4 - -
-------- -------- --------
NET LOSS $(2,811) $(2,273) $ (15)
======== ======== ========
NET LOSS PER LIMITED
PARTNERSHIP UNIT $(38.71) $(31.30) $ (0.21)
======== ======== ========
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING
DURING PERIOD 71,879 71,879 $71,879
======== ======== ========
See accompanying
notes to financial statements.
F-4
53
FALCON CLASSIC INCOME PROPERTIES, L.P.
STATEMENTS OF PARTNERS' EQUITY
--------------------------------------
Notes
Receivable
from
General Limited General
Partner Partners Partner Total
-------------------------------------------------------------------------------
(Dollars In Thousands)
PARTNERS' EQUITY,
January 1, 1994, $ 460 $ 36,515 $ (230) $ 36,745
Payments on notes - - 8 8
Distributions to partners (8) (813) - (821)
Net loss for year (28) (2,783) - (2,811)
----------- ------------ ------------- ------------
PARTNERS' EQUITY,
December 31, 1994 424 32,919 (222) 33,121
Net loss for year (23) (2,250) - (2,273)
----------- ------------ ------------- ------------
PARTNERS' EQUITY,
December 31, 1995 401 30,669 (222) 30,848
Net loss for year - (15) - (15)
----------- ------------ ------------- ------------
PARTNERS' EQUITY,
December 31, 1996 $ 401 $ 30,654 $ (222) $ 30,833
=========== ============ ============= ============
See accompanying
notes to financial statements.
F-5
54
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
STATEMENTS OF CASH FLOWS
---------------------------------------------
Year ended in December 31,
----------------------------------------------
1994 1995 1996
----------------------------------------------
(Dollars in Thousands)
Cash flows from operating activities:
Net loss $ (2,811) $ (2,273) $ (15)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 8,924 8,526 7,712
Gain on retirement of assets (4) - -
Provision for losses on receivables 281 234 171
Amortization of deferred loan cost - 4 27
Increase (decrease) from changes in:
Receivables (667) (98) (175)
Prepaid expenses and other assets (159) (254) 250
Cable materials, equipment and supplies - (324) (313)
Accounts payable and other liabilities 526 671 (910)
--------- ---------- ------------
Net cash provided by operating activities $ 6,090 $ 6,486 $ 6,747
--------- ---------- ------------
Cash flows from investing activities:
Capital expenditures (3,982) (5,713) (3,033)
Increase in intangible assets (35) (167) (25)
--------- ---------- ------------
Net cash used in investing activities $ (4,017) $ (5,880) $ (3,058)
--------- ---------- ------------
Cash flows from financing activities:
Repayments of notes payable $ (1,300) $ (18,000) $ (2,700)
Borrowings under notes payable 1,500 22,500 -
Distributions to partners (1,671) - -
Capital contributions 8 - -
--------- ---------- ------------
Net cash provided by (used in) financing activities (1,463) 4,500 (2,700)
--------- ---------- ------------
Net increase in cash and cash equivalents 610 5,106 989
Cash and cash equivalents, at beginning of year 421 1,031 6,137
--------- ---------- ------------
Cash and cash equivalents, at end of year $ 1,031 $ 6,137 $ 7,126
========= ========== ============
See accompanying
notes to financial statements.
F-6
55
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Falcon Classic Cable Income Properties, L.P. (the "Partnership")
was formed in 1989 to acquire, own, operate and otherwise invest principally in
existing cable television systems in suburban and rural areas located in
California, Kentucky, Maryland, North Carolina and Oregon. The General Partner
of the Partnership is Falcon Classic Cable Investors, L.P., a California limited
partnership ("General Partner"). The general partner of the General Partner is
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"). The
general partner of FHGLP is Falcon Holding Group, Inc., a California corporation
("FHGI").
The financial statements do not give effect to any assets that
the partners may have outside 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 $6,000,000 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:
Headend buildings and equipment 7-16 years
Trunk and distribution 5-15 years
Microwave equipment 7-15 years
OTHER:
Furniture and office equipment 5-7 years
Vehicles and construction equipment 3-10 years
Leasehold improvements Life of lease
Buildings 15 years
FRANCHISE COST AND GOODWILL
The excess of cost over the fair value of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises and goodwill. In addition, franchise cost includes capitalized costs
incurred in obtaining new franchises. These costs (primarily legal fees) are
direct and incremental to the acquisition of the franchise and are amortized
using the straight-line method over the lives of the franchises, ranging up to
12 years. 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.
F-7
56
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
--------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
CUSTOMER LISTS AND OTHER INTANGIBLE COSTS
Customer lists and other intangible costs include customer
lists and organization costs which are amortized using the straight-line method
over five years and covenants not to compete which are amortized over the life
of the covenant.
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to
interest expense over the life of the related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an on-going basis the
recoverability of intangible assets, including goodwill, 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
generally approximates discounted cash flows. The Partnership also evaluates
the amortization periods of assets, including goodwill and other intangible
assets, to determine whether events or circumstances warrant revised estimates
of useful lives.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services
are provided.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market
risk, the Partnership enters into various transactions that involve contracts
and financial instruments with off-balance-sheet risk, including interest rate
swap and interest rate cap agreements. The Partnership enters into these
agreements in order to manage the interest-rate sensitivity associated with its
variable-rate indebtedness. The differential to be paid or received in
connection with interest rate swap and interest rate cap agreements is
recognized as interest rates change and is charged or credited to interest
expense over the life of the agreements. Gains or losses for early termination
of those contracts are recognized as an adjustment to interest expense over the
remaining portion of the original life of the terminated contract.
INCOME TAXES
The Partnership pays no income taxes as an entity. All of the
income, gains, losses, deductions and credits of the Partnership are passed
through to the partners. The basis in the Partnership's assets and liabilities
differs for financial and tax reporting purposes. At December 31, 1996, the
book basis of the Partnership's net assets exceeds its tax basis by $19.1
million.
F-8
57
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
EARNINGS AND LOSSES PER LIMITED PARTNERSHIP UNIT
Earnings and losses are allocated 99% to the limited partners
and one percent to the General Partner. Earnings and losses per limited
partnership Unit is based on the weighted average limited partnership Units
outstanding during the period.
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 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
----------------------------
1995 1996
----------------------------
(Dollars in Thousands)
Cable television systems $ 44,871 $ 47,158
Furniture and equipment 973 1,033
Vehicles 654 746
Land, buildings and improvements 845 846
---------- --------
47,343 49,783
Less accumulated depreciation
and amortization (15,357) (19,128)
---------- --------
$ 31,986 $ 30,655
========== ========
F-9
58
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 3 - 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.
Notes Payable
The carrying amount approximates fair value due to the variable
rate nature of the notes payable.
Interest Rate Hedging Agreements
The fair value of interest rate hedging agreements is estimated
by obtaining quotes from brokers as to the amount either party would be required
to pay or receive in order to terminate the agreement.
The following table depicts the fair value of each class of
financial instruments for which it is practicable to estimate that value as of
December 31:
1995 1996
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
Value (1) Value Value (1) Value
-----------------------------------------------------------------------
(Dollars in Thousands)
Cash and cash equivalents $ 6,137 $ 6,137 $ 7,126 $ 7,126
Note Payable (Note 4) (2) $ 27,000 $ 27,000 $ 24,300 $ 24,300
Notional Fair Notional Fair
Amount Value(4) Amount(3) Value(4)
-----------------------------------------------------------------------
Interest Rate Hedging Agreements
(Note 4):
Interest rate swaps $ 20,000 $ (347) $ 20,000 $ (36)
Interest rate caps 5,000 - - -
- ----------------
(1) Carrying amounts represent cost basis.
(2) Due to the variable rate nature of the indebtedness, the fair value is
assumed to approximate the carrying value.
(3) The amount on which the interest was computed in 1995 was $15 million for
swaps and $5 million for caps. The amount in 1996 was $20 million for
swaps.
(4) The amount that the Partnership estimates it would receive (pay) to
terminate the hedging agreements. This amount is not recognized in the
financial statements.
F-10
59
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 4 - NOTES PAYABLE
In September 1992, the Partnership entered into a $34 million
credit agreement with four banks (the "Bank Credit Agreement"). The Bank
Credit Agreement provides for annual interest rates ranging from prime plus
0.5% to prime plus 2.5% or LIBOR plus 2.25% to LIBOR plus 4.25%. At December
31, 1996, the weighted average interest on the outstanding balance (including
the effects of interest rate swap transactions) was 7.8% per annum.
On April 10, 1995, the Partnership executed an amendment to
the Bank Credit Agreement (the "Amendment") which, among other things, reduced
the total facility from $34 million to $29 million. On December 31, 1995, the
outstanding principal balance of $27 million converted to a term loan with
required quarterly payments commencing March 31, 1996 through June 30, 2000,
the maturity date of the term loan.
The present scheduled repayments of the term loan are as
follows: $4.1 million in 1997; $5.4 million in 1998; $6.8 million in 1999 and
$8 million thereafter.
The Bank Credit Agreement also contains restrictions relating
to, among other things, additional borrowings, guarantees, mergers and
distributions to partners. The debt is collateralized by a security interest
in substantially all of the assets of the Partnership. Management believes
that the Partnership was in compliance with such covenants at December 31,
1996.
The Partnership Agreement provides that without the approval
of a majority of interests of limited partners, the Partnership may not incur
any borrowings unless the amount of such borrowings together with all
outstanding borrowings does not exceed 30% of the greater of the aggregate cost
or current fair market value of the Partnership's assets as determined by the
General Partner. The Partnership Agreement also limits borrowings incurred to
fund distributions to partners to not more than 10% of Gross Proceeds from the
public offering of the Units (approximately $7.2 million). As of December 31,
1996, the Partnership had incurred an aggregate of approximately $5.4 million
in borrowings to make distributions to partners.
The Partnership utilizes interest rate hedging agreements to
establish long-term fixed interest rates on a portion of its variable rate debt
in order to manage the interest rate sensitivity on its borrowings. At December
31, 1996, the Partnership participated in interest rate swap contracts with
aggregate notional principal of $20 million under which the Partnership pays
interest at fixed rates ranging from 5.75% to 6.51% (weighted average rate of
6.12%), and receives interest at variable LIBOR-based rates. These contracts
expire in 1997, 1998 and 1999.
The hedging agreements resulted in additional interest expense
of $82,000, $19,000 and $117,000 for the years ended December 31, 1994, 1995
and 1996, respectively. The Partnership does not believe that it has any
significant risk of exposure to non-performance by any of its counterparties.
NOTE 5 - NOTES RECEIVABLE FROM GENERAL PARTNER
In accordance with the Partnership's Limited Partnership
Agreement, capital contributions of the General Partner were contributed
one-half in cash and one-half in non-interest bearing notes payable on demand.
Additionally, according to the Limited Partnership Agreement, a minimum of 50%
of all distributions received by the General Partner are to be returned to the
Partnership to reduce the notes receivable balance.
F-11
60
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 6 - MANAGEMENT COMPENSATION
The Partnership is obligated to pay FHGLP a 5% management fee
based on the gross operating revenues of the Partnership. In addition, FHGLP
is entitled to reimbursement from the Partnership for certain expenses relating
to the performance of management functions as described in the management
agreement. Such reimbursable expenses are limited to 3% of gross operating
revenues. Management fees and reimbursed expenses amounted to approximately
$1.4 million, $1.5 million and $1.6 million for the years ended December 31,
1994, 1995 and 1996, respectively.
Beginning in 1991, up to 50% of management fees have not been
paid currently unless adjusted operating cash, as defined, for a particular
month exceeded a 10% annualized return, calculated with respect to outstanding
partnership Units. To the extent that adjusted operating cash for any month
exceeds the 10% annualized return, FHGLP may recover previously deferred fees,
without interest. In compliance with these provisions, FHGLP received its
standard management fee for 1996 and recovered $900,000 in previously deferred
management fees. As a result, at December 31, 1995 and 1996, deferred
management fees amounted to $1.2 million and $276,000, respectively. At
December 31, 1996, the Partnership's management anticipates that adjusted
operating cash in the first quarter of 1997 will exceed the 10% requirement,
thereby permitting the Partnership to pay the remaining deferred fees to FHGLP.
In March 1993, FHGLP assumed the operations of FHGI. As
successor to the management service operations of FHGI, FHGLP is due management
fees and reimbursed expenses which had previously been payable to FHGI.
NOTE 7 - PARTNERSHIP MATTERS
The Partnership sold Units of limited partnership interest
during 1989 and 1990 resulting in an aggregate of 71,879 Units sold with the
Partnership receiving net proceeds amounting to approximately $62.7 million
(net of $9.2 million offering costs).
Distributions are based on the Partnership's definition of
cash available for distributions. All partners admitted to the Partnership for
a period of one year received distributions from available Partnership funds
yielding at least a 10% annual rate of return on their original investment
through June 1993, after which they received a 7% annual rate of return on
their original investment, until the Partnership discontinued distributions
subsequent to the April 15, 1994 payment.
Income and losses of the Partnership are allocated 99% to the
limited partners and one percent to the General Partner. Cash Available for
Distributions, as defined in the Partnership agreement, are allocated 99% to
the limited partners and one percent to the General Partner. Distributions of
Other Distributable Funds (as defined) are allocated 99% to limited partners
who own Units which have been issued and outstanding for at least one year and
one percent to the General Partner. Such distributions to limited partners
will be made pro-rata based on the number of such Units held by each limited
partner. The limited partners will receive 99% and the General Partner will
receive one percent of distributions of Available Sale Proceeds (as defined)
until the limited partners have received Payback. After the limited partners
have received Payback, the limited partners will receive 75% and the General
Partner will receive 25% of Available Sale Proceeds.
F-12
61
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 7 - PARTNERSHIP MATTERS (CONTINUED)
APPRAISAL PROCESS
The Partnership may, in the sole discretion of its General
Partner, sell individual cable systems and may also sell all or substantially
all of the Partnership's assets to the General Partner or its affiliates, which
include FHGLP. Any such sale would be subject to certain terms and conditions
set forth in the Partnership Agreement and summarized below.
The Partnership Agreement provides that any sale of Partnership
assets to the General Partner or any of its affiliates must be made in cash
pursuant to the "Appraisal Process." "Appraisal Process" is defined in the
Partnership Agreement as an appraisal undertaken by three independent nationally
recognized experts in the cable television field to determine the fair market
value of the cable systems to be appraised. One such appraiser must be
appointed by the General Partner, one by the Partnership's Conflicts Committee
and the third by the first two appraisers acting jointly. The appraised value
pursuant to the Appraisal Process will be deemed to be the median of the three
appraised values. No appraisals arising in affiliated transactions may be
conducted at the Partnership's expense. Except under certain circumstances,
sales of assets by the Partnership to the General Partner or its affiliates
prior to January 1, 1997 would have required an affirmative vote of a majority
of limited partner interests outstanding and not owned by the General Partner or
its affiliates. No such vote is required or will be sought in the future.
In a meeting held in Los Angeles on August 27, 1996, the
General Partner formally advised the Partnership's Advisory Committee and
Conflicts Committee that it desired to explore on a preliminary basis the
possibility of exercising the purchase rights contained in the Partnership
Agreement and summarized above. Accordingly, the General Partner requested
that the Appraisal Process be commenced and that, in compliance therewith, the
Conflicts Committee select an independent nationally recognized expert in the
cable television field to determine the fair market value of each of the
Partnership's cable systems. The Conflicts Committee selected Arthur Andersen,
LLP; the General Partner selected Kane Reece Associates, Inc.; and those two
appraisers selected Communications Equity Associates (the "Appraisers").
On February 6, 1997, each of the Appraisers delivered
summaries of the results of their appraisals (the "Appraisals"), and
subsequently delivered their reports to the Partnership. These Appraisals
address the value of the appraised Partnership assets and do not give effect to
any debt or other liabilities of the Partnership. Based solely upon the
Appraisals, as of December 31, 1996, the Partnership understands the appraised
values of the five cable systems owned by the Partnership to be as follows
(dollars in thousands):
Communications
Equity
Associates, Inc.
Kane Reece Arthur ----------------
Associates, Inc. Andersen LLP (MEDIAN)
---------------- ------------ --------
Redmond, OR $ 7,680 $ 5,882 $ 6,200
Burke County, NC 20,570 17,685 19,000
Somerset, KY 33,590 30,277 31,000
Centreville, MD 23,980 20,445 23,000
California City, CA 3,500 2,791 2,800
---------
Total $82,000
=======
F-13
62
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 7 - PARTNERSHIP MATTERS (CONCLUDED)
As noted above, the Appraisal Process dictates that the
appraised value of an asset to be appraised shall be the median Appraisal for
such asset.
The General Partner has made no decision whether to purchase any
or all of the Partnership's five cable television Systems. Any decision by the
General Partner will, as permitted by the Partnership Agreement, be made on a
system-by-system basis. Any decision by the General Partner or its affiliates
to acquire any of the Partnership's systems will further be subject to, among
other things, (i) the availability of the necessary financing on terms
acceptable to the acquiring affiliate; (ii) the relative attractiveness of
available alternative and investment opportunities; (iii) the receipt of any
necessary regulatory approvals and consents; and (iv) other future developments
relating to the Partnership and the cable television industry, general economic
conditions and other future developments. Although the foregoing reflects
activities which the General Partner and certain of its affiliates are
currently exploring with respect to the Partnership, the foregoing is subject
to change at any time. Accordingly, there can be no assurance that the sale of
the cable television Systems of the Partnership in accordance with the rights
of the General Partner and its affiliates under the terms of the Partnership
Agreement as described above or otherwise will be pursued, or if pursued, when
and if any of them will be successfully consummated.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Partnership leases office space and equipment under
operating leases expiring at various dates through the year 2008. Pole
attachment fees are excluded from the following schedule since those contracts
may be canceled with notice. Future minimum rentals for operating leases at
December 31, 1996 are as follows:
Year Total
---- -----
(Dollars in Thousands)
1997 $ 75
1998 70
1999 70
2000 58
2001 40
Thereafter 119
------
$ 432
======
In most cases, management expects that, in the normal course
of business, these leases will be renewed or replaced by other leases. Rent
expense for the years ended December 31, 1994, 1995 and 1996 for all facilities
amounted to $83,000, $86,000 and $91,000, respectively.
In addition, the Partnership rents line space on utility poles
in some of the franchise areas it serves. These rentals amounted to $265,000,
$290,000 and $341,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Generally such pole rental agreements are short-term, but the
Partnership expects such rentals to continue in the future.
F-14
63
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Other commitments include approximately $650,000 at December
31, 1996 to upgrade certain portions of the Burke County, North Carolina cable
system over the next five years as required by the applicable franchise
agreements. However, provided it has the necessary liquidity, the Partnership
intends to rebuild the entire Burke County system during the next five years at
an estimated total cost of approximately $10 million. As discussed in Note 4,
the Partnership Agreement limits the Partnership's ability to increase its
borrowings. While the Partnership believes that anticipated cash flow from
operations will be sufficient to fund its minimum capital expenditure plans in
1997, the Partnership's management does not believe that the Partnership will
be able to fund its future rebuild plans entirely from operating cash flow.
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 services 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 negative impact on its operations and cash flow. It
also presently believes than 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. This
statute contains a significant overhaul of the federal regulatory structure. As
it pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain nonbasic programming services in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC is in the process of conducting a number
of additional rulemaking proceedings in order to implement many of the
provisions of the 1996 Telecom Act.
The Partnership has various contracts to obtain basic and
premium programming for its systems from program suppliers whose compensation
is generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership. The
Partnership's programming contracts are generally for a fixed period of time
and are subject to negotiated renewal. The Partnership does not have long-term
programming contracts for the supply of a substantial amount of its
programming. Accordingly, no assurance can be given that the Partnership's
programming costs will not increase substantially or that other materially
adverse terms will not be added to the Partnership's programming contracts.
Management believes, however, that the Partnership's relations with its
programming suppliers generally are good.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Partnership maintains a Key Executive Equity Program (the
"Program") for certain key employees designated by the Partnership.
Participants become vested over six years from the date of admission into the
Program. Under the terms of the Program, participants derive benefits, as
defined, in the Program based on achieving a specified operating margin
percentage in conjunction with a specific percentage increase in cash flow in
relation to the immediately preceding year. The effect of certain events and
transactions, such as system
F-15
64
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
-------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLANS (CONCLUDED)
acquisitions and dispositions, are adjusted on a pro forma basis in the
determination of benefits. There were no expenses incurred in 1994, 1995 and
1996. On February 14, 1995, the Board of Representatives of the General
Partner approved the termination of the Program. All current participants will
continue to vest in their contributions, but there will be no new participants
or future contributions.
The Partnership also 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 1994, 1995 or 1996.
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1994, 1995 and 1996, the
Partnership paid cash interest amounting to $1.7 million, $2.1 million and $2.2
million, respectively.
F-16
65
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions(a) period
----------- ---------- ---------- ------------- ----------
(Dollars in Thousands)
Allowance for possible
losses on receivables
Year ended December 31,
1994 $ 48 $ 281 $ (302) $ 27
1995 $ 27 $ 234 $ (221) $ 40
1996 $ 40 $ 171 $ (180) $ 31
(a) Write-off uncollectible accounts
F-17
66
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Limited Partnership of the Registrant filed with
the California Secretary of State on February 17, 1989.(1)
3.2 Agreement of Limited Partnership of the Registrant dated as of
February 21, 1989.(1)
3.3 Certificate of Limited Partnership of Falcon Classic Cable
Investors, L.P. filed with the California Secretary of State on
February 21, 1989.(1)
3.4 Agreement of Limited Partnership of Falcon Classic Cable
Investors, L.P. dated as of February 17, 1989 among Falcon
Holding Group, Inc., Marc B. Nathanson, Stanley S. Itskowitch,
Frank J. Intiso, and Michael K. Menerey.(1)
3.5 Articles of Incorporation of Falcon Holding Group, Inc.(1)
3.6 Bylaws of Falcon Holding Group, Inc.(1)
3.7 Amended and Restated Agreement of Limited Partnership of the
Registrant dated as of April 14, 1989.(1)
3.8 Amended and Restated Agreement of Limited Partnership of Falcon
Classic Cable Investors, L.P. dated as of April 1989 among Falcon
Holding Group, Inc., Marc B. Nathanson, Stanley S. Itskowitch,
Frank J. Intiso, and Michael K. Menerey.(1)
3.9 Amended and Restated Agreement of Limited Partnership of the
Registrant dated as of May 11, 1989.(1)
3.10 Amended and Restated Agreement of Limited Partnership of Falcon
Classic Cable Investors, L.P. dated as of May 10, 1989 among
Falcon Holding Group, Inc., Marc B. Nathanson, Stanley S.
Itskowitch, Frank J. Intiso, and Michael K. Menerey.(1)
3.11 Amended and Restated Agreement of Limited Partnership of the
Registrant dated as of May 15, 1989.(1)
3.12 First Amendment to Amended and Restated Agreement of Limited
Partnership of the Registrant dated as of July 24, 1989(3)
4.1 Subscription Documents(1)
10.1 Management Agreement between the Registrant and Falcon Holding
Group, Inc. dated as of May 15, 1989.(1)
10.2 Asset Purchase and Sale Agreement dated as of July 14, 1989 by
and among Jack Kent Cooke Incorporated, Cooke Media Group Inc.,
Cooke Cablevision of Cottage Grove, Inc., Cooke Cablevision,
Inc., and Pacific Telatronics, Inc., on one part, and Falcon
Holding Group, Inc., on another part.(1)
10.3 Assignment and Assumption of Purchase Agreement dated October 12,
1989 by and between Falcon Holding Group, Inc. and the
Registrant.(1)
10.4 Assignment and Assumption of Purchase Agreement dated October 12,
1989 by and between Falcon Holding Group, Inc. and the
Registrant.(1)
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67
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.5 Ordinance No. 568 of the City of Redmond, Oregon, granting a
non-exclusive franchise to McCaw Communications of Redmond to
operate and maintain a cable communications system within the
City limits of Redmond, Oregon passed and adopted by the City
Council on November 21, 1989.(3)
10.6 Ordinance No. 600 of the City of Redmond, Oregon dated November
8, 1984, approving the transfer and assignment of the rights to
construct, operate and maintain a community antenna television
system in the City of Redmond, Oregon.(3)
10.7 Ordinance No. 87-05 of the City of Redmond, Oregon dated February
24, 1987, approving the transfer and assignment of the rights to
construct, operate and maintain a community antenna television
system in the City of Redmond, Oregon.(3)
10.8 Ordinance No. 89-15 of the City of Redmond, Oregon dated November
21, 1989, approving the transfer and assignment to operate a
cable television system in the City of Redmond, Oregon.(3)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Burke
County, North Carolina.(7)
10.10 Assignment of Cable Television Franchise for Laurel County,
Kentucky.(7)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Pulaski
County, Kentucky, dated June 6, 1979.(7)
10.12 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Pulaski
County, Kentucky, dated October 26, 1988.(7)
10.13 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City
of Somerset, Kentucky.(7)
10.14 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Queen
Anne's County, Maryland.(7)
10.15 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for Talbot
County, Maryland.(7)
10.16 Asset Purchase Agreement dated as of July 20, 1991 by and between
Burke Cable Company Ltd. and the Registrant.(4)
10.17 Asset Purchase Agreement dated as of April 24, 1991 by and
between Cumberland Valley Cable TV Company and the Registrant.(5)
10.18 Asset Purchase Agreement dated as of May 1, 1991 by and between
Simmons Communications Company, LP and the Registrant.(6)
10.19 Asset Purchase Agreement dated as of September 20, 1991 by and
between CABLE TV FUND XII-BCB VENTURE and the Registrant.(8)
10.20 Ordinance No. 7-70-71 of the City of California City granting to
Desert Video, Inc. a franchise to construct, operate and maintain
a cable television system. Passed and adopted January 31,
1974.(8)
10.21 Resolution No. 4-86-1208 of the Council of the City of California
City approving the transfer of a CATV Franchise from Antelope
Valley Cablevision to Jones Intercable, Inc. Passed, approved
and adopted April 1, 1986.(8)
10.22 Ordinance No. 86-373 of the City of California City approved of
the transfer of the above cable television franchise from Desert
Video, Inc. to Jones Intercable, Inc. a Colorado Corporation.
Passed and adopted May 6, 1986.(8)
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68
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.23 Resolution No. 3-88-1301 of the City of California City approved
of the transfer of the above the above cable television franchise
from Jones Intercable, Inc., a Colorado Corporation, to Cable TV
Fund 12-BCD Venture. Passed and adopted March 15, 1988.(8)
10.24 Resolution No. 3-92-1463 of the City of California City granting
the transfer of the above cable company franchise from Cable TV
Fund 12-BCD Venture to Falcon Classic Cable Income Properties,
L.P. Passed and approved March 3, 1992.(8)
10.25 Credit Agreement by and among Falcon Classic Cable Income
Properties, L.P., The Bank of California, N.A., as Agent, Societe
Generale, NationsBank of Texas, N.A., The Connecticut National
Bank, N.A. and The Bank of California, N.A., as banks dated as of
September 10, 1992.(10)
10.26 Bill of Sale and Assignment whereby Falcon Holding Group, Inc.
assigned its interest in the Classic Management Agreement to
Falcon Holding Group, L.P. (10)
10.27 First amendment to the Credit Agreement by and among Falcon
Classic Cable Income Properties, L.P., The Bank of California,
N.A., as Agent, Societe Generale, NationsBank of Texas, N.A., The
Connecticut National Bank, N.A. and The Bank of California, N.A.,
as banks, dated as of April 10, 1995.(12)
10.28 Franchise Ordinance No. 450.2 and related documents granting
non-exclusive franchises to erect, construct, maintain and
operate community antenna television service facilities in Laurel
County, Kentucky. (12)
10.29 Franchise Agreement between the Town of Valdese, North Carolina,
and Falcon Classic Cable Income Properties, L.P., dated June 5,
1995.(14)
10.30 Fair Market Valuation Report for Falcon Classic Cable Income
Properties, L.P., as of December 31, 1996, dated February 20,
1997, prepared by Arthur Andersen LLP.
10.31 Valuation Analysis for Falcon Classic Cable Income Properties,
L.P., as of December 31, 1996, dated March 3, 1997, prepared by
Communications Equity Associates.
10.32 Fair Market Valuation Report for Falcon Classic Cable Income
Properties, L.P., as of December 31, 1996, dated March 10, 1997,
prepared by Kane Reece Assocates, Inc.
21.1 Subsidiaries: None
28.1 Prospectus Supplement dated November 6, 1989 to the Registrant's
Prospectus dated May 15, 1989.(2)
28.2 Prospectus Supplement dated April 17, 1990 to the Registrant's
Prospectus dated May 15, 1989 and the Prospectus Supplement dated
November 6, 1989.(3)
99.1 Memorandum to Unitholders dated August 13, 1993 relating to
distribution policy of the Partnership.(9)
99.2 Memorandum to Unitholders dated April 29, 1994 relating to
distribution policy of the Partnership.(11)
99.3 Memorandum to Unitholders dated October 24, 1996 relating to JJJ
tender offer.(15)
E-3
69
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-1, Registration No. 33-27215.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1989.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1990.
(4) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 0-18266 dated March 21, 1991.
(5) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 0-18266 dated May 2, 1991.
(6) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 0-18266 dated October 3, 1991.
(7) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1991.
(8) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1992.
(9) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18266 for the quarter ended June 30,
1993.
(10) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1993.
(11) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 0-18266 dated April 29, 1994.
(12) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1994.
(13) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-18266 for the quarter ended June 30,
1995.
(14) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-18266 for the fiscal year ended
December 31, 1995.
(15) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 0-18266 dated October 24, 1996.
E-4