-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CPPeDhYTJc7tH6YsrYEB1kQMp0i0AacV3E5pL3mXF95RmnSUaz3FL68YbDlGNFgi ByDTXeM2yBbqY5IDecAWcQ== 0000950148-98-001328.txt : 19980518 0000950148-98-001328.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950148-98-001328 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON CLASSIC CABLE INCOME PROPERTIES LP CENTRAL INDEX KEY: 0000846811 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954200409 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18266 FILM NUMBER: 98623200 BUSINESS ADDRESS: STREET 1: 10990 WILSHIRE BLVD 15TH FL CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 10-K405 1 FORM 10-K 405 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, 1997 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 - ----------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10900 WILSHIRE BOULEVARD - 15TH FLOOR LOS ANGELES, CALIFORNIA 90024 - --------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 824-9990 ---------------------- Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Name of each exchange Title of each Class on which registered ------------------- ------------------- UNITS OF LIMITED PARTNERSHIP INTEREST NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting equity securities held by non-affiliates of the registrant: 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. ================================================================================ The Exhibit Index is located at Page E-1 2 PART I ITEM 1. BUSINESS INTRODUCTION Falcon Classic Cable Income Properties, L.P. (the "Partnership") is a California limited partnership. Prior to March 1998, the Partnership was engaged in the ownership and operation of non-urban cable television systems in five regions in Oregon, North Carolina, Kentucky, California and Maryland. On March 6 and 9, 1998, the Partnership consummated the sale of substantially all of the Partnership's assets ("the Sold Systems"), except the cable system serving the City of Somerset Kentucky (the "Somerset System"), to Falcon Holding Group, L.P. ("FHGLP"), the general partner of the Partnership's general partner, Falcon Classic Cable Investors, L.P. (the "General Partner"). The sale of the Somerset System to FHGLP will be completed as soon as the necessary regulatory approvals can be obtained, of which there can be no assurance. If the sale of the Somerset System is successfully completed, the General Partner intends to dissolve the Partnership as soon as practicable thereafter. See " -- Recent Developments." As of December 31, 1997, the Partnership's cable television systems served approximately 49,000 basic subscribers, including approximately 4,000 basic subscribers in the Somerset System. 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, 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, 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 nineteen years of experience in the industry and has worked together for over a decade. Mr. Nathanson, a 29-year veteran of the cable business, is a member 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 a 19-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 Pursuant to the terms of the "Appraisal Process" provided for in the Partnership Agreement, the Partnership may, in the sole discretion of the 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. The Partnership Agreement provides that any such sale must be made in cash at the median of appraisals undertaken by three nationally recognized experts in the cable television field. As previously reported, the Partnership commenced the -2- 3 "Appraisal Process" in August 1996 and received the results of the related appraisals in February 1997. The full text of these appraisals has previously been filed with the Securities and Exchange Commission. By letter dated June 24, 1997, the General Partner advised the Partnership that it intended to exercise its purchase right to acquire all of the Partnership's cable systems (the "Proposed Sale") pursuant to the Appraisal Process for cash consideration equal to the median appraised value of $82 million (the "Appraised Value"). The General Partner further advised the Partnership that, as permitted by the Partnership Agreement, it intended that the cable systems be acquired by certain affiliates of the General Partner (the "Purchasers"). On June 27, 1997, the General Partner caused the Partnership to enter into an Asset Purchase Agreement with the Purchasers, and the parties began to seek the necessary regulatory and other consents. The Asset Purchase Agreement is filed as an exhibit to the Partnership's Report on Form 8-K dated June 24, 1997. On or about September 2, 1997, the Partnership was named in a putative class action suit (the "Lawsuit") filed against the Partnership, the General Partner and certain of its directors and officers with respect to the Proposed Sale. Effective as of December 31, 1997, the Partnership and certain other parties reached an agreement (the "Settlement Agreement") resolving and settling the Lawsuit. In exchange for a complete dismissal of the Lawsuit with prejudice and releases, and without admitting or conceding any fault, liability or wrongdoing whatsoever, the Partnership and the other defendants agreed to establish a settlement fund payable to holders of Units as of June 30, 1997, which amounted to $1.3 million plus interest at 10% from January 1, 1998 through closing of the sale as defined in the Settlement Agreement. On March 6 and 9, 1998, the Partnership consummated the sale of substantially all of its assets except for the Somerset System. The assets sold represented approximately 92.4% of the total amount of the Proposed Sale. In connection with such sale, and in accordance with the Settlement Agreement and the Asset Purchase Agreement, the Partnership received approximately $76.8 million, representing the purchase price, accrued interest on the net purchase price attributable to the systems sold, less an appropriate portion of the settlement notice costs. In addition, the defendants to the Lawsuit separately transferred approximately $1.2 million to the settlement fund. In connection with the Partnership's receipt of the proceeds from the sale of the Sold Systems, on March 6, 1998, the Partnership retired its outstanding bank debt and, on March 27, 1998, the Partnership distributed approximately $58.2 million (approximately $809.92 per unit) to its unitholders. In addition, the Partnership understands that counsel for the plaintiffs in the Lawsuit intend to distribute the settlement fund in late May or early June 1998. As of March 9, 1998, the Partnership's sole remaining cable system asset is the Somerset System, which represents approximately 7.6% of the Proposed Sale. The regulatory approvals required to consummate the sale of the Somerset System to FHGLP have not been obtained from the City of Somerset. The Partnership will continue to negotiate with the City of Somerset to obtain such approvals. There can be no assurance, however, that the Partnership will be successful in obtaining such approvals. If such approvals are not received on or before September 30, 1998, the Partnership intends to explore alternative options, including the sale of the Somerset System to a third party. If the Partnership obtains the requisite approvals from the City of Somerset on or prior to September 30, 1998, the Partnership intends to complete the sale of the Somerset System to FHGLP and to distribute to unitholders at the time of such sale approximately $6.3 million, representing the proceeds from the sale of the Somerset System (less certain deductions) and the remainder of the interest required by the Settlement Agreement. The approximately $6.3 million to be distributed upon the sale of the Somerset System is only an estimate and may vary depending on transaction costs and expenses and liabilities incurred prior to distribution. In addition, if the sale of the Somerset System occurs on or before September 30, 1998, the Settlement Agreement requires that additional funds be transferred to the settlement fund for distribution to unitholders as of June 30, 1997. The Partnership Agreement provides that the Partnership shall be dissolved upon the occurrence of the sale or distribution of all or substantially all of the assets of the Partnership. The Partnership Agreement also provides that upon the dissolution of the Partnership, the General Partner shall take such actions as are necessary for the winding up of the affairs of the Partnership and the distribution of its assets to the partners pursuant to the provisions of the Partnership Agreement. Accordingly, following the consummation of the sale of the Somerset System, the General Partner intends to wind-up the affairs of the Partnership in accordance with the terms of the Partnership Agreement, including the liquidation of the assets of the Partnership, the discharge of -3- 4 all of the liabilities of the Partnership, and the distribution of the remaining assets of the Partnership to its partners as appropriate. BUSINESS STRATEGY The Partnership's strategy is to attempt to obtain the regulatory approvals necessary to consummate the sale of the Somerset System, to consummate such sale and to dissolve the Partnership as discussed above. Prior to March 1998, the Partnership was engaged primarily in the business of owning, operating and developing cable television systems. The Partnership did not participate in any other activities in 1995, 1996 or 1997 and, based on the planned liquidation, will not undertake any such activities in the future. See "Legislation and Regulation" and Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." Adoption of rules implementing certain provisions of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") by the Federal Communications Commission (the "FCC") has had a negative impact on the Partnership's revenues and cash flow. These rules are subject to further amendment to give effect to the Telecommunications Act of 1996 (the "1996 Telecom Act"). Among other changes, the 1996 Telecom Act provides that the regulation of certain cable programming service tier ("CPST") rates will be phased out altogether in 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Partnership expects Congress and the FCC to explore additional methods of regulating cable service rate increases, including deferral or repeal of the March 31, 1999 sunset of CPST regulation. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Partnership's business. See "Legislation and Regulation" and Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." -4- 5 DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS The Partnership's remaining cable television system is located in Somerset, Kentucky. The assets sold to FHGLP included cable television systems in the following locations: Redmond, Oregon; Burke County, North Carolina; Centreville, Maryland; California City, California; and the adjacent communities of Somerset, Kentucky. The table below sets forth certain operating statistics for the Somerset System and the Sold Systems as of December 31, 1997:
Average Monthly Premium Revenue Homes Basic Basic Service Premium Per Basic Region Passed(1) Subscribers(2) Penetration(3) Units(4) Penetration(5) Subscriber(6) - ------ -------- ------------- ------------- ------- ------------ ------------ Redmond, OR 7,502 3,626 48.3% 494 13.6% $ 33.73 Burke County, NC 19,200 10,582 55.1% 3,823 36.1% $ 36.53 Somerset, KY(7) 22,060 19,784 89.7% 3,577 18.1% $ 32.18 Centreville, MD 24,187 13,083 54.1% 7,045 53.8% $ 37.84 California City, CA 2,858 1,908 66.8% 670 35.1% $ 30.98 ------ ------ ------ Total 75,807 48,983 64.6% 15,609 31.9% $ 34.69 ====== ====== ======
- ---------- (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) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic customer equivalent" basis in which the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. (3) Basic subscribers as a percentage of homes passed by cable. (4) 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. (5) Premium service units as a percentage of basic subscribers. 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. (6) Average monthly revenue per home subscribing to cable service has been computed based on revenue for the year ended December 31, 1997. (7) The statistics for Somerset, KY include the Somerset System and cable television systems in adjacent communities of Somerset, KY which were included in the Sold Systems. The Somerset System statistics included are: 5,119 Homes Passed; 4,091 Basic Subscribers; 79.9% Basic Penetration; 757 Premium Service Units; 18.5% Premium Penetration; and $30.43 Average Monthly Revenue Per Basic Subscriber. The Somerset System, the Partnership's remaining cable television system, and its adjacent communities, are considered to be the hub of commerce, industry, transportation and recreation in the region. 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. -5- 6 At March 9, 1998, the Somerset system had approximately 4,000 basic subscribers and addressable technology is available to all customers. The system offers 39 channels of programming which are 100% utilized. Fiber overlay projects have been completed in the Somerset System. The Somerset System has been tied together with fiber to the Burnside system, which was sold to FHGLP on March 9, 1998, thereby eliminating the Somerset head-end. CUSTOMER RATES AND SERVICES The Partnership offers customers packages of services that include the local area network, independent and educational television stations, a limited number of television signals from distant cities, numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN, TNT and The Disney Channel) and certain information and public access channels. For an extra monthly charge, the Partnership provides certain premium television services, such as HBO and Showtime. The Partnership also offers other cable television services to its customers, including pay-per-view programming. Pursuant to the 1992 Cable Act, most cable television systems are subject to rate regulation of the basic service tier, the non-basic service tiers other than premium (per channel or program) services, the charges for installation of cable service, and the rental rates for customer premises equipment such as converter boxes and remote control devices. These rate regulation provisions affect all of the Partnership's systems not deemed to be subject to effective competition under the FCC's definition. See "Legislation and Regulation." At March 9, 1998, the Somerset System's monthly rates for basic cable service for residential customers, excluding special senior citizen discount rates, ranged from $19.08 to $19.65 and premium service rates were $11.95, excluding special promotions offered periodically in conjunction with the Partnership's marketing programs. A one-time installation fee, which the Partnership may wholly or partially waive during a promotional period, is usually charged to new customers. Commercial customers, such as hotels, motels and hospitals, are charged a negotiated, non-recurring fee for installation of service and monthly fees based upon a standard discounting procedure. Most multi-unit dwellings are offered a negotiated bulk rate in exchange for single-point billing and basic service to all units. These rates are also subject to regulation. EMPLOYEES At March 9, 1998, the Partnership had no employees. PROGRAMMING The Partnership has various contracts to obtain basic and premium programming 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 fees in return for carrying their service. Due to a lack of channel capacity available for adding new channels, the Partnership's management cannot predict the impact of such potential payments on its business. In addition, the FCC may require that certain such payments from programmers be offset against the programming fee increases which can be passed through to subscribers under the FCC's rate regulations. 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 continue to 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 -6- 7 costs to produce or purchase cable programming generally (including sports programming), inflationary increases and other factors. The 1996 retransmission carriage agreement negotiations resulted in the Partnership agreeing to carry one new service in certain of its systems 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's 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." FRANCHISES Cable television systems are generally constructed and operated under non-exclusive franchises granted by local governmental authorities. These franchises typically contain many conditions, such as time limitations on commencement and completion of construction; conditions of service, including number of channels, types of programming and the provision of free service to schools and certain other public institutions; and the maintenance of insurance and indemnity bonds. The provisions of local franchises are subject to federal regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and Regulation." As of December 31, 1997, the Partnership held 36 franchises. As of March 9, 1998, the Partnership had one franchise due to the sale of substantially all the Partnership's assets to FHGLP. This franchise, which is non-exclusive, provides for the payment of fees to the City of Somerset. The franchise fees imposed on the Partnership are 3% of the gross revenues generated by the system. The 1984 Cable Act prohibits franchising authorities from imposing franchise fees in excess of 5% of gross revenues and also permits the cable system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. The City of Somerset's franchise is currently under renewal negotiation, there can be no assurance however, that it will be renewed. The franchise serves approximately 4,000 basic subscribers. The 1984 Cable Act provides, among other things, for an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied and the franchising authority acquires ownership of the system or effects a transfer of the system to another person, the operator generally is entitled to the "fair market value" for the system covered by such franchise, but no value attributable to the franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes comprehensive renewal procedures which require that an incumbent franchisee's renewal application be assessed on its own merit and not as part of a comparative process with competing applications. See "Legislation and Regulation". COMPETITION Cable television systems compete with other communications and entertainment media, including over-the-air television broadcast signals which a viewer is able to receive directly using the viewer's own television set and antenna. The extent to which a cable system competes with over-the-air broadcasting depends upon the quality and quantity of the broadcast signals available by direct antenna reception compared to the quality and quantity of such signals and alternative services offered by a cable system. Cable systems also face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theaters and home video products, including videotape recorders and videodisc players. In recent years, the FCC has adopted policies providing for authorization of new technologies and a more favorable operating environment for certain existing technologies that provide, or may provide, substantial additional competition for cable television systems. The extent to which cable television service is competitive depends in significant part upon the cable television system's ability to provide an even greater variety of programming than that available over the air or through competitive alternative delivery sources. -7- 8 Individuals presently have the option to purchase home satellite dishes, which allow the direct reception of satellite-delivered broadcast and nonbroadcast program services formerly available only to cable television subscribers. Most satellite-distributed program signals are being electronically scrambled to permit reception only with authorized decoding equipment for which the consumer must pay a fee. The 1992 Cable Act enhances the right of cable competitors to purchase nonbroadcast satellite-delivered programming. See "Legislation and Regulation - Federal Regulation." Television programming is now also being delivered to individuals by high-powered direct broadcast satellites ("DBS") utilizing video compression technology. This technology has the capability of providing more than 100 channels of programming over a single high-powered DBS satellite with significantly higher capacity available if, as in the case with DIRECTV, multiple satellites are placed in the same orbital position. Unlike cable television systems, however, DBS satellites are limited by law in their ability to deliver local broadcast signals. One DBS provider, EchoStar, has announced plans to deliver a limited number of local broadcast signals in a limited number of markets. DBS service can be received virtually anywhere in the continental United States through the installation of a small rooftop or side-mounted antenna, and it is more accessible than cable television service where cable plant has not been constructed or where it is not cost effective to construct cable television facilities. DBS service is being heavily marketed on a nationwide basis by several service providers. In addition, medium-power fixed-service satellites can be used to deliver direct-to-home satellite services over small home satellite dishes, and one provider, PrimeStar, currently provides service to subscribers using such a satellite. Multichannel multipoint distribution systems ("Wireless Cable") deliver programming services over microwave channels licensed by the FCC received by subscribers with special antennas. Wireless Cable systems are less capital intensive, are not required to obtain local franchises or to pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. To date, the ability of Wireless Cable services to compete with cable television systems has been limited by channel capacity (35-channel maximum) and the need for unobstructed line-of-sight over-the-air transmission. Although relatively few Wireless Cable systems in the United States are currently in operation or under construction, virtually all markets have been licensed or tentatively licensed. The use of digital compression technology may enable Wireless Cable systems to deliver more channels. Private cable television systems compete for service to condominiums, apartment complexes and certain other multiple unit residential developments. The operators of these private systems, known as satellite master antenna television ("SMATV") systems, often enter into exclusive agreements with apartment building owners or homeowners' associations which preclude franchised cable television operators from serving residents of such private complexes. However, the 1984 Cable Act gives franchised cable operators the right to use existing compatible easements within their franchise areas upon nondiscriminatory terms and conditions. Accordingly, where there are preexisting compatible easements, cable operators may not be unfairly denied access or discriminated against with respect to the terms and conditions of access to those easements. There have been conflicting judicial decisions interpreting the scope of the access right granted by the 1984 Cable Act, particularly with respect to easements located entirely on private property. Under the 1996 Telecom Act, SMATV systems can interconnect non-commonly owned buildings without having to comply with local, state and federal regulatory requirements that are imposed upon cable systems providing similar services, as long as they do not use public rights-of-way. The FCC has initiated a new interactive television service which will permit non-video transmission of information between an individual's home and entertainment and information service providers. This service 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 has allocated spectrum in the 28 GHz range for a new multichannel wireless service that can be used to provide video and telecommunication services. The FCC is in the process of awarding -8- 9 licenses to use this spectrum via a market-by-market auction. It cannot be predicted at this time whether such a service will have a material impact on the operations of cable television systems. 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, Wireless Cable, 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. The cable television industry competes with radio, television and print media and internet 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. Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment, are constantly occurring. Thus, it is not possible to predict the competitive effect that ongoing or future developments might have on the cable industry. See "Legislation and Regulation." -9- 10 LEGISLATION AND REGULATION The cable television industry is regulated by the FCC, some state governments and substantially all local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past materially affected, and may in the future materially affect, the Partnership and the cable television industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable television industry and a description of certain state and local laws. The Partnership believes that the regulation of its industry remains a matter of interest to Congress, the FCC and other regulatory authorities. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the Partnership. FEDERAL REGULATION The primary federal statute dealing with the regulation of the cable television industry is the Communications Act of 1934 (the "Communications Act"), as amended. The three principal amendments to the Communications Act that shaped the existing regulatory framework for the cable television industry were the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations to implement the provisions contained in the Communications Act. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain of these federal regulations as adopted to date follows. RATE REGULATION The 1992 Cable Act replaced the FCC's previous standard for determining effective competition, under which most cable systems were not subject to local rate regulation, with a statutory provision that resulted in nearly all cable television systems becoming subject to local rate regulation of basic service. The 1996 Telecom Act expanded the definition of effective competition to include 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. A finding of effective competition exempts both basic and nonbasic tiers from regulation. Additionally, the 1992 Cable Act required the FCC to adopt a formula, enforceable by franchising authorities, to assure that basic cable rates are reasonable; allowed the FCC to review rates for nonbasic service tiers (other than per-channel or per-program services) in response to complaints filed by franchising authorities and/or cable customers; prohibited cable television systems from requiring subscribers to purchase service tiers above basic service in order to purchase premium services if the system is technically capable of doing so; required the FCC to adopt regulations to establish, on the basis of actual costs, the price for installation of cable service, remote controls, converter boxes and additional outlets; and allowed the FCC to impose restrictions on the retiering and rearrangement of cable services under certain limited circumstances. The 1996 Telecom Act limits the class of complainants regarding nonbasic tier rates to franchising authorities only and terminates FCC regulation of nonbasic tier rates on March 31, 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulation, the Partnership expects Congress and the FCC to explore additional methods of addressing this issue, including deferral or repeal of the March 31, 1999 termination of CPST rate regulation, and legislation recently was introduced in Congress to repeal the termination provision. The FCC's regulations contain standards for the regulation of basic and nonbasic cable service rates (other than per-channel or per-program services). Local franchising authorities and/or the FCC are empowered to order a reduction of existing rates which exceed the maximum permitted level for either basic and/or nonbasic cable services and associated equipment, and refunds can be required. The rate regulations adopt a benchmark price cap system for measuring the reasonableness of existing basic and nonbasic service rates. -10- 11 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 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, a number of the Partnership's customers and/or 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 so as to bring these rates and charges into compliance with the applicable benchmark or equipment and installation cost levels. FCC regulations adopted pursuant to the 1992 Cable 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 adopted new television station carriage requirements. These rules allow commercial television broadcast stations which are "local" to a cable system, i.e., the system is located in the station's Area of Dominant Influence, to elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether the cable system will have to negotiate for "retransmission consent" to carry the station. Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, within the larger of: (i) a 50 mile radius from the station's city of license; or (ii) the station's Grade B contour (a measure of signal strength). Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable systems 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 WGN. The Partnership has thus far not been required to pay cash compensation to broadcasters for retransmission consent or been required by broadcasters to remove broadcast stations from the cable television channel line-ups. The Partnership has, however, agreed to carry some services in specified markets pursuant to retransmission consent arrangements which it believes are comparable to those entered into by most other large cable operators, and for which it pays monthly fees to the service providers, as it does with other satellite providers. The second election between must-carry and retransmission consent for local commercial television broadcast stations was October 1, 1996, and the Partnership has agreed to carry one new service in specified markets pursuant to these retransmission consent arrangements. The next election between must-carry and retransmission consent for local commercial television broadcast stations will be October 1, 1999. -11- 12 NONDUPLICATION OF NETWORK PROGRAMMING Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or nonsimultaneous network programming of certain lower priority distant stations affiliated with the same network as the local station. DELETION OF SYNDICATED PROGRAMMING FCC regulations enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from other television stations which are carried by the cable system. The extent of such deletions will vary from market to market and cannot be predicted with certainty. However, it is possible that such deletions could be substantial and could lead the cable operator to drop a distant signal in its entirety. PROGRAM ACCESS The 1992 Cable Act contains provisions that are intended to foster the development of competition to traditional cable systems by regulating the access of competing video providers to vertically integrated, satellite-distributed cable programming services. The FCC has commenced a rulemaking proceeding to seek comment on proposed modifications to its existing rules implementing the statute, including: (1) establishing specific deadlines for resolving program access complaints; (2) improving the discovery process, such as requiring the disclosure of the rates that vertically integrated programmers charge cable operators; (3) imposing monetary damages for program access violations; (4) possibly applying the program access rules to certain situations in which programming is moved from satellite delivery to terrestrial delivery; and (5) revising the manner in which the rules apply to program buying cooperatives. It is not clear to what extent, if any, the provisions of the 1992 Cable Act cover programming distributed by means other than satellite or by programmers unaffiliated with Multiple System Operators ("MSOs"). Legislation also is expected to be introduced shortly in Congress to strengthen the program access provisions of the 1992 Cable Act. FRANCHISE FEES Franchising authorities may impose franchise fees, but such payments cannot exceed 5% of a cable system's annual gross revenues. Under the 1996 Telecom Act, franchising authorities may not exact franchise fees from revenues derived from telecommunications services. RENEWAL OF FRANCHISES The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Even after the formal renewal procedures are invoked, franchising authorities and cable operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. The 1992 Cable Act makes several changes to the process under which a cable operator seeks to enforce his renewal rights which could make it easier in some cases for a franchising authority to deny renewal. While a cable operator must still submit its request to commence renewal proceedings within thirty to thirty-six months prior to franchise expiration to invoke the formal renewal process, the request must be in writing and the franchising authority must commence renewal proceedings not later than six months after receipt of such notice. The four-month period for the franchising authority to grant or deny the renewal now runs from the submission of the renewal proposal, not the completion of the public proceeding. Franchising authorities may consider the -12- 13 "level" of programming service provided by a cable operator in deciding whether to renew. For alleged franchise violations occurring after December 29, 1984, franchising authorities are no longer precluded from denying renewal based on failure to substantially comply with the material terms of the franchise where the franchising authority has "effectively acquiesced" to such past violations. Rather, the franchising authority is estopped if, 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. The FCC has recently changed the formula in order to produce lower rates and thereby encourage the use of leased access. COMPETING FRANCHISES The 1992 Cable Act prohibits franchising authorities from unreasonably refusing to grant franchises to competing cable television systems and permits franchising authorities to operate their own cable television systems without franchises. OWNERSHIP The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against local exchange telephone companies ("LECs") providing video programming directly to customers within their local telephone exchange service areas. However, with certain limited exceptions, a LEC may not acquire more than a 10% equity interest in an existing cable system operating within the LEC's service area. The 1996 Telecom Act also authorized LECs and others to operate "open video systems" 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. Finally, in order to encourage competition in the provision of video programming, the FCC adopted a rule prohibiting the common ownership, affiliation, control or interest in cable television systems and Wireless Cable facilities having overlapping service areas, except in very limited circumstances. The 1992 Cable Act codified this restriction and extended it to co-located SMATV systems. Permitted arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom Act exempts cable systems facing effective competition from the Wireless Cable and SMATV restriction. In addition, a cable operator can purchase a SMATV system serving the same area and technically integrate it into the cable system. The 1992 Cable Act permits states or local franchising authorities to adopt certain additional restrictions on the ownership of cable television systems. The FCC has also adopted rules which limit the number of channels on a cable system which can be occupied by programming in which the entity which owns the cable system has an attributable interest. The limit is 40% of the first 75 activated channels. The FCC also recently commenced a rulemaking proceeding to examine, among other issues, whether any limitations on cable-DBS cross-ownership are warranted in order to prevent anticompetitive conduct in the video services market. -13- 14 FRANCHISE TRANSFERS The 1992 Cable Act requires franchising authorities to act on any franchise transfer request submitted after December 4, 1992 within 120 days after receipt of all information required by FCC regulations and by the franchising authority. Approval is deemed to be granted if the franchising authority fails to act within such period. TECHNICAL REQUIREMENTS The FCC has imposed technical standards applicable to the cable channels on which broadcast stations are carried, and has prohibited franchising authorities from adopting standards which are in conflict with or more restrictive than those established by the FCC. Those standards are applicable to all classes of channels which carry downstream National Television System Committee (NTSC) video programming. The FCC also has adopted additional standards applicable to cable television systems using frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful interference with aeronautical navigation and safety radio services and has also established limits on cable system signal leakage. Periodic testing by cable operators for compliance with the technical standards and signal leakage limits is required and an annual filing of the results of these measurements is required. The 1992 Cable Act requires the FCC to periodically update its technical standards to take into account changes in technology. Under the 1996 Telecom Act, local franchising authorities may not prohibit, condition or restrict a cable system's use of any type of subscriber equipment or transmission technology. The FCC has adopted regulations to implement the requirements of the 1992 Cable Act designed to improve the compatibility of cable systems and consumer electronics equipment. Among other things, these regulations, inter alia, generally prohibit cable operators from scrambling their basic service tier. The 1996 Telecom Act directs the FCC to set only minimal standards to assure compatibility between television sets, VCRs and cable systems, and to rely on 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. The state of Kentucky, where the Partnership operates its remaining cable system, has certified to the FCC that it regulates 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. As directed by the 1996 Telecom Act, the FCC has adopted 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, but does not begin to take effect until 2001. OTHER MATTERS Other matters subject to FCC regulation include certain restrictions on a cable system's carriage of local sports programming; rules governing political broadcasts; customer service standards; obscenity and indecency; home wiring; EEO; privacy; closed captioning; sponsorship identification; system registration; and limitations on advertising contained in nonbroadcast children's programming. -14- 15 COPYRIGHT Cable television systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable system with respect to over-the-air television stations. Any future adjustment to the copyright royalty rates will be done through an arbitration process supervised by the U.S. Copyright Office. Cable operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for overpayment of copyright fees. Copyrighted music 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, e.g., on local origination channels or in advertisements inserted locally on cable networks, must also be licensed. Cable industry negotiations with ASCAP, BMI and SESAC, Inc. (a third and smaller performing rights organization) are in progress. LOCAL REGULATION Because a cable television system uses local streets and rights-of-way, cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions. Although the 1984 Cable Act provides for certain procedural protections, there can be no assurance that renewals will be granted or that renewals will be made on similar terms and conditions. Upon receipt of a franchise, the cable system owner usually is subject to a broad range of obligations to the issuing authority directly affecting the business of the system. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction, and even from city to city within the same state, historically ranging from reasonable to highly restrictive or burdensome. The specific terms and conditions of a franchise and the laws and regulations under which it was granted directly affect the profitability of the cable television system. Cable franchises generally contain provisions governing charges for basic cable television services, fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable services provided. The 1996 Telecom Act prohibits a franchising authority from either requiring or limiting a cable operator's provision of telecommunications services. The 1984 Cable Act places certain limitations on a franchising authority's ability to control the operation of a cable system operator and the courts have from time to time reviewed the constitutionality of several general franchise requirements, including franchise fees and access channel requirements, often with inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive franchises, and allows franchising authorities to exercise greater control over the operation of franchised cable television systems, especially in the area of customer service and rate regulation. Moreover, franchising authorities are immunized from monetary damage awards arising from regulation of cable television systems or decisions made on franchise grants, renewals, transfers and amendments. -15- 16 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. ITEM 2. PROPERTIES As of March 9, 1998, the Partnership had sold substantially all of its assets (except for the Somerset System) to FHGLP, including all its program production equipment, headend equipment (towers, antennae, electronic equipment, and satellite earth stations), test equipment, tools and maintenance equipment and vehicles. The Partnership's remaining assets related to its Somerset System are its cable plant (distribution equipment, amplifiers, customer drops and hardware) and converters. Prior to the sale of the Sold Systems to FHGLP, the Partnership generally leased the real estate on which its business offices, microwave receiving antennae, microwave towers, warehouses, headend facilities and other related equipment were located. The Partnership paid approximately $86,000 pursuant to all such leases for the year ended December 31, 1997. All such leases were transferred to FHGLP in connection with the sale of the Sold Systems. As of March 9, 1998, the Partnership entered into an agreement with FHGLP to rent the usage of the headend site, the office and related equipment with respect to the Somerset System. Such arrangement will terminate upon the sale of the Somerset System to FHGLP. 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. -16- 17 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 5,990 as of March 1, 1998. 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 Agreement provides that 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 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. The Partnership does not presently expect to generate cash in excess of the 11% Preferred Return. 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. In connection with the Partnership's receipt of the proceeds from the sale of the Sold Systems, on March 6, 1998, the Partnership retired its outstanding bank debt and, on March 27, 1998, the Partnership distributed approximately $58.2 million (approximately $809.92 per unit) to its unitholders. If the Partnership obtains the requisite approvals from the City of Somerset on or prior to September 30, 1998, the Partnership intends to complete the sale of the Somerset System to FHGLP and to distribute to unitholders at the time of such sale approximately $6.3 million, representing the proceeds from the sale of the Somerset System (less certain deductions) and the remainder of the interest required by the Settlement Agreement. The approximately $6.3 million to be distributed upon the sale of the Somerset System is only an estimate and may vary depending on transaction costs and expenses and liabilities incurred prior to distribution. The Partnership's management does not anticipate that any limited partner will receive payback prior to the dissolution of the Partnership. -17- 18 The Partnership Agreement provides that the Partnership shall 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 and the Partnership does not expect that any such distributions will be made during the duration of the Partnership. See Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Partnership Agreement provides that 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 Partnership does not expect that any such distributions will be made during the duration of the Partnership. 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 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, 1997, 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. -18- 19 ITEM 6. SELECTED FINANCIAL DATA Set forth below is selected financial data of the Partnership for the five years ended December 31, 1997. 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, ---------------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (In thousands of dollars) OPERATIONS STATEMENT DATA Revenues $ 16,785 $ 17,382 $ 18,363 $ 19,826 $ 20,299 Costs and expenses (9,578) (9,497) (10,100) (10,316) (11,248) Depreciation and amortization (8,404) (8,924) (8,526) (7,712) (8,080) -------- -------- -------- -------- -------- Operating income (loss) (1,197) (1,039) (263) 1,798 971 Interest expense, net (1,519) (1,776) (2,010) (1,813) (1,490) Other expense -- 4 -- -- (61) -------- -------- -------- -------- -------- Net loss $ (2,716) $ (2,811) $ (2,273) $ (15) $ (580) ======== ======== ======== ======== ======== Distributions to partners $ 6,163 $ 821 $ -- $ -- $ -- ======== ======== ======== ======== ======== PER UNIT OF LIMITED PARTNERSHIP INTEREST: Net loss $ (37.41) $ (38.71) $ (31.30) $ (0.21) $ (7.99) ======== ======== ======== ======== ======== Distributions $ 84.86 $ 11.31 $ -- $ -- $ -- ======== ======== ======== ======== ======== OTHER OPERATING DATA Net cash provided by operating activities $ 6,169 $ 6,090 $ 6,486 $ 6,747 $ 8,064 EBITDA(1) 7,207 7,885 8,263 9,510 9,051 EBITDA to revenues 42.9% 45.4% 45.0% 48.0% 44.6% Total debt to EBITDA 3.1x 2.9x 3.3x 2.6x 1.6x Capital expenditures $ 3,889 $ 3,982 $ 5,713 $ 3,033 $ 4,832
As of December 31, ---------------------------------------------------------------------------- BALANCE SHEET DATA 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Total assets $ 63,807 $ 60,060 $ 62,959 $ 59,334 $ 49,434 Total long-term debt 22,300 22,500 27,000 24,300 14,750 Total liabilities 27,062 26,939 32,111 28,501 19,181 Partners' equity 36,745 33,121 30,848 30,833 30,253
- -------- (1) EBITDA is calculated as operating income before income taxes, depreciation and amortization. Based on its experience in the cable television industry, the Partnership believes that EBITDA and related measures of cash flow serve as important financial analysis tools for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. In addition, the covenants in the primary debt instruments of the Partnership use EBITDA-derived calculations 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. -19- 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The 1992 Cable Act required the FCC to, among other things, implement extensive regulation of the rates charged by cable television systems for basic and programming service tiers, installation, and customer premises equipment leasing. Compliance with those rate regulations has had a negative impact on the Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the 1996 Telecom Act provides that the regulation of CPST rates will be terminated on March 31, 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Partnership expects Congress and the FCC to explore additional methods of regulating cable service rate increases, including deferral or repeal of the March 31, 1999 termination of CPST rate regulation and legislation recently was introduced in Congress to repeal the termination provision. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Partnership's business. Accordingly, the Partnership's historical financial results as described below are not necessarily indicative of future performance. See "Legislation and Regulation." 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, on March 6 and 9, 1998, the Partnership consummated the sale of substantially all of the Partnership's assets, except the Somerset System, to FHGLP, the general partner of the Partnership's general partner. The sale of the Somerset System to FHGLP will be completed as soon as the necessary regulatory approvals can be obtained, of which there can be no assurance. If the sale of the Somerset System is successfully completed, the General Partner intends to dissolve the Partnership as soon as practicable thereafter. See "Recent Developments." 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 December 31, 1997, March 3, 1998 and March 27, 1998. Unitholders are urged to review the referenced materials carefully. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 The Partnership's revenues increased from $19.8 million to $20.3 million, or by 2.4%, during 1997 compared to 1996. Of the $472,000 increase, approximately $708,000 was due to increases in regulated service rates, $184,000 was due to the restructuring of The Disney Channel from a premium channel to a tier channel on July 1, 1996 and $111,000 was due to increases in advertising sales. These increases were partially offset by $368,000 due to reductions in the number of subscriptions for premium cable services and by $163,000 due to decreases in programming incentives. As of December 31, 1997, the Partnership had approximately 49,000 basic subscribers and 15,600 premium service units, approximately 4,000 and 800 of which were in the Somerset System. Service costs increased from $6.0 million to $6.7 million, or by 11.3%, during 1997 compared to 1996. Service costs represent costs directly attributable to providing cable service to customers. The -20- 21 $678,000 increase was primarily related to an increase of $504,000 in programming fees charged by program suppliers (including primary satellite fees), which included an $82,000 increase related to the restructuring of The Disney Channel discussed above and to increases of $216,000 in franchise fees and $30,000 in other expenses. These increases were partially offset by a $72,000 increase in capitalized labor, primarily related to upgrading the Centreville, Maryland cable television system. General and administrative expenses increased from $2.7 million to $2.9 million, or by 7.9%, during 1997 compared with 1996. Of the $216,000 increase, $164,000 was due to bad debt expense, $76,000 was due to costs associated with advertising sales, $17,000 was due to costs associated with marketing activities and $21,000 was due to other expenses. These increases were partially offset by a decrease of $62,000 related primarily to reduced insurance premiums as a result of self-insuring the Partnership's cable distribution plant and subscriber connections during 1997. General Partner management fees and reimbursed expenses remained constant as a percent of revenue at 8.0% and remained at $1.6 million during 1997 compared with 1996. Operating income before income taxes, depreciation and amortization (EBITDA) is a commonly used financial analysis tool for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. EBITDA as a percentage of revenues decreased from 48.0% in 1996 to 44.6% in 1997. The decrease was primarily caused by increased programming fees, franchise fees and bad debt expense, as described above. EBITDA decreased from $9.5 million to $9.1 million, or by 4.8%, during 1997 compared with 1996. EBITDA should be considered in addition to and not as a substitute for net income and cash flows determined in accordance with generally accepted accounting principles as an indicator of financial performance and liquidity. Depreciation and amortization expense increased from $7.7 million to $8.1 million, or by 4.8%, during 1997 compared with 1996. The $368,000 increase was due to asset additions related to various projects in the Centreville, Maryland cable systems. Operating income decreased from $1.8 million to $971,000 during 1997 compared with 1996. The $827,000 decrease was primarily due to increased programming fees, franchise fees and bad debt expense as discussed above. Net interest expense, including the effects of interest rate hedging agreements, decreased from $1.8 million to $1.5 million, or by 17.8%, during 1997 compared to 1996. The $323,000 decrease was due primarily to lower average debt balances and lower interest rates. The hedging agreements resulted in higher interest expense of $117,000 and $72,000 for the years ended December 31, 1996 and 1997, respectively. Other expense increased $61,000 for the year ended December 31, 1997 as compared to 1996. The increase was due primarily to $103,000 in legal costs related to the sale of the Partnership's assets as discussed above in "Recent Developments." This increase was partially offset by other income of $42,000 due primarily to the sale of an easement in Somerset, Kentucky to the Commonwealth of Kentucky for the purpose of improving U.S. Highway 27. Due to the factors described above, the Partnership's net loss increased from $15,000 to $580,000 during 1997 compared to 1996. 1996 COMPARED TO 1995 The Partnership's revenues 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 -21- 22 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 48,600 basic subscribers and 17,500 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. 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 reregulation 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 and amortization expense 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 and 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. LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary objective, having invested its net offering proceeds in cable systems, has been 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. As discussed above in "Recent Developments", the Partnership sold substantially all its assets to FHGLP in March 1998, and in connection with such sale distributed approximately $58.2 million to its unitholders on March 27, 1998. If the Partnership obtains the requisite approvals from the City of Somerset on or prior to September 30, 1998, the Partnership intends to complete the sale of the Somerset System and to distribute the proceeds from such sale (less certain deductions) to unitholders at the time of such sale. If such approvals are not received on or before September 30, 1998, the Partnership intends to explore alternative options, including the sale of the Somerset System to a third party. See "Business-Recent Developments." The Partnership has relied upon the availability of cash generated from operations and borrowings to fund its ongoing capital requirements. In general, these requirements have involved expansion, improvement and upgrade of the Partnership's cable systems. The Partnership encountered liquidity difficulties -22- 23 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 required that material amounts of capital be invested in the Partnership's cable 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, 1996 and 1997 in order to preserve liquidity. See "Legislation and Regulation." The Partnership's access to capital has been severely constrained primarily due to the limitations imposed by the Partnership Agreement. This limitation on indebtedness, which is discussed below, has been at odds with the need to increase leverage and to spend approximately $35 million to rebuild and upgrade the Partnership's cable systems (of which approximately $650,000 was mandated by franchise agreements). The Partnership spent an aggregate of approximately $4.8 million in 1997 for all capital expenditures, including approximately $156,000 to begin the upgrade of a portion of one system, which represented the minimum level of expenditures that management believes were necessary in 1997 to comply with franchise authority and FCC technical requirements. 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 have been amended in order to have significantly increased the Partnership's leverage because the Partnership's management did not believe that it would be able to fund rebuild requirements entirely from cash resources and operating cash flow. 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, 1997, 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. As of December 31, 1997, the amount outstanding under the Partnership's amended Bank Credit Agreement was $14.8 million. At December 31, 1997, such borrowings bore interest at an average rate of 8.4% (including the effect of interest rate swap transactions). In connection with the sale of the Sold Systems, the Partnership fully repaid the $14.8 million outstanding debt on March 6, 1998. The Partnership's management believes that the Partnership's anticipated cash resources and cash flow from operations will be sufficient to fund its working capital requirements until the Partnership is dissolved. See "Business - Recent Developments." The Partnership's management agreement with the General Partner requires deferral of the payment of up to 50% of the management fees for any month, 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 1997 and recovered $276,000 in previously deferred management fees. Beginning in August 1997, the General Partner elected to self-insure the Partnership's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to the geographical diversification of the Partnership's asset base and due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. The Partnership continues to purchase insurance coverage in amounts its management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. In January 1998, the Partnership suffered storm damage to its Somerset, Kentucky cable -23- 24 television system. Management estimates that the cost to repair this damage will be $1.0 million and will be funded through cash from the sale of the Sold Systems. 1997 VS. 1996 Cash provided by operating activities increased from $6.7 million to $8.1 million, or by $1.3 million, for the year ended December 31, 1997 compared to 1996. The increase resulted from an increase in the net loss of $565,000, $368,000 of which resulted from an increase in non-cash depreciation and amortization; and from an increase of $1.5 million in other operating items (receivables, prepaid expenses and other assets, cable materials, equipment and supplies, payables, accrued expenses and customer deposits and prepayments). Cash used in investing activities increased by $2.0 million during 1997 compared to 1996, primarily due to an increase in capital expenditures. Cash used by financing activities increased $6.9 million because of increased net repayment of debt of $9.6 million during 1997 compared to $2.7 million during 1996. 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 revenues, as described above. EBITDA increased from $8.3 million to $9.5 million, or by 15.1%, during 1996 compared to 1995. 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, due to the reregulation of rates charged for certain cable services. 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. -24- 25 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 are as follows:
Name Age Position - ---- --- -------- Marc B. Nathanson 52 Chairman of the Board, Chief Executive Officer and Director of FHGI Frank J. Intiso 51 President and Chief Operating Officer Stanley S. Itskowitch 59 Executive Vice President, General Counsel and Director of FHGI Michael K. Menerey 46 Executive Vice President, Chief Financial Officer and Secretary Joe A. Johnson 53 Executive Vice President - Operations Thomas J. Hatchell 48 Executive Vice President - Operations Jon W. Lunsford 38 Executive Vice President - Finance
The following sets forth certain biographical information with respect to the directors and executive officers of FHGI: MARC B. NATHANSON, 52, 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"). 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 28-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 served as Chairman of the Board, Chief Executive Officer and President of Enstar since October 1988. Mr. Nathanson is a Director of T.V. Por Cable Nacional, S.A. de C.V., an Advisory Board member of TVA, (Brazil) and a Director of GRB Entertainment. Mr. Nathanson is also Chairman of the Board and Chief Executive Officer of FIC. Mr. Nathanson was appointed by President Clinton and confirmed by the U.S. Senate on August 14, 1995 for a three year term on the Board of Governors of International Broadcasting of the United States Information Agency. He also serves on the Board of Radio Free Asia, Radio Free Europe and Radio Liberty. Mr. Nathanson is a trustee of the Annenburg School of Communications at the University of Southern California and a member of the Board of Visitors of the Anderson School of Management at the University of California, Los Angeles ("UCLA"). In addition, he serves on the Board of the UCLA Foundation and the UCLA Center for Communications Policy and is on the Board of Governors of AIDS Project Los Angeles. Mr. Nathanson received the "Entrepreneur of the Year Award" from Inc. Magazine in 1994. -25- 26 FRANK J. INTISO, 51, 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, with responsibility for the day-to-day operations of all cable television systems under FHGLP's management. Mr. Intiso 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 UCLA 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, 59, 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, 46, has been Executive Vice President, Chief Financial Officer and Secretary of FHGI since February 1998 and was Chief Financial Officer and Secretary of FHGI and its predecessors between 1984 and 1998. 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, 53, has been Executive Vice President of Operations of FHGI since September 1995, and was a Divisional Vice President of FHGI between 1989 and 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. THOMAS J. HATCHELL, 48, has been Executive Vice President of Operations of FHGI since February 1998. From October 1995 to February 1998, he was Senior Vice President of Operations of Falcon International Communications, L.P. and its predecessor company and was a Senior Vice President of FHGI from January 1992 to September 1995. Mr. Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From 1981 to 1989 he served as Vice President and Regional Manager for Falcon's San Luis Obispo, California region. He was Vice President - Construction of an affiliate of Falcon from June 1980 to June 1981. In addition, he served as a General Manager of the cable system in Tulare County, California, from 1977 to 1980. Prior to that time, Mr. Hatchell served as a cable executive with the Continental Telephone Company. JON W. LUNSFORD, 38, has been Executive Vice President - Finance of FHGI since February 1998 and was Vice President - Finance and Corporate Development of FHGI between September 1994 and 1998. 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, 1997, certain biographical information with respect to additional members of the management of FHGI: -26- 27 LYNNE A. BUENING, 44, has been Vice President of Programming of FHGI since November 1993. From 1989 to 1993, she served as Director of Programming for Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening held programming and marketing positions in the cable, broadcast and newspaper industries. OVANDO COWLES, 44, has been Vice President of Advertising Sales and Production of FHGI 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 TV, an affiliate of Falcon, from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various sales and advertising positions. ABEL C. CRESPO, 38, has been Controller of FHGI since January 1997. Mr. Crespo joined Falcon in December 1984, and has held various accounting positions during that time, most recently Senior Assistant Controller. Mr. Crespo holds a Bachelor of Science degree in Business Administration from California State University, Los Angeles. HOWARD J. GAN, 51, has been Vice President of Regulatory Affairs of FHGI and its predecessors since 1988. 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, 50, has been Vice President of Marketing of FHGI 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, 62, has been Vice President of Human Resources of FHGI and its predecessors since May 1988. From 1987 to May 1988, she was self-employed as a Management Consultant to cable and transportation companies. She served as Director of Human Resources of a Los Angeles based cable company from 1985 through 1987. Prior to that time, she served as a human resource executive in the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in Human Resources Management from Pepperdine University. RAYMOND J. TYNDALL, 50, has been Vice President of Engineering of FHGI since October 1989. From 1975 to September 1989, he held various technical positions with Choice TV and its predecessors. From 1967 to 1975, he held various technical positions with Sammons Communications. He is a certified National Association of Radio and Television Engineering ("NARTE") engineer in lightwave, microwave, satellite and broadband and is a member of the Cable Pioneers. In addition, FHGI has six Divisional Vice Presidents who are based in the field. They are Donald L. Amick, Daniel H. DeLaney, Ron L. Hall, Michael E. Kemph, Michael D. Singpiel and Robert S. Smith. 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. -27- 28 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 Fair Dinkum 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 Fair Dinkum, which produces feature films and television programming, including the hit series "Sightings." Mr. Winkler was co-executive producer of MacGyver. He is also co-executive producer of Dead Man's Gun, currently on Showtime. 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. -28- 29 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, 1997, 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 $276,000 of fees to the General Partner that had been deferred in prior years to give effect to the amount of Adjusted Operating Cash realized. As a result of the sale of the Sold Systems, the Partnership's management anticipates deferring 50% of the management fee payments in 1998. -29- 30 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. Accordingly, no disposition fee was paid in connection with the sale of the Sold Systems and, if the Somerset System is sold to FHGLP as currently anticipated, no disposition fee will be paid in connection with such sale. 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. -30- 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 3, 1998, 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, 1998, 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, 1998, 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 0.46% of Falcon Classic Cable Income Properties, L.P. ("Falcon Classic") and 2.58% of Falcon Video Communications ("Falcon Video"). In accordance with the respective partnership agreements of these two 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. See Item 13., "Certain Relationships and Related Transactions." 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. -31- 32 SALE OF THE PARTNERSHIP'S SYSTEMS The Partnership Agreement provides that, pursuant to the terms of the "Appraisal Process" (as defined below), the Partnership may, in the sole discretion of the 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. The Partnership Agreement provides that any such sale must be made in cash at the median of appraisals undertaken by three nationally recognized experts in the cable television field. 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 Partnership Agreement provides that the appraised value pursuant to the Appraisal Process is to 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. The Partnership Agreement provides that 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. 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. 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 full text of the Appraisal reports has previously been filed with the Securities and Exchange Commission. These Appraisals addressed the value of the appraised Partnership assets and did not give effect to any debt or other liabilities of the Partnership. Based solely upon the Appraisals, as of December 31, 1997, the Partnership understood the appraised values of the five cable Systems owned by the Partnership to be as follows (dollars in thousands): -32- 33
Communications Kane Reece Arthur Equity Associates, Inc. Andersen LLP Associates, Inc. ---------------- ------------ ---------------- (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. Actual sales in the marketplace could have been at valuations materially above or below those reflected by the Appraisals. The Appraisals, by their respective terms, were 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. Also, actual future results may vary materially from those shown in the 1997 projections. The Partnership is not under any obligation to update the projections at any future time. By letter dated June 24, 1997, the General Partner advised the Partnership that it intended to exercise its purchase right to acquire all of the Partnership's cable systems pursuant to the Appraisal Process for cash consideration equal to the median appraised value of $82.0 million (the "Appraised Value"). The General Partner further advised the Partnership that, as permitted by the Partnership Agreement, it intended that the cable systems be acquired (the "Proposed Sale") by certain affiliates of the General Partner (the "Purchasers"). On June 27, 1997, the General Partner caused the Partnership to enter into an Asset Purchase Agreement with the Purchasers, and the parties began to seek the necessary regulatory and other consents. The Asset Purchase Agreement is filed as an exhibit to the Partnership's Report on Form 8-K dated June 24, 1997. On or about September 2, 1997, the Partnership was named in a putative class action suit (the "Lawsuit") filed against the Partnership, its general partner and certain of its directors and officers with respect to the Proposed Sale. Effective as of December 31, 1997, the Partnership and certain other parties reached the -33- 34 Settlement Agreement resolving and settling the Lawsuit. In exchange for a complete dismissal of the Lawsuit with prejudice and releases, and without admitting or conceding any fault, liability or wrongdoing whatsoever, the Partnership and the other defendants agreed to establish a settlement fund, payable to holders of Units as of June 30, 1997, which amounted to $1.3 million plus interest at 10% from January 1, 1998 through closing of the sale as defined in the Settlement Agreement. On March 6 and 9, 1998, the Partnership consummated the sale of substantially all of its assets except for the Somerset System. The assets sold represented approximately 92.4% of the total amount of the Proposed Sale. In connection with such Sale, and in accordance with the Settlement Agreement and the Asset Purchase Agreement, the Partnership received approximately $76.8 million, representing purchase price, accrued interest on the net purchase price attributable to the systems sold, less an appropriate portion of the settlement notice costs. In addition, the defendants to the Lawsuit separately transferred approximately $1.2 million to the settlement fund. In connection with the Partnership's receipt of the proceeds from the sale of the Sold Systems, on March 6, 1998, the Partnership retired its outstanding bank debt and, on March 27, 1998, the Partnership distributed approximately $58.2 million (approximately $809.92 per unit) to its unitholders. In addition, the Partnership understands that counsel for the plaintiffs in the Lawsuit intend to distribute the settlement fund in late May or early June 1998. As of March 9, 1998, the Partnership's sole remaining cable system asset is the Somerset System, which represents approximately 7.6% of the Proposed Sale. The regulatory approvals required to consummate the sale of the Somerset System to FHGLP have not been obtained from the City of Somerset. The Partnership will continue to negotiate with the City of Somerset to obtain such approvals. There can be no assurance that the Partnership will be successful in obtaining such approvals. If such approvals are not received on or before September 30, 1998, the Partnership intends to explore alternative options, including the sale of the Somerset System to a third party. If the Partnership obtains the requisite approvals from the City of Somerset on or prior to September 30, 1998, the Partnership intends to complete the sale of the Somerset System and to distribute to unitholders at the time of such sale approximately $6.3 million, representing the proceeds from the sale of the Somerset System (less certain deductions) and the remainder of the interest required by the Settlement Agreement. The approximately $6.3 million to be distributed upon the sale of the Somerset System is only an estimate and may vary depending on transaction costs and expenses and liabilities incurred prior to distribution. In addition, if the sale of the Somerset System occurs on or before September 30, 1998, the Settlement Agreement requires that additional funds be transferred to the settlement fund for distribution to holders of units as of June 30, 1997. The Partnership Agreement provides that the Partnership shall be dissolved upon the occurrence of the sale or distribution of all or substantially all of the assets of the Partnership. The Partnership Agreement also provides that upon the dissolution of the Partnership, the General Partner shall take such actions as are necessary for the winding up of the affairs of the Partnership and the distribution of its assets to the partners pursuant to the provisions of the Partnership Agreement. Accordingly, following the consummation of the sale of the Somerset System, the General Partner intends to wind-up the affairs of the Partnership in accordance with the terms of the Partnership Agreement, including the liquidation of the assets of the Partnership, the discharge of all of the liabilities of the Partnership, and the distribution of the remaining assets of the Partnership to its partners as appropriate. 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 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 -34- 35 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. -35- 36 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. -36- 37 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 2, 1997 (Putative Class Action Suit) -37- 38 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 15th day of May 1998. 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 Executive Vice President and 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 15th day of May 1998.
Signatures Title(*) ------------------------- ------------------------------------------------- /s/ Marc B. Nathanson Director of Falcon Holding Group, Inc. ------------------------- and Chief Executive Officer of the Registrant Marc B. Nathanson (Principal Executive Officer) /s/ Michael K. Menerey Executive Vice President, Chief Financial Officer ------------------------- and Secretary of the Registrant Michael K. Menerey (Principal Financial and Accounting Officer) /s/ Stanley S. Itskowitch Director of Falcon Holding Group, Inc. ------------------------- and Executive Vice President Stanley S. Itskowitch and General Counsel of the Registrant
-38- 39 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page ---- Report of Independent Auditors F-2 Balance Sheets - December 31, 1996 and 1997 F-3 Financial Statements for each of the three years in the period ended December 31, 1997: 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-16 All other schedules have been omitted because they are either not required, not applicable or the information has otherwise been supplied. F-1 40 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, 1996 and 1997, and the related statements of operations, partners' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 April 22, 1998 F-2 41 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. BALANCE SHEETS ============================================
December 31, ------------------------- 1996 1997 -------- -------- (Dollars in Thousands) ASSETS: Cash and cash equivalents $ 7,126 $ 620 Receivables, less allowance of $31,000 and $42,000 for possible losses 660 773 Prepaid expenses and other assets 1,516 1,065 Property, plant and equipment, less accumulated depreciation and amortization 30,655 30,563 Franchise cost and goodwill, less accumulated amortization of $15,029,000 and $17,712,000 17,409 14,783 Customer lists and other intangible costs, less accumulated amortization of $2,684,000 and $2,018,000 1,968 1,630 -------- -------- $ 59,334 $ 49,434 ======== ======== LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Notes payable $ 24,300 $ 14,750 Accounts payable 542 592 Accrued expenses 2,509 3,422 Payable to general partner 1,006 274 Customer deposits and prepayments 144 143 -------- -------- TOTAL LIABILITIES 28,501 19,181 -------- -------- COMMITMENTS AND CONTINGENCIES PARTNERS' EQUITY: General partner 401 395 Limited partners 30,654 30,080 Notes receivable from general partner (222) (222) -------- -------- TOTAL PARTNERS' EQUITY 30,833 30,253 -------- -------- $ 59,334 $ 49,434 ======== ========
See accompanying notes to financial statements. F-3 42 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. STATEMENTS OF OPERATIONS ============================================
Year ended December 31, ------------------------------------------ 1995 1996 1997 -------- -------- -------- (Dollars in thousands, except net loss per limited partnership unit) REVENUES $ 18,363 $ 19,826 $ 20,299 -------- -------- -------- EXPENSES: Service costs 6,042 6,013 6,691 General and administrative expenses 2,589 2,717 2,933 Management fees and reimbursed expenses 1,469 1,586 1,624 Depreciation and amortization 8,526 7,712 8,080 -------- -------- -------- Total expenses 18,626 18,028 19,328 -------- -------- -------- Operating income (loss) (263) 1,798 971 OTHER INCOME (EXPENSE) Interest income 41 314 280 Interest expense (2,051) (2,127) (1,770) Other income (expense) - - (61) -------- -------- -------- NET LOSS $ (2,273) $ (15) $ (580) ======== ======== ======== Net income (loss) allocated to General Partner $ (23) $ - $ (6) ======== ======== ======== Net income (loss) allocated to Limited Partners $ (2,250) $ (15) $ (574) ======== ======== ======== NET LOSS PER LIMITED PARTNERSHIP UNIT $ (31.30) $ (0.21) $ (7.99) ======== ======== ======== WEIGHTED AVERAGE LIMITED PARTNERSHIP UNITS OUTSTANDING DURING PERIOD 71,879 71,879 71,879 ======== ======== ========
See accompanying notes to financial statements. F-4 43 FALCON CLASSIC CABLE 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, 1995, $ 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 Net loss for year (6) (574) - (580) -------- -------- -------- -------- PARTNERS' EQUITY, December 31, 1997 $ 395 30,080 $ (222) $ 30,253 ======== ======== ======== ========
See accompanying notes to financial statements. F-5 44 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. STATEMENTS OF CASH FLOWS ============================================
Year ended in December 31, ------------------------------------------ 1995 1996 1997 -------- -------- -------- (Dollars in Thousands) Cash flows from operating activities: Net loss $ (2,273) $ (15) $ (580) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,526 7,712 8,080 Gain on sale of assets - - (4) Provision for losses on receivables 234 171 345 Amortization of deferred loan costs 4 27 - Increase (decrease) from changes in: Receivables (98) (175) (458) Prepaid expenses and other assets (578) (63) 451 Accounts payable and other liabilities 671 (910) 230 -------- -------- -------- Net cash provided by operating activities $ 6,486 $ 6,747 $ 8,064 -------- -------- -------- Cash flows from investing activities: Capital expenditures (5,713) (3,033) (4,832) Increase in intangible assets (167) (25) (192) Proceeds on sale of property, plant and equipment - - 4 -------- -------- -------- Net cash used in investing activities $ (5,880) $ (3,058) $ (5,020) -------- -------- -------- Cash flows from financing activities: Repayments of notes payable $(18,000) $ (2,700) $ (9,550) Borrowings under notes payable 22,500 - - -------- -------- -------- Net cash provided by (used in) financing activities 4,500 (2,700) (9,550) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,106 989 (6,506) Cash and cash equivalents, at beginning of year 1,031 6,137 7,126 -------- -------- -------- Cash and cash equivalents, at end of year $ 6,137 $ 7,126 $ 620 ======== ======== ========
See accompanying notes to financial statements. F-6 45 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 1 - SUMMARY OF ACCOUNTING POLICIES BASIS OF PRESENTATION 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. These financial statements are presented on the basis that the Partnership continues as a going concern. As more fully described in Note 2 to the financial statements, the Partnership completed the sale of substantially all of its assets to FHGLP in March 1998 and distributed the net cash proceeds to its unitholders. The sale of the Partnership's remaining assets (City of Somerset, Kentucky; the "Somerset System") to FHGLP is pending regulatory approval, of which there can be no assurance. The carrying value of the net assets presented herein bear no relation to the fair value of the assets sold or expected to be sold, and the resulting distributable value per unit. 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 included $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 F-7 46 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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. 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. F-8 47 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 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, 1997, the book basis of the Partnership's net assets exceeds its tax basis by $11.9 million. 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 - PARTNERSHIP MATTERS AND SALE OF PARTNERSHIP ASSETS 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. APPRAISAL PROCESS 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. Accordingly, on August 27, 1996, the General Partner requested that the Appraisal Process be commenced and that, in compliance therewith, the Conflicts Committee of the Advisory 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"). F-9 48 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 2 - PARTNERSHIP MATTERS AND SALE OF PARTNERSHIP ASSETS (CONTINUED) 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, including the Somerset System, to be as follows (dollars in thousands):
Communications Kane Reece Arthur Equity Associates, Inc. Andersen LLP Associates, Inc. ---------------- ------------ ---------------- (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. In March 1998 the Partnership received from FHGLP $76.8 million in connection with the acquisition by FHGLP of substantially all of the assets of the Partnership (the "Sold Systems"), other than the Somerset System. In addition, the defendant to certain litigation arising from such sale transferred $1.2 million to a settlement fund for the benefit of unitholders of record as of June 30, 1997. The sale of the Somerset System will be completed as soon as regulatory approvals can be obtained, of which there can be no assurance. For the year ended December 31, 1997, the Somerset System had revenues of approximately $1.5 million. In connection with the Partnership's receipt of the proceeds from the sale of the Sold Systems, on March 6, 1998, the Partnership retired its outstanding bank debt and, on March 27, 1998, the Partnership distributed approximately $58.2 million (approximately $809.92 per unit) to its unitholders. In addition, the Partnership understands that counsel for the plaintiffs in the litigation arising from the sale intend to distribute the settlement fund in late May or early June 1998. If the Partnership obtains the requisite approvals from the City of Somerset on or prior to September 30, 1998, the Partnership intends to complete the sale of the Somerset System to FHGLP and to distribute to unitholders at the time of such sale approximately $6.3 million, representing the proceeds from the sale of the Somerset System (less certain deductions) and the remainder of the interest required by the settlement agreement. The approximately $6.3 million to be distributed upon the sale of the Somerset System is only an estimate and may vary depending on transaction costs and expenses and liabilities incurred prior to distribution. In addition, if the sale of the Somerset System occurs on or before September 30, 1998, additional funds will be transferred to the settlement fund for distribution to unitholders as of June 30, 1997. F-10 49 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
December 31, ------------------------- 1996 1997 -------- -------- (Dollars in Thousands) Cable television systems $ 47,158 $ 50,031 Furniture and equipment 1,033 1,125 Vehicles 746 972 Land, buildings and improvements 846 854 -------- -------- 49,783 52,982 Less accumulated depreciation and amortization (19,128) (22,419) -------- -------- $ 30,655 $ 30,563 ======== ========
NOTE 4 - 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. F-11 50 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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:
1996 1997 ---------------------- ------------------------- Carrying Fair Carrying Fair Value (1) Value Value (1) Value -------- ------- -------- -------- (Dollars in Thousands) Cash and cash equivalents $ 7,126 $ 7,126 $ 620 $ 620 Note Payable (Note 5) (2) $24,300 $24,300 $14,750 $14,750
Notional Fair Notional Fair Amount(3) Value(4) Amount(3) Value(4) --------- -------- --------- -------- Interest Rate Hedging Agreements (Note 5): Interest rate swaps $20,000 $ (36) $15,000 $ (14)
- ---------------- (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 1996 was $20 million for swaps. The amount in 1997 was $15 million for swaps. (4) The amount that the Partnership estimates it would pay to terminate the hedging agreements, such amount has not been reflected in the financial statements. The fair value of the excess of interest swaps over outstanding notes payable is immaterial. NOTE 5 - 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 provided 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, 1997, the weighted average interest on the outstanding balance (including the effects of interest rate swap transactions) was 8.4% 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 term loan was repaid on March 6, 1998 in connection with the sale of substantially all the Partnership's assets. (See Note 2). The Bank Credit Agreement also contained restrictions relating to, among other things, additional borrowings, guarantees, mergers and distributions to partners. The debt was 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, 1997. F-12 51 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 5 - NOTES PAYABLE (CONTINUED) 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, 1997, 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, 1997, the Partnership participated in interest rate swap contracts with aggregate notional principal of $15 million under which the Partnership pays interest at fixed rates ranging from 5.75% to 6.51% (weighted average rate of 6.07%), and receives interest at variable LIBOR-based rates. These contracts expire in 1998 and 1999, and were sold to FHGLP on March 6, 1998 when the outstanding notes payable under the Bank Credit Agreement were retired. The hedging agreements resulted in additional interest expense of $19,000, $117,000 and $72,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Partnership does not believe that it has any significant risk of exposure to non-performance by any of its counterparties. NOTE 6 - 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. The notes receivable balance was repaid to the Partnership on March 30, 1998 in connection with the sale of substantially all the Partnership's assets (other than the Somerset System). See Note 2. NOTE 7 - 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 $1.5 million, $1.6 million and $1.6 million for the years ended December 31, 1995, 1996 and 1997, 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 1997 and recovered $276,000 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. As a result of the sale of substantially all the Partnership's assets (other than the Somerset System), the Partnership's management anticipates that adjusted operating cash in 1998 will not exceed the 10% requirement, and 50% of the management fees in 1998 will be deferred. F-13 52 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 8 - COMMITMENTS AND CONTINGENCIES The Partnership leased office space and equipment under operating leases expiring at various dates through the year 2008. These lease commitments were assumed by FHGLP with the purchase of substantially all the Partnership's assets. Rent expense for the years ended December 31, 1995, 1996 and 1997 for all facilities amounted to $86,000, $91,000 and $86,000, respectively. The Somerset System has no long term lease commitment. In addition, the Partnership rents line space on utility poles in some of the franchise areas it serves. These rentals amounted to $290,000, $341,000 and $360,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Generally such pole rental agreements, which were substantially assumed by FHGLP, are short-term, but the Partnership expects such rentals to continue in the future. The pole rental agreements related to the Somerset System amounted to approximately $33,000 for the year ended December 31, 1997. Beginning in August 1997, the General Partner elected to self-insure the Partnership's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. Management believes that the relatively small size of the Partnership's markets in any one geographic area coupled with their geographic separation will mitigate the risk that the Partnership could sustain losses due to seasonal weather conditions or other events that, in the aggregate, could have a material adverse effect on the Partnership's liquidity and cash flows. There can be no assurance that future self-insured losses will not exceed prior costs of maintaining insurance for these risks. In January 1998, the Partnership suffered storm damage to its Somerset, Kentucky cable television system. Management estimates that the cost to repair this damage will be $1.0 million and will be funded through cash from the sale of the Sold Systems. The Partnership continues to purchase insurance coverage in amounts management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. The Somerset System has been tied together with fiber to the Burnside system, thereby eliminating the Somerset headend. The Burnside system was sold to FHGLP on March 9, 1998. In the event that the Partnership is unable to obtain regulatory approvals to complete the sale of the Somerset System to FHGLP, the Partnership intends to seek other buyers for the Somerset System. The value of the Somerset System could be adversely affected by the lack of a headend. As of March 1998, the Partnership entered into an agreement with FHGLP to rent the usage of the headend site, the office and related equipment. 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 F-14 53 FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. NOTES TO FINANCIAL STATEMENTS ============================================ NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 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 At December 31, 1997, the Partnership had a cash or deferred profit sharing plan (the "Profit Sharing Plan") covering substantially all of its employees. The Profit Sharing Plan provided 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 1995, 1996 or 1997. As of March 1998, in connection with the sale of substantially all the Partnership's assets, the Partnership no longer has employees. NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended December 31, 1995, 1996 and 1997, the Partnership paid cash interest amounting to $2.1 million, $2.2 million and $1.8 million, respectively. F-15 54 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, 1995 $ 27 $ 234 $ (221) $ 40 1996 $ 40 $ 171 $ (180) $ 31 1997 $ 31 $ 345 $ (334) $ 42
(a) Write-off uncollectible accounts F-16 55 EXHIBIT INDEX
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) 5.1 Stipulation of Settlement (17) 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)
E-1 56 EXHIBIT INDEX
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)
E-2 57 EXHIBIT INDEX
10.23 Resolution No. 3-88-1301 of the City of California City approved of the transfer of 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 Asset Purchase Agreement, dated as of June 27, 1997, by and among Falcon Community Cable, L.P., Falcon Cable Media, Falcon Cable Systems Company II, L.P. and Falcon Classic Cable Income Properties, L.P. (17) 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) 99.4 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.(16) 99.5 Valuation Analysis for Falcon Classic Cable Income Properties, L.P., as of December 31, 1996, dated March 3, 1997, prepared by Communications Equity Associates. (16) 99.6 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. (16) 99.7 Letter to unitholders dated June 24, 1997 relating to sale of the Partnership. (17)
E-3 58 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. (16) Incorporated by reference to the exhibits to the Registrant's Annual Report on Form 10-K, File No. 0-18266 dated December 31, 1996. (17) Incorporated by reference to the exhibits to the Registrant's Current Report on Form 8-K, File No. 0-18266 dated June 24, 1997. (18) Incorporated by reference to the exhibits to the Registrant's Current Report on Form 8-K, File No. 0-18266 dated December 31, 1997. E-4 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT DECEMBER 31, 1997, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 620 0 815 42 0 0 52,982 22,419 49,434 4,431 0 0 0 0 0 49,434 0 20,299 0 19,238 (61) 345 1,490 (580) 0 (580) 0 0 0 (580) (7.99) 0
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