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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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: 33-60776
FALCON HOLDING GROUP, L.P.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 95-4408577
(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)
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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: 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/
The aggregate market value of equity securities held by non-affiliates of
the Registrant: There is no public trading market for the equity securities of
the Registrant and, accordingly, the Registrant is not presently able to
determine the market value of the equity securities held by non-affiliates.
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The Exhibit Index is located at Page E-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP" or the
"Partnership"), owns and operates cable television systems in 23 states (the
"Owned Systems"), principally California, Oregon, Missouri, Georgia, Texas,
North Carolina and Alabama. As of December 31, 1997, the Owned Systems served
approximately 563,000 basic subscribers. The Partnership also controls, holds
varying equity interests in and manages certain other cable television systems
(the "Affiliated Systems" and, together with the Owned Systems, the "Falcon
Systems"). As of December 31, 1997, the Affiliated Systems served approximately
214,000 basic subscribers in 16 states, including North Carolina, Kentucky,
Illinois, Washington and Tennessee. All of the Owned Systems and most of the
Affiliated Systems operate under the name "Falcon Cable TV." See "Overview of
the Systems."
A cable television system receives television, radio and data signals at the
system's "headend" site by means of over the air antennas, microwave relay
systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The Falcon Systems offer customers various levels (or "tiers") of cable
services consisting of broadcast television signals of local network,
independent and educational stations, a limited number of television signals
from so-called "super stations" originating from distant cities (such as WGN),
various satellite-delivered, non-broadcast channels (such as Cable News Network
("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN, Turner
Network Television ("TNT"), WTBS and The Disney Channel), programming originated
locally by the cable television system (such as public, educational and
governmental access programs) and informational displays featuring news,
weather, stock market and financial reports, and public service announcements. A
number of the satellite services are also offered in certain packages. For an
extra monthly charge, the Falcon Systems offer "premium" television services to
their customers. These services (such as Home Box Office ("HBO") and Showtime)
are satellite channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic, expanded basic, other tiers of satellite services and premium
programming services. Such monthly service fees constitute the primary source of
revenues for the Falcon Systems. In addition to customer revenues, the Falcon
Systems receive revenue from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. The Falcon Systems also
offer to their customers home shopping services, which pay the Partnership a
share of revenues from sales of products in the system's service areas, in
addition to paying the Falcon System a separate fee in return for carrying their
shopping service. Certain other new channels have also recently offered the
Falcon Systems fees in return for carrying their service. Due to a general lack
of channel capacity available for adding new channels, management cannot predict
the impact of such potential payments on the Partnership's business. See Item
7., "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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 cable
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
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National Cable Television Association and a past winner of its prestigious
Vanguard Award for outstanding contributions to the growth and development of
the cable television industry. Mr. Intiso is an 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, Falcon Holding Group, Inc. ("FHGI"), are
located at 10900 Wilshire Boulevard, 15th Floor, Los Angeles, California 90024,
and their telephone number is (310) 824-9990.
RECENT DEVELOPMENTS
TCI TRANSACTION
On December 30, 1997, FHGLP entered into a Contribution and Purchase
Agreement (as it may be amended, modified or supplemented, the "Contribution
Agreement") with Falcon Communications, L.P., a newly organized holding company
("New Falcon"), TCI Falcon Holdings, LLC ("TCI"), an affiliate of
Tele-Communications, Inc., the existing partners of FHGLP and the investors in
Falcon Video Communications, L.P. ("Falcon Video"). The parties to the
Contribution Agreement have agreed to consolidate under the ownership and
control of New Falcon, a holding company to be owned by FHGLP and TCI,
substantially all of the Falcon Systems and all of the TCI Systems (as defined).
The Falcon Systems to be contributed to New Falcon, which as of December 31,
1997 served approximately 682,000 basic subscribers, including the approximately
70,000 basic subscribers served by the systems owned by Falcon Video, represent
all of the Owned Systems and all of the Affiliated Systems currently under the
control of FHGLP, except for the Affiliated Systems under the management of
Enstar Communications Corporation ("Enstar"), an indirect wholly-owned
subsidiary of FHGLP, which served approximately 95,000 basic subscribers as of
December 31, 1997 (the "Enstar Systems"). The systems to be contributed by TCI
served approximately 293,000 basic subscribers as of December 31, 1997, and are
located in California, Oregon, Washington, Missouri and Alabama (the "TCI
Systems"). Following completion of the TCI Transaction (as defined), the TCI
Systems will be consolidated into and operated by the operating subsidiaries
(the "Owned Subsidiaries") of the Partnership. As such, New Falcon will own or
manage systems that served approximately 1,070,000 basic subscriber in 26 states
as of December 31, 1997.
FHGLP will own, subject to possible adjustment pursuant to the Contribution
Agreement, approximately 53% of the equity of New Falcon and will serve as the
managing general partner of New Falcon. TCI will own, subject to possible
adjustment pursuant to the Contribution Agreement, approximately 47% of the
equity of New Falcon. FHGI will continue to serve as the sole general partner of
FHGLP. As such, subject to certain governance provisions set forth in the
Amended and Restated Agreement of Limited Partnership of Falcon Communications,
L.P. (the "New FHGLP Partnership Agreement"), FHGI and its senior management
will continue to manage the business and day-to-day operations of New Falcon.
Assuming the Partnership successfully completes a pending private placement,
FHGLP will offer to purchase all of the outstanding 11% Senior Subordinated
Notes due 2003 (the "Notes") in a tender offer (the "Notes Tender"). If the
Notes Tender does not result in the purchase of all of the Notes, the Company
will redeem any remaining outstanding Notes prior to October 15, 1998, in
accordance with the redemption provisions of the indenture governing the Notes.
The Notes are redeemable at the option of the obligor, in whole or in part, at
any time on or after September 15, 1998, at 105.5% of the outstanding principal
amount, plus accrued interest to the redemption date. If the TCI Transaction is
consummated before all of the Notes either have been tendered for purchase by
FHGLP or redeemed, New Falcon will initially assume (subject to a subsequent
assumption by New Falcon II, as described below) the rights and obligations of
FHGLP under the Notes. See "--Private Placement."
Management currently anticipates that, immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to Falcon Communications, LLC, a newly-formed limited
liability company wholly-owned by New Falcon ("New Falcon II"), subject to
certain
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indebtedness to be assumed by New Falcon II, including any Notes that remain
outstanding and the indebtedness resulting from New Falcon's proposed new bank
financing. Thus, New Falcon II will be substituted for New Falcon as the obligor
under the Notes and the new bank financing.
As part of the TCI Transaction, FHGLP will redeem a specified portion of the
partnership interests in FHGLP currently held by certain of the non-management
limited partners of FHGLP (the "Redeemed Partners") in exchange for a portion of
FHGLP's limited partnership interest in New Falcon (the "New Falcon Interests").
Following the redemption, TCI will purchase the New Falcon Interests from the
Redeemed Partners for cash in the approximate aggregate amount of $154.7
million.
The consummation of the TCI Transaction is also subject to, among other
things, the satisfaction of customary closing conditions and the receipt of
certain third-party and governmental approvals, including the consent of
franchising authorities. Although there can be no assurances that such closing
conditions will be satisfied, that the Partnership will be able to obtain new
financing on acceptable terms or that the TCI Transaction will be consummated,
management presently anticipates that the TCI Transaction will be completed in
the third quarter of 1998.
PROPOSED PRIVATE PLACEMENT
On March 19, 1998, the Partnership announced that it was pursuing a private
placement of $500 million gross proceeds of debentures due 2010, consisting of
$300 million principal amount of Senior Debentures and $200 million gross
proceeds of Senior Discount Debentures (collectively, the "Debentures"). The net
proceeds of the offering are to be used to repay certain outstanding
indebtedness, including all outstanding Notes. The offering is being made in a
private placement only to certain specified qualified institutional buyers,
non-United States persons and a limited number of accredited institutional
investors. Such offering will only be made by confidential offering memorandum
delivered to specified qualified investors. There can be no assurance that such
placement will be successfully completed. See "-- TCI Transaction" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FALCON CLASSIC TRANSACTION
As previously disclosed in prior filings with the Securities and Exchange
Commission (the "Commission"), in June 1997 the Partnership exercised its right
to acquire the cable television systems operated by Falcon Classic Cable Income
Properties, LP. ("Classic" or "Falcon Classic") for $82 million in cash,
representing the appraised value of those assets, and entered into a related
asset purchase agreement. On or about September 2, 1997, the Partnership was
named in a putative class action suit (the "Lawsuit") filed against Falcon
Classic, its general partner and certain of its directors and officers with
respect to the planned purchase of the Falcon Classic assets by certain of the
Partnership's wholly-owned subsidiaries. Effective as of December 31, 1997,
FHGLP 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, FHGLP and the other
defendants agreed to establish a settlement fund which amounted to $1,250,000
plus interest at 10% from January 1, 1998 through closing of the sale as defined
in the Settlement Agreement. FHGLP estimates its portion of the total net amount
of the settlement, including its legal fees, will be approximately $1.0 million.
The defendants also agreed to pay interest at 10% on the projected net sale
proceeds of $64 million from January 1, 1998 through closing of the sale. In
March 1998 the Partnership paid to Classic $76.8 million, including $1.1 million
of interest as required by the Settlement Agreement, in connection with the
acquisition of substantially all of the assets of Falcon Classic other than the
system serving the City of Somerset, Kentucky (the "Somerset System"). The
acquisition of the Somerset System will be completed as soon as regulatory
approvals can be obtained, of which there can be no assurance. As of December
31, 1997, Falcon Classic's cable television systems served approximately 49,000
basic subscribers (which are included in the 682,000 basic subscribers of
systems that will be
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contributed to New Falcon, as described above), including approximately 4,000
basic subscribers in the Somerset System.
BUSINESS STRATEGY
Historically, the Partnership has followed a systematic approach to
acquiring, consolidating, operating and developing cable television systems
based on the primary goal of increasing operating cash flow while maintaining
the quality of its services. The Partnership's business strategy has focused on
serving small to medium-sized communities and the suburbs of certain cities,
including Corpus Christi, Eugene, Huntsville, Little Rock, Los Angeles, Norfolk,
Portland (Oregon), San Luis Obispo, Salem, San Jose and St. Louis. Because the
Falcon Systems are located in geographically and economically diverse markets
across the United States, the Partnership believes that the Falcon Systems,
taken as a whole, are not dependent on any single local economy, are resistant
to regional economic fluctuations and provide the Partnership with a stable
revenue and operating cash flow stream.
The Partnership also believes that given a similar technical and channel
capacity/utilization profile, its cable television systems generally involve
less risk of increased competition than systems in large urban cities. In many
of the Partnership's markets, consumers have access to only a limited number of
over-the-air broadcast television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. Nonetheless,
the Partnership believes that all cable operators will face increased
competition in the future from alternative providers of multi-channel video
programming services. See "Competition."
Adoption of rules implementing certain provisions of the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") by the
Federal Communications Commission (the "FCC") has had a negative impact on the
Partnership's revenues and cash flow. These rules are subject to further
amendment to give effect to the Telecommunications Act of 1996 (the "1996
Telecom Act"). Among other changes, the 1996 Telecom Act provides that the
regulation of certain cable programming service tier ("CPST") rates will 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."
CLUSTERING
The Partnership has sought to acquire cable television systems in
communities that are proximate to other Falcon Systems in order to achieve the
economies of scale and operating efficiencies associated with regional
"clusters." The Partnership believes clustering can reduce marketing and
personnel costs and can also reduce capital expenditures in cases where cable
service can be delivered through a central headend reception facility. In
determining whether the Partnership should acquire a particular system, the
Partnership evaluates, among other things, the capital expenditure requirements
of the system and the demographics of the region.
ACQUISITIONS
Management believes that the cable television industry has entered a period
of further consolidation. Subject to the availability of adequate capital on
terms satisfactory to the Partnership, of which there can be no assurance, the
Partnership plans to continue its acquisition strategy by pursuing opportunities
to purchase cable television systems in its existing geographic service areas as
well as by entering new
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geographic markets, if and when attractive acquisition opportunities become
available. Any such acquisitions, which could be substantial in size, may
involve cable systems owned by affiliated entities in addition to those
discussed in "Recent Developments." In addition to opportunities to purchase
additional cable systems, management expects to pursue opportunities to exchange
its systems for other cable television properties to further its clustering
strategy. In the ordinary course of its business, the Partnership regularly
investigates and otherwise considers investment and acquisition opportunities.
See Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 13., "Certain Relationships and Related
Transactions."
CAPITAL EXPENDITURES
The Partnership has invested in the rebuilding and upgrading of its cable
television systems to the extent financing and regulatory conditions have
permitted. These rebuilds and upgrades have consisted primarily of replacing low
capacity cable plant with new higher capacity fiber-optic trunk and feeder
lines, adding headend electronics to increase channel capacity and addressable
converters to permit system addressability, and reducing the number of headends
in various regions through microwave network transmission links, fiber optic
super trunk and improved reception equipment. However, as noted in "Overview of
the Systems--The Owned Systems," many of the Falcon Systems have almost no
available channel capacity with which to add new channels or to further expand
pay-per-view offerings to customers. As a result, significant amounts of capital
for future upgrades will be required in order to increase available channel
capacity, improve quality of service and facilitate the expansion of new
services such as advertising, pay-per-view, new unregulated tiers of
satellite-delivered services and home shopping, so that the Falcon Systems
remain competitive within the industry. For the three year period ended December
31, 1997, capital expenditures for line extensions, rebuilds and upgrades, and
new equipment for the Partnership totaled approximately $171.2 million.
Approximately $88 million of these capital expenditures related to upgrading and
rebuilding existing distribution plant.
As discussed in prior reports, the Partnership postponed a number of rebuild
and upgrade projects that were planned for 1994 and 1995 because of the
uncertainty related to implementation of the 1992 Cable Act and the impact
thereof on the Partnership's business and access to capital. As a result, even
after giving effect to certain upgrades and rebuilds that were started or
completed in 1996 and 1997, the Partnership's systems are significantly less
technically advanced than had been expected prior to the implementation of
re-regulation. The Partnership believes that the delays in upgrading many of its
systems will, under present market conditions, most likely have an adverse
affect on the value of the systems compared to systems that have been rebuilt to
a higher technical standard. Currently, the Owned Systems have an average
capacity of 48 channels (substantially all of which is presently utilized). The
Partnership's management has selected a technical standard that incorporates a
fiber to the feeder architecture for the majority of its systems that are to be
rebuilt. A system built with this type of architecture can provide for future
channels of analog video service. Such a system will also permit the
introduction of high speed data transmission and telephony services in the
future after incurring incremental capital expenditures related to these
services as well as new digital services. The Partnership is also evaluating the
use of digital compression technology in its Systems. See "Technological
Developments" and "Digital Compression."
The Partnership's future capital expenditure plans are, however, all subject
to the availability of adequate capital on terms satisfactory to the
Partnership, of which there can be no assurance. Subject to the Partnership's
ability to remain in compliance with certain covenants of its debt agreements,
the Partnership presently intends to spend approximately $68.2 million for
rebuild and upgrade projects in 1998. See "Legislation and Regulation" and Item
7., "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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DECENTRALIZED MANAGEMENT
The Partnership manages the Falcon Systems through 42 separate regional
service centers in 26 states. In some circumstances, both Owned Systems and
Affiliated Systems are operated through the same regional service center to take
advantage of cost efficiencies. The Partnership believes that its decentralized
management structure, by enhancing management presence at the system level,
increases its sensitivity to the needs of its customers, enhances the
effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
MARKETING
The Partnership has made substantial changes in the way in which it packages
and sells its services and equipment in the course of its implementation of the
FCC's rate regulations promulgated under the 1992 Cable Act. Pursuant to the
FCC's rules, the Partnership has set rates for cable-related equipment (E.G.,
converter boxes and remote control devices) and installation services based upon
actual costs plus a reasonable profit and has unbundled these charges from the
charges for the provision of cable service. In addition, in some systems, the
Partnership began offering programming services on an a la carte basis that were
previously offered only as part of a package. Services offered on an a la carte
basis typically were made available for purchase both individually and on a
combined basis at a lower rate than the aggregate a la carte rates. The FCC
subsequently amended its rules to exclude from rate regulation newly created
packages of program services consisting only of programming new to a cable
system. The FCC also decided that newly-created packages containing previously
offered non-premium programming services will henceforth be subject to rate
regulation, whether or not the services also are available on an existing a la
carte basis. With respect to a la carte programming packages created by the
Partnership and numerous other cable operators, the FCC decided that where only
a few services had been moved from regulated tiers to a non-premium programming
package, the package will be treated as if it were a tier of new program
services, and thus not subject to rate regulation. Substantially all of the a la
carte programming packages offered by the Partnership have received this
desirable treatment. These amendments to the FCC's rules have allowed the
Partnership to resume its core marketing strategy and reintroduce program
service packaging. As a result, in addition to the basic service package,
customers in substantially all of the Falcon Systems may purchase an expanded
group of regulated services, additional unregulated packages of
satellite-delivered services, and premium services. The premium services may be
purchased on either an a la carte or a discounted package basis. See
"Legislation and Regulation."
The Partnership has employed a variety of targeted marketing techniques to
attract new customers by focusing on delivering value, choice, convenience and
quality. The Partnership employs direct mail, radio and local newspaper
advertising, telemarketing and door-to-door selling utilizing demographic
"cluster codes" to target specific messages to target audiences. In many Falcon
Systems, the Partnership offers discounts to customers who purchase premium
services on a limited trial basis in order to encourage a higher level of
service subscription. The Partnership also has a coordinated strategy for
retaining customers that includes televised retention advertising to reinforce
the initial decision to subscribe and encourage customers to purchase higher
service levels.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
The Partnership places a strong emphasis on customer service and community
relations and believes that success in these areas is critical to its business.
The Partnership has developed and implemented a wide range of monthly internal
training programs for its employees, including its regional managers, that focus
on the Partnership's operations and employee interaction with customers. The
effectiveness of the Partnership's training program as it relates to the
employees' interaction with customers is monitored on an ongoing basis, and a
portion of the regional managers' compensation is tied to achieving customer
service targets. The Partnership conducts an extensive customer survey on a
periodic basis and uses the
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information in its efforts to enhance service and better address the needs of
its customers. In addition, the Partnership is participating in the industry's
Customer Service Initiative which emphasizes an on-time guarantee program for
service and installation appointments. The Partnership's corporate executives
and regional managers lead the Partnership's involvement in a number of programs
benefiting the communities the Partnership serves, including, among others,
CABLE IN THE CLASSROOM, Drug Awareness, Holiday Toy Drive and the Cystic
Fibrosis Foundation. Cable in the Classroom is the cable television industry's
public service initiative to enrich education through the use of commercial-free
cable programming. In addition, a monthly publication, Cable in the Classroom
magazine, provides educational program listings by curriculum area, as well as
feature articles on how teachers across the country use the programs.
OVERVIEW OF THE SYSTEMS
The following table sets forth certain operating statistics for the Falcon
Systems as of the dates indicated.
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AS OF DECEMBER 31,
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1993(1) 1994 1995(2) 1996(3) 1997
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Homes passed(4)
Owned Systems.................................. 546,702 562,616 691,941 924,030 937,786
Affiliated Systems*............................ 640,798 654,108 549,676 327,201 331,142
---------- ---------- ---------- ---------- ----------
Total........................................ 1,187,500 1,216,724 1,241,617 1,251,231 1,268,928
Basic subscribers(5)
Owned Systems.................................. 342,406 360,835 442,166 570,708 562,984
Affiliated Systems*............................ 414,384 425,490 356,977 214,987 213,727
---------- ---------- ---------- ---------- ----------
Total........................................ 756,790 786,325 799,143 785,695 776,711
Basic penetration(6)
Owned Systems.................................. 62.6% 64.1% 63.9% 61.8% 60.0%
Affiliated Systems*............................ 64.7 65.0 64.9 65.7 64.5
---------- ---------- ---------- ---------- ----------
Combined..................................... 63.7% 64.6% 64.4% 62.8% 61.2%
Premium service units(7)
Owned Systems.................................. 154,846 165,137 186,477 203,679 165,960
Affiliated Systems*............................ 184,846 194,958 143,810 77,659 67,052
---------- ---------- ---------- ---------- ----------
Total........................................ 339,692 360,095 330,287 281,338 233,012
Premium penetration(8)
Owned Systems.................................. 45.2% 45.8% 42.2% 35.7% 29.5%
Affiliated Systems*............................ 44.6 45.8 40.3 36.1 31.4
---------- ---------- ---------- ---------- ----------
Combined..................................... 44.9% 45.8% 41.3% 35.8% 30.0%
Average monthly revenue per Basic subscriber(9)
Owned Systems.................................. $ 32.71 $ 32.43 $ 32.77 $ 34.22 $ 36.67
Affiliated Systems*............................ 30.22 31.87 31.39 33.70 36.00
---------- ---------- ---------- ---------- ----------
Combined..................................... $ 31.36 $ 32.13 $ 32.15 $ 34.08 $ 36.49
</TABLE>
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* As of December 31, 1997, Affiliated Systems consisted of the cable systems
owned by Falcon Classic and Falcon Video and the cable systems managed by
Enstar. Substantially all of the Falcon Classic systems became Owned Systems
in March 1998, and following the consummation of the TCI Transaction, the
Falcon Video systems will become Owned Systems.
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(1) In prior reports, the December 31, 1993 totals for the Affiliated Systems
included the statistics for the systems owned by Vista Communications
Limited Partnership III ("Vista"). Vista sold those systems on December 23,
1994. Accordingly, in order to provide a comparable presentation, the
statistics for the Vista systems have been removed from the table above for
1993.
(2) On December 28, 1995, the Partnership acquired all of the direct and
indirect ownership interests in Falcon First, Inc. ("Falcon First") that it
did not previously own and, as a result, the systems of Falcon First became
Owned Systems; previously they were reported as Affiliated Systems. On July
1, 1996, the Partnership sold certain of the Falcon First Systems. As a
result, comparisons of 1996 and 1995 to prior years must take these changes
into account. At December 31, 1997, 1996 and 1995, respectively, Falcon
First had approximately 97,549, 96,318 and 114,682 homes passed, 67,601,
68,212 and 77,258 basic subscribers and 22,230, 29,571 and 36,413 premium
service units. At December 31, 1994, the corresponding totals for Falcon
First were 113,403, 75,688 and 38,756, respectively. At July 1, 1996, the
Systems that were sold had approximately 18,957 homes passed, 9,547 basic
subscribers and 3,932 premium service units.
(3) On July 12, 1996, the Partnership acquired the assets of Falcon Cable
Systems Company ("FCSC") and, as a result, the systems of FCSC became Owned
Systems; previously they were reported as Affiliated Systems. As a result,
comparisons of 1996 to prior years must take this change into account. At
December 31, 1997 and 1996, respectively, the FCSC systems had approximately
245,807 and 239,431 homes passed, 127,315 and 140,599 basic subscribers and
33,844 and 44,199 premium service units. At December 31, 1995 and 1994, the
corresponding totals for the FCSC systems were 233,304 and 228,522 homes
passed, 140,642 and 138,196 basic subscribers and 52,694 and 59,732 premium
service units.
(4) 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.
(5) 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.
(6) Basic subscribers as a percentage of homes passed by cable.
(7) 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 tiered 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, December 31, 1995
and at December 31, 1994 were: Owned Systems 19,124, Affiliated Systems
7,060; Owned Systems 22,613, Affiliated Systems 18,970, and Owned Systems
21,309, Affiliated Systems 29,641, respectively.
(8) 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.
(9) Average monthly revenue per basic subscriber for the one-year period ending
on the respective dates indicated, except for 1994 data which reflects the
fourth quarter of 1994 only. Management believes that the fourth quarter is
more relevant for 1994 because the FCC's amended rate regulation rules
became effective during the third quarter of 1994. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Position and Results of Operations."
9
<PAGE>
CALIFORNIA. As of December 31, 1997, the Partnership's six operating
regions in California had 136,696 basic subscribers, which comprised
approximately 24% of the basic subscribers of the Owned Systems. The systems in
the California regions have an average channel capacity of 50, approximately 93%
of which are currently utilized. Approximately 94% of the customers in the
California regions are served by systems that utilize addressable technology.
OREGON. As of December 31, 1997, the Partnership's seven Oregon operating
regions had 95,897 basic subscribers, which comprised approximately 17% of the
basic subscribers of the Owned Systems. The systems in the Oregon operating
regions have an average channel capacity of 48, approximately 96% of which are
currently utilized. Over 91% of the customers in these operating regions are
served by systems that utilize addressable technology.
MISSOURI. As of December 31, 1997, the Partnership's four operating regions
in Missouri had 73,695 basic subscribers, which comprised approximately 13% of
the basic subscribers of the Owned Systems. The Missouri systems have an average
channel capacity of 46, approximately 95% of which are currently utilized.
Approximately 94% of the customers in the Missouri regions are served by systems
that utilize addressable technology.
GEORGIA. As of December 31, 1997 the Partnership's Georgia systems had
44,249 basic subscribers, which comprised approximately 8% of the basic
subscribers of the Owned Systems. The systems had average channel capacity of
54, of which 98% are utilized. Approximately 87% of the customers are served by
addressable technology.
TEXAS. As of December 31, 1997, the Partnership's three Texas operating
regions had 31,377 basic subscribers, which comprised approximately 6% of the
basic subscribers of the Owned Systems. These systems currently have an average
channel capacity of 53, approximately 89% of which are currently utilized.
Approximately 66% of the customers in the Texas regions are served by systems
that utilize addressable technology.
NORTH CAROLINA. As of December 31, 1997, the Partnership's two North
Carolina operating regions had 26,234 basic subscribers, which comprised
approximately 5% of the basic subscribers of the Owned Systems. These systems
have an average channel capacity of 40, approximately 99% of which are utilized.
Addressable technology is currently being introduced in one of the North
Carolina operating regions, but only 1% of the customers in the state had the
technology available to them at December 31, 1997.
ALABAMA. As of December 31, 1997, the Partnership's Alabama systems had
25,171 basic subscribers which comprised approximately 5% of the basic
subscribers of the Owned Systems. The Alabama systems have an average channel
capacity of 44, approximately 97% of which are currently utilized. Approximately
31% of the customers are served by systems that utilize addressable technology.
OTHER OPERATING REGIONS. The Partnership also owns and operates systems
through ten additional regional centers in Benton, Arkansas; Plattsburgh, New
York; Suffolk, Virginia; Corbin, Kentucky; Colville, Washington; Shawnee,
Oklahoma; Sebastian, Florida; St. George, Utah; Scottsburg, Indiana; and Au
Gres, Michigan. None of these regions are in states that have basic subscribers
that are in excess of 5% of the total basic subscribers of the Owned Systems.
THE OWNED SYSTEMS
The Owned Systems are divided into 35 separate operating regions located in
23 states. The following is a brief description of the operating regions located
in states that include at least 5% of the basic subscribers of the Owned
Systems. In certain cases, operating regions serve customers in more than one
state and, thus, totals by operating region may exceed basic subscriber totals
for a given state.
10
<PAGE>
The following is a summary of certain operating data, as of December 31,
1997, for the Owned Systems:
<TABLE>
<CAPTION>
AVERAGE
MONTHLY
PREMIUM REVENUE
HOMES BASIC BASIC SERVICE PREMIUM PER BASIC
STATE PASSED SUBSCRIBERS PENETRATION UNITS PENETRATION SUBSCRIBER(1)
- ----------------------------------------------- --------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alabama........................................ 39,528 25,171 63.7% 9,777 38.8% $ 36.98
Arkansas....................................... 45,550 20,963 46.0% 5,417 25.8% $ 37.60
California..................................... 236,125 136,696 57.9% 39,229 28.7% $ 37.01
Florida........................................ 14,885 9,543 64.1% 1,952 20.5% $ 35.03
Georgia........................................ 54,183 44,249 81.7% 12,183 27.5% $ 40.54
Illinois....................................... 3,424 1,834 53.6% 725 39.5% $ 34.07
Indiana........................................ 7,180 4,688 65.3% 1,047 22.3% $ 37.38
Kansas......................................... 3,512 2,431 69.2% 618 25.4% $ 35.00
Kentucky....................................... 19,220 14,689 76.4% 3,931 26.8% $ 34.40
Louisiana...................................... 5,494 2,832 51.5% 1,816 64.1% $ 40.42
Maryland....................................... 2,916 2,011 69.0% 595 29.6% $ 42.73
Michigan....................................... 7,280 3,701 50.8% 950 25.7% $ 36.83
Missouri....................................... 116,288 73,695 63.4% 17,856 24.2% $ 35.48
Mississippi.................................... 1,911 1,123 58.8% 230 20.5% $ 37.76
No. Carolina................................... 44,376 26,234 59.1% 7,275 27.7% $ 39.11
Nevada......................................... 6,285 1,125 17.9% 1,472 130.8% $ 31.86
New York....................................... 26,092 16,572 63.5% 5,520 33.3% $ 37.56
Oklahoma....................................... 17,132 11,062 64.6% 4,918 44.5% $ 38.66
Oregon......................................... 154,478 95,897 62.1% 23,888 24.9% $ 34.47
Texas.......................................... 50,596 31,377 62.0% 11,211 35.7% $ 36.41
Utah........................................... 31,138 9,990 32.1% 4,970 49.8% $ 31.29
Virginia....................................... 35,097 16,502 47.0% 7,952 48.2% $ 41.98
Washington..................................... 15,096 10,601 70.2% 2,428 22.9% $ 33.83
--------- ----------- ---------
937,786 562,984 60.0% 165,960 29.5% $ 36.67
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
- ------------------------
(1) Average monthly revenue per basic subscriber has been computed based on
revenue for the year ended December 31, 1997.
THE AFFILIATED SYSTEMS
The Partnership controls and holds varying equity interests in the
Affiliated Systems, which it manages pursuant to agreements that provide for
fees generally based on revenues and the reimbursement of certain expenses. The
Affiliated Systems are owned separately by several partnerships, namely, Falcon
Classic, Falcon Video, as well as certain partnerships of which Enstar, an
indirect, wholly-owned subsidiary of one of the subsidiaries of the Partnership,
is the general partner (collectively, the "Affiliated Partnerships"). On
December 28, 1995, the Partnership acquired the direct and indirect ownership
interests in Falcon First that it did not previously own, and as a result, the
systems of Falcon First became Owned Systems; previously they were reported as
Affiliated Systems. On July 12, 1996, the Partnership acquired the assets of
FCSC and, as a result, the systems of FCSC became Owned Systems; previously they
were reported as Affiliated Systems. As a result, comparisons of 1996 and 1995
to prior years must take these changes into account. Due to the date of the
acquisition of Falcon First, no operating results of Falcon First were included
in the Partnership's 1995 results of operations. As a result, the management
fees received by the Partnership from Falcon First similarly have not been
eliminated in consolidation of the Partnership's 1995 results of operations, and
are treated as having been received from the Affiliated
11
<PAGE>
Systems. The operating results of the FCSC systems have been included from July
12, 1996. The management fees and reimbursed expenses received by the
Partnership from FCSC prior to July 12, 1996 have not been eliminated in
consolidation and are also treated as having been received from the Affiliated
Systems.
As discussed elsewhere in this Report, the Partnership acquired
substantially all of the assets of Falcon Classic in March 1998 and will acquire
all of the Falcon Video systems upon consummation of the TCI Transaction.
Through the Affiliated Systems, the Partnership manages cable television
systems which at December 31, 1997 served approximately 214,000 basic
subscribers in 16 states, including North Carolina, Kentucky, Illinois,
Washington and Tennessee.
In 1995, 1996 and 1997, the Partnership recognized aggregate revenues of
$8.6 million, $6.3 million and $5.2 million, respectively, from management
agreements with the Affiliated Systems and its consulting agreements with NYNEX
Cable Comms ("NYNEX") and Telecab (as described below). Subject to customary
conditions, most of the management agreements continue for the lives of the
respective managed entities. Falcon Classic and Falcon Video are scheduled to
terminate in 2004 and 2007, respectively; however, the Partnership purchased
substantially all the Falcon Classic assets in March 1998 and expects that the
Falcon Video systems will become Owned Systems in 1998 in connection with the
TCI Transaction and that the management agreements with these entities will be
terminated. Additionally, as noted above, the Partnership manages the
partnerships of which Enstar is the general partner. The partnership agreements
of these partnerships are scheduled to terminate at various times from 2033 to
2037. The consulting agreement with NYNEX expired on September 12, 1997. The
Partnership received $336,000, $343,000 and $248,000 under this agreement in
1995, 1996 and 1997, respectively. The consulting agreement with Telecab was
assigned to an affiliate in February 1996. The Partnership received $270,000 and
$37,000 under this agreement in 1995 and 1996, respectively. Certain of the
credit agreements and partnership agreements of the Affiliated Partnerships
restrict, in certain circumstances, the payment of cash management fees by the
Affiliated Systems to the Partnership. In addition, the Partnership may provide
additional financing to certain of the Affiliated Partnerships in the form of
deferral of amounts owed to the Partnership. Marc B. Nathanson, certain members
of management and the Partnership hold varying equity interests in the
Affiliated Partnerships. See "Recent Developments", Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Item 13., "Certain
Relationships and Related Transactions."
INTERNATIONAL ACTIVITIES
In order to focus its limited capital resources on the upgrade and rebuild
needs of the Owned Systems, the Partnership does not expect to pursue any
further international investments. See Item 13., "Certain Relationships and
Related Transactions." As of December 31, 1997, the Partnership held the
following international investments:
NYNEX CABLE COMMS. The Partnership holds a 1.1% carried interest in the
results of certain systems operated under franchises that the Partnership
contributed to NYNEX. NYNEX is operating and constructing advanced fiber optic
cable and telephone networks in the United Kingdom. On October 22, 1996, NYNEX,
Cable and Wireless plc. and Bell Canada International Inc. merged their
respective interests to form Cable and Wireless Communications. The Partnership
believes that NYNEX is now obligated to make the carried interest payment to the
Partnership, and the Partnership is evaluating its rights and remedies in that
regard. NYNEX has not provided the Partnership with information required to make
the calculation of the carried interest and the amount of the carried interest,
if any, is therefore unknown at this time. The Partnership also provided
consulting services to NYNEX for an annual fee of $356,700. This consulting
agreement terminated on September 12, 1997.
12
<PAGE>
TELECAB. The Partnership has made a 5% equity investment of $2.5 million in
Duhamel Falcon Cable Mexico L.L.C., a Delaware limited liability company ("DFC
Mexico"). DFC Mexico was formed with Hellman & Friedman Capital Partners II,
L.P. (which is also a partner in the Partnership), Mexican Duhamel Cable,
Limited Partnership and Duhamel Cable Partners, Limited Partnership to make an
investment in TV Por Cable Nacional, S.A. de C.V. ("Telecab"). Telecab is a
large cable television operator in Mexico, which owns and operates cable
television systems in various Mexican cities, including Tijuana, Ensenada,
Mexicali, Chihuahua and Ciudad Juarez. The Partnership's investment is part of
an investment of approximately $41 million by DFC Mexico for an ownership
interest of 34% of Telecab. The Partnership entered into a consulting agreement
with Telecab to provide it with certain services in connection with the
operation of Telecab's cable television systems. On February 20, 1996, in
connection with the Partnership's wind-up of its international activities, this
agreement was assigned to Falcon International Communications, LLC ("FIC"), a
separately capitalized affiliated company whose members and management also
include certain limited partners and management of the Partnership. DFC Mexico
is presently in an arbitration proceeding (which includes the Partnership) with
the Mexican partners regarding the resolution of certain disagreements regarding
the management policies of Telecab. The resolution of the arbitration proceeding
may result in either DFC Mexico's shares being purchased by the Mexican partners
or DFC Mexico purchasing the shares of the Mexican partners in Telecab. The
Partnership's current carrying value of the investment in Telecab on its books
is approximately $1.5 million.
OTHER INVESTMENTS
LAKE LAS VEGAS PROJECT. The Partnership is an equity owner in, and the
general partner of, Falcon Lake Las Vegas Cablevision, L.P. ("Falcon Lake Las
Vegas"). This limited partnership was formed in September 1993 to design,
construct and operate an advanced fiber optic cable network in Lake Las Vegas, a
master planned community being developed around a man-made lake southeast of Las
Vegas, Nevada. The Partnership's partner in this project is an affiliate of
Transcontinental Properties, Inc., which is controlled by Ronald Boeddeker of
Las Vegas, Nevada and the Bass Family interests of Fort Worth, Texas. Upon its
completion, Lake Las Vegas is targeted to have 5,000 dwelling units and up to
11,000 hotel units, although there are presently fewer than 50 homes occupied in
the development. The Partnership recently completed building a fiber-to-the-curb
cable television system, and the system is now operational.
FALCON/CAPITAL CABLE. During 1988, one of the Owned Partnerships made a
$1.3 million investment in, and became co-general partner of, Falcon/Capital
Cable, which has approximately 29,000 basic subscribers in six midwestern
states. The Partnership does not manage these systems and has not included the
subscribers of these systems in the number of basic subscribers of the Falcon
Systems. The terms of Falcon/Capital Cable's senior bank debt and subordinated
debt were refinanced on February 11, 1998, and resulted in a decrease in the
percentage of equity of Falcon/Capital Cable owned by the Partnership.
ENSTAR COMMUNICATIONS CORPORATION. Enstar, an indirect wholly-owned
subsidiary of the Partnership, controls and holds varying equity interests in 15
limited partnerships ("Enstar Limited Partnerships"). The Partnership's
financial statements as of December 31, 1997 reflected a $1.5 million investment
in Enstar.
ENSTAR FINANCE COMPANY, LLC. On June 6, 1997, the Partnership and Enstar
formed Enstar Finance Company, LLC ("EFC"), an unrestricted subsidiary under the
Indenture. On September 30, 1997, EFC obtained a secured bank facility with $35
million of availability from two agent banks in order to provide funds that
would be loaned to certain Enstar Limited Partnerships. The lenders advanced
$7.5 million to EFC, which in turn advanced those funds to a number of Enstar
Limited Partnerships at closing. The EFC loan is non-recourse to the Partnership
and matures on August 31, 2001, at which time all funds previously advanced will
be due in full.
The Partnership's interest in the Enstar entities and the international
investments described above will not be contributed to New Falcon as part of the
TCI Transaction and will be retained by FHGLP.
13
<PAGE>
CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offer customers packages of
services that include the local 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 Falcon Systems provide 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. For
additional charges, in most of the Falcon Systems, the Partnership also rents
remote control devices and VCR compatible devices (devices that make it easier
for a customer to tape a program from one channel while watching a program on
another).
The service options offered by the Partnership vary from system to system,
depending upon a system's channel capacity and viewer interests. Rates for
services also vary from market to market and according to the type of services
selected.
Pursuant to the 1992 Cable Act, most cable television systems are subject to
rate regulation of the basic service tier, the non-basic service tiers other
than premium (per channel or program) services, the charges for installation of
cable service, and the rental rates for customer premises equipment such as
converter boxes and remote control devices. These rate regulation provisions
affect all of the Partnership's systems not deemed to be subject to effective
competition under the FCC's definition. See "Legislation and Regulation."
At December 31, 1997, the Partnership's monthly rates for basic cable
service for residential customers of the Owned Systems, excluding special senior
citizen discount rates, ranged from $13.17 to $33.02 and premium service rates
ranged from $5.00 to $11.95, excluding special promotions offered periodically
in conjunction with the Partnership's marketing programs. A one-time
installation fee, which the Partnership may wholly or partially waive during a
promotional period, is usually charged to new customers. 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.
For the years ended December 31, 1995, 1996 and 1997, subscriber fees
accounted for 84.9%, 86.9% and 87.4%, respectively, of the Partnership's
revenues. Management fees accounted for 5.7%, 2.9% and 2.0%, respectively, of
the Partnership's revenues, with other services, comprised of, among other
things, installation fees, franchise fees and other charges, advertising and
home shopping revenues, accounting for 9.4%, 10.2% and 10.6%, respectively.
EMPLOYEES
As of February 6, 1998, the Partnership had approximately 1,085 full-time
employees and 51 part-time employees. The Partnership considers its relations
with its employees to be good. As of February 6, 1998, the Affiliated Systems
had approximately 265 full-time and 11 part-time employees. There are no
collective bargaining agreements relating to any of such employees.
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership emphasizes
high technical standards and prudently seeks to apply technological advances in
the cable television industry to the Owned Systems on the basis of cost
effectiveness, capital availability, enhancement of product quality, service
delivery and industry-wide acceptance. Currently, the Owned Systems have an
average channel capacity of 48, substantially all of which is presently
utilized. The Partnership believes that system upgrades would enable it to
provide customers with greater programming diversity, better picture quality and
alternative communications delivery systems made possible by the introduction of
fiber optic technology and by the possible future application of digital
compression. The implementation of the Partnership's capital expenditure plans
is, however, dependent in part on the availability of adequate capital on terms
satisfactory to the
14
<PAGE>
Partnership, of which there can be no assurance. See "Business Strategy--Capital
Expenditures," "Legislation and Regulation" and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial cable is playing a
major role in expanding channel capacity and improving the performance of cable
television systems. Fiber optic cable is capable of carrying hundreds of video,
data and voice channels and, accordingly, its utilization is essential to the
enhancement of a cable television system's technical capabilities. The
Partnership's current policy is to utilize fiber optic technology in
substantially all rebuild projects which it undertakes. The benefits of fiber
optic technology over traditional coaxial cable distribution plant include lower
ongoing maintenance and power costs and improved picture quality and
reliability.
As of December 31, 1997, approximately 76% of the customers of the Owned
Systems were served by Systems that utilize addressable technology. Addressable
technology permits the cable operator to activate from a central control point
the cable television services to be delivered to a customer if that customer has
also been supplied with an addressable converter. To date, the Partnership has
supplied addressable converter boxes to customers of the Falcon Systems
utilizing addressable technology who subscribe to one or more premium services
and, in selected regions, to customers who subscribe to certain new product
tiers. As a result, if the system utilizes addressable technology and the
customer has been supplied with an addressable converter, the Partnership can
upgrade or downgrade services immediately, without the delay or expense
associated with dispatching a technician to the home. Addressable technology
also reduces pay service theft, is an effective enforcement tool in collecting
delinquent payments and allows the Partnership to offer pay-per-view services.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the area of
digital compression, a technology that is expected to enable cable operators to
increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. Depending on the technical characteristics of the
existing system, the Partnership believes that the utilization of digital
compression technology in the future could enable the Owned Systems to increase
channel capacity in certain systems in a manner that could, in the short term,
be more cost efficient than rebuilding such systems with higher capacity
distribution plant. However, unless the system has sufficient unused channel
capacity and bandwidth, the use of digital compression to increase channel
offerings is not a substitute for the rebuild of the Falcon Systems, which will
improve picture quality, system reliability and quality of service. The use of
digital compression in the Owned Systems also could expand the number and types
of services these systems offer and enhance the development of current and
future revenue sources in these systems. The Partnership's management plans to
introduce this technology in selected markets in 1998. This issue is under
frequent management review.
PROGRAMMING
The Partnership has various contracts to obtain basic and premium
programming for its systems from program suppliers whose compensation is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership.
Certain other new channels have also recently offered the Falcon Systems fees in
return for carrying their service. Due to a lack of channel capacity available
for adding new channels, the Partnership's management cannot predict the impact
of such potential payments on its business. In addition, the FCC may require
that 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
15
<PAGE>
materially adverse terms will not be added to the Partnership's programming
contracts. Management believes, however, that the Partnership's relations with
its programming suppliers generally are good.
The Partnership's cable programming costs have increased in recent years and
are expected to continue to increase due to additional programming being
provided to basic customers, the requirements to carry channels under
retransmission carriage agreements entered into with certain programming
sources, increased costs to produce or purchase cable programming generally
(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 (serving
approximately 49,000 basic subscribers), 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 Owned Systems held 446 franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Owned Systems range
up to 5% of the gross revenues generated by a system. For the past three years,
franchise fee payments made by the Owned Systems have averaged approximately
3.1% of total gross system revenues. The 1984 Cable Act prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues and
also permits the cable operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances.
The following table groups the franchises of the Owned Systems by date of
expiration and presents the number of franchises for each group of franchises
and the approximate number and percentage of basic subscribers for each group as
of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF BASIC PERCENTAGE OF BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES SUBSCRIBERS SUBSCRIBERS
- -------------------------------------------------- ------------- ----------- -------------------
<S> <C> <C> <C>
Prior to 1999..................................... 133 176,654 31.4%
1999-2003......................................... 139 143,073 25.4%
2004 and after.................................... 174 208,825 37.1%
--- ----------- ---
Total............................................. 446 528,552 93.9%
--- ----------- ---
--- ----------- ---
</TABLE>
The Partnership operates numerous cable television systems which serve
multiple communities and, in some circumstances, portions of such systems extend
into jurisdictions for which it believes no franchise is necessary. In the
aggregate, approximately 34,433 basic subscribers, comprising approximately 6.1%
of the Owned Systems' basic subscribers, are served by such portions of such
systems. In general, the Partnership does not believe that the loss of any
single franchise would cause a substantial reduction in the economies of scale
discussed above. In certain instances, however, where a single franchise
comprises a large percentage of the customers in an operating region, the loss
of such franchise could decrease the economies of scale achieved by the
Partnership's clustering strategy. The Partnership has never had a franchise
revoked for any of its systems and believes that it has satisfactory
relationships with substantially all of its franchising authorities.
16
<PAGE>
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.
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
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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 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."
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
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 ends 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 sunset of CPST rate regulation, and legislation recently was
introduced in Congress to repeal the sunset 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
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regulations adopt a benchmark price cap system for measuring the reasonableness
of existing basic and nonbasic service rates. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment (E.G., converter boxes and remote control
devices) and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable operator
adds or deletes channels. In addition, new product tiers consisting of services
new to the cable system can be created free of rate regulation as long as
certain conditions are met, such as not moving services from existing tiers to
the new tier. These provisions currently provide limited benefit to the
Partnership's systems due to the lack of channel capacity previously discussed.
There is also a streamlined cost-of-service methodology available to justify a
rate increase on basic and regulated nonbasic tiers for "significant" system
rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate the
rates charged by the Partnership for basic cable service and for associated
basic cable service equipment. In addition, 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 in substantially all of its systems
so as to bring these rates and charges into compliance with the applicable
benchmark or equipment and installation cost levels.
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.
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NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of 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 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
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the renewal now runs from the submission of the renewal proposal, not the
completion of the public proceeding. Franchising authorities may consider the
"level" of programming service provided by a cable operator in deciding whether
to renew. For alleged franchise violations occurring after December 29, 1984,
franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, 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.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more than
30% of all homes nationwide. Attributable interests for these purposes include
voting interests of 5% or more (unless there is another single holder of more
than 50% of the
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voting stock), officerships, directorships and general partnership interests.
The FCC has stayed the effectiveness of these rules pending the outcome of the
appeal from a U.S. District Court decision holding the multiple ownership limit
provision of the 1992 Cable Act unconstitutional. In the event the stay is
lifted, and the court decision is reversed, TCI may need to assess, based on its
other attributable interests then existing, its compliance with the multiple
ownership limits.
The FCC has also adopted rules which limit the number of channels on a cable
system which can be occupied by programming in which the entity which owns the
cable system has an attributable interest. The limit is 40% of the first 75
activated channels.
The FCC also recently commenced a rulemaking proceeding to examine, among
other issues, whether any limitations on cable-DBS cross-ownership are warranted
in order to prevent anticompetitive conduct in the video services market.
FRANCHISE TRANSFERS
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
TECHNICAL REQUIREMENTS
The FCC has imposed technical standards applicable to the cable channels on
which broadcast stations are carried, and has prohibited franchising authorities
from adopting standards which are in conflict with or more restrictive than
those established by the FCC. Those standards are applicable to all classes of
channels which carry downstream National Television System Committee (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 states of California, Illinois, Kentucky,
Louisiana, Michigan, New York, Oregon, Utah and Washington, where the
Partnership operates cable systems, have certified to the FCC that they regulate
the rates, terms and conditions for pole attachments. In the absence of state
regulation, the FCC administers such pole attachment rates through use of a
formula which it has devised. 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
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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.
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.
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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.
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
The Partnership owns substantially all of the assets related to the Owned
Systems' cable television operations, including program production equipment,
headend equipment (towers, antennae, electronic equipment and satellite earth
stations), cable plant (distribution equipment, amplifiers, customer drops and
hardware), converters, test equipment, tools and maintenance equipment and
vehicles. The Partnership owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices. The Partnership believes that its properties, both owned and leased,
are in good condition and are suitable and adequate for the Partnership's
business operations.
The Partnership leases office space for both its corporate headquarters
(located in Los Angeles, California) and its corporate financial center (located
in Pasadena, California). The office building in which the Partnership leases
space for the corporate financial center is owned by a partnership owned by Marc
B. Nathanson and his wife. The Partnership has increased the amount of space it
leases from such partnership. The terms of the current lease for the corporate
financial center have been negotiated on an arm's length basis. The Partnership
also assumed a lease for office space in a building owned by Marc B. Nathanson
and his wife in connection with the acquisition of the assets of FCSC. The
property will be purchased by the Partnership in March, 1998 for a purchase
price determined by two independent appraisals. See Item 13., "Certain
Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Partnership is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business and management presently 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.
The Partnership, certain of its affiliates, and certain third parties have
been named as defendants in an action entitled FRANK O'SHEA I.R.A. ET AL. v.
FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386, pending in the
Superior Court of the State of California, County of Los Angeles (the "Action").
Plaintiffs in the Action are certain former unitholders of FCSC purporting to
represent a class consisting of former unitholders of FCSC other than those
affiliated with FCSC and/or its controlling persons. The complaint in the Action
alleges, among other things, that defendants breached their fiduciary and
contractual duties to unitholders, and acted negligently, with respect to the
purchase from former unitholders of their interests in FCSC in 1996. In
particular, the complaint in the Action alleges, among other things, (a) that
the appraisals conducted to determine the price at which the purchase of the
former unitholders' interests
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would occur were "inadequate", "defective" and "unreasonable" and that the
appraisal firms who conducted the appraisals (two out of three of which are
named as defendants) acted negligently or recklessly in performing the
appraisals; (b) that the price paid per unit was unfair and was intended to
unfairly benefit the defendants at the expense of the public unitholders, in
that allegedly the price paid did not fairly reflect the intrinsic value of the
partnership assets, was not based on arms-length negotiation, and was less than
the per unit value that could be derived from an alleged estimate of asset value
submitted by FCSC to its lenders in connection with its borrowings' and (c) that
the sums paid the unitholders should not have been based on a calculation that
reflected payment to the General Partner of a "sales fee" as defined in the
partnership agreement. As relief, the complaint seeks damages (and prejudgment
interest) in an unspecified amount, and/or the imposition of a constructive
trust upon the partnership assets purchased by certain defendants, and/or
rescission of the transaction. The defendants have filed answers denying the
material allegations of the complaint in the Action, and the Action is currently
in the pre-trial discovery stage. The Court has set a trial date for October
1998 in this matter. The Partnership believes it has substantial and meritorious
defenses to the claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Partnership's equity
securities and no distributions have been paid or declared in respect thereof
since the formation of the Partnership on March 29, 1993. As of March 1, 1998,
there were 26 partners, including FHGI, in the Partnership.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues................................. $ 146,469 $ 147,229 $ 151,208 $ 217,320 $ 255,886
Costs and expenses....................... (67,025) (67,711) (71,652) (97,180) (122,080)
Depreciation and amortization............ (57,771) (60,935) (54,386) (100,415) (118,856)
--------- --------- --------- --------- ---------
Operating income......................... 21,673 18,583 25,170 19,725 14,950
Interest expense, net(2)................. (49,122) (49,859) (57,777) (71,602) (79,137)
Equity in net loss of investee
partnerships........................... (3,596) (1,782) (5,705) (44) 443
Other income (expense), net.............. (403) (455) 13,077(3) 814 885
Income tax benefit....................... -- -- -- 1,122 2,021
--------- --------- --------- --------- ---------
Loss before extraordinary item........... $ (31,448) $ (33,513) $ (25,235) $ (49,985) $ (60,838)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER OPERATING DATA
Net cash provided by operating
activities............................. $ 51,642 $ 49,076 $ 43,162 $ 90,631 $ 79,537
Net cash used in investing activities.... (27,562) (36,065) (22,674) (284,247) (76,287)
Net cash provided by (used in) financing
activities............................. (25,221) (18,169) (15,906) 192,199 (2,966)
EBITDA(4)................................ 79,444 79,518 79,556 120,140 133,806
EBITDA margin............................ 54.2% 54.0% 52.6% 55.3% 52.3%
Total debt to EBITDA..................... 6.7x 6.8x 7.0x(5) 6.6x(5) 6.8x
Capital expenditures(6).................. $ 25,798 $ 28,232 $ 37,149 $ 57,668 $ 76,323
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.................. $ 15,626 $ 10,468 $ 15,050 $ 13,633 $ 13,917
Total assets............................... 432,668 425,402 585,258 774,323 740,358
Total debt................................. 532,938 538,626 669,019 885,786 911,221
Redeemable partners' equity(7)............. 93,964 93,964 271,902 271,902 171,373
Partners' deficit.......................... (236,096) (256,758) (411,681) (456,499) (416,755)
</TABLE>
FOOTNOTES ON THE FOLLOWING PAGE
27
<PAGE>
FOOTNOTES TO ITEM 6--"SELECTED FINANCIAL DATA"
(1) The December 31, 1995 consolidated balance sheet includes the assets and
liabilities of Falcon First which were acquired on December 28, 1995. The
consolidated statement of operations data for the year ended December 31,
1995 excludes the operations of Falcon First due to the proximity of the
acquisition date to the end of the year, except that management fees from
Falcon First of $1.6 million are included in the consolidated statement of
operations data. On July 12, 1996, the Partnership acquired the assets of
FCSC and, accordingly, the results of the FCSC systems have been included
from July 12, 1996. Management fees and reimbursed expenses received in 1996
by the Partnership from FCSC prior to July 12, 1996 amounted to $1.5 million
and $1.0 million, respectively, and are included in the 1996 consolidated
statement of operations data. The amounts attributable to management fees
and reimbursed expenses received by the Partnership in 1995 were $2.6
million and $2.0 million, respectively.
(2) Interest expense, net includes payment-in-kind interest expense amounting to
$17.5 million, $24.5 million, $27.1 million, $26.6 million and $20.4 million
during 1993, 1994, 1995, 1996 and 1997, respectively. See Note 7 to the
Consolidated Financial Statements.
(3) Other income (expense), net in 1995 includes a gain on sale of marketable
securities.
(4) 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.
(5) Total debt to EBITDA has been computed on a pro forma basis for 1995 to
include the EBITDA of Falcon First of $15.9 million, making the combined
1995 EBITDA $95.4 million. Similarly, total debt to EBITDA has also been
computed on a pro forma basis for 1996 to include the EBITDA of FCSC of
$13.6 million, making the combined 1996 EBITDA $133.8 million. Without these
pro forma adjustments, 1995 data would include the debt incurred to acquire
Falcon First, but would exclude Falcon First's EBITDA, and 1996 data would
include the debt to acquire FCSC, but would exclude its EBITDA for the
period January 1, 1996 through July 11, 1996. See Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(6) Excluding acquisitions of cable television systems.
(7) The Third Amended and Restated Partnership Agreement dated December 28, 1995
(the "Existing FHGLP Partnership Agreement") provides that certain holders
of partnership interests have various redemption rights, which will be
deferred and reduced upon consummation of the TCI Transaction as more fully
described in Note 2 to the consolidated financial statements.
28
<PAGE>
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 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 rate
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. 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, pending
business combination and acquisition transactions, competition, capital needs
and general business conditions applicable to the Partnership. Such forward
looking statements involve risks and uncertainties including, without
limitation, the uncertainty of legislative and regulatory changes and the rapid
developments in the competitive environment facing cable television operators
such as the Partnership, as discussed more fully elsewhere in this Report.
RESULTS OF OPERATIONS
As discussed in Note 3 to the consolidated financial statements, the
historical results of operations of the Partnership for 1995 did not include the
results of Falcon First or FCSC, and for the period January 1, 1996 through July
11, 1996 did not include the results of FCSC. Results of operations of the
Partnership in 1996 compared to 1995 were significantly affected by the
acquisition of Falcon First on December 28, 1995 and FCSC on July 12, 1996.
Falcon First and FCSC were managed by the Partnership prior to and subsequent to
their acquisitions and have been affected by the same trends in operating costs
and revenues as all of the Partnership's cable systems. Accordingly, the
Partnership believes that it is more meaningful to compare 1997 historical
operations to 1996 operations and to compare 1996 operations to 1995 operations,
on an adjusted basis assuming that the acquisitions of Falcon First and FCSC had
occurred on January 1, 1995. The adjusted results include the historical results
of Falcon First and FCSC, as well as the effect of increased amortization for
both periods relating to the allocated purchase price of the intangible assets
acquired, and the effect of increased interest expense related to the increase
in debt incurred to finance the acquisitions. Set forth in the table below are
adjusted results of operations for 1995 and 1996 prepared on this basis and 1997
historical results of operations. The as adjusted results are not necessarily
indicative of
29
<PAGE>
what would have occurred had the acquisitions been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
AS ADJUSTED
YEAR ENDED ACTUAL
DECEMBER 31, YEAR ENDED
------------------------ DECEMBER 31,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues....................................................... $ 231,498 $ 244,905 $ 255,886
Costs and expenses............................................. (112,141) (111,124) (122,080)
Depreciation and amortization.................................. (118,772) (126,832) (118,856)
----------- ----------- ------------
Operating income............................................... 585 6,949 14,950
Interest expense, net.......................................... (94,975) (83,333) (79,137)
Equity in net income (loss) of investee partnerships........... 66 (44) 443
Other income, net.............................................. 20,355 649 885
Income tax benefit............................................. 5,994 1,122 2,021
----------- ----------- ------------
Loss before extraordinary item................................. $ (67,975) $ (74,657) $ (60,838)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
1997 HISTORICAL COMPARED TO 1996 (AS ADJUSTED FOR THE ACQUISITIONS OF FALCON
FIRST AND FCSC)
The Partnership's revenues increased from $244.9 million to $255.9 million,
or by 4.5%, during 1997 compared to 1996. Of the $11 million net increase in
revenues, $10.7 million was due to increased cable service revenues and $333,000
was due to increases in management fees. The $10.7 million increase in cable
service revenues was caused principally by increases of $12.6 million due to
increases in regulated service rates implemented during 1996 and 1997, $4
million related to increases in unregulated service rates implemented during
1996 and in May 1997, $1.6 million due to the July 1, 1996 restructuring of The
Disney Channel from a premium channel to a tier channel and $1.1 million due to
increases in advertising sales. These increases were partially offset by
decreases of $4.5 million due to reductions in the number of premium
subscriptions for cable service, $1.8 million related to the Eastern Georgia
cable systems sold on July 1, 1996, $1.7 million due to reductions in the number
of regulated subscriptions for cable service and $780,000 related to decreases
in other revenues. As of December 31, 1997, the Owned Systems had approximately
563,000 basic subscribers and 166,000 premium service units. Excluding the
Eastern Georgia cable systems sold on July 1, 1996, the Partnership's revenues
increased 5.3% during 1997 compared to 1996.
Management and consulting fees earned by the Partnership increased from $4.9
million during 1996 to $5.2 million during 1997. The increased fees resulted
primarily from recording in 1997 the balance of previously deferred 1995 fees
from Falcon Classic.
Service costs increased from $68.9 million to $75.6 million, or by 9.7%,
during 1997 compared to 1996. Service costs represent costs directly
attributable to providing cable services to customers. Of the $6.7 million
increase in service costs, $5 million related to increases in programming fees
paid to program suppliers (including primary satellite fees) and $1.7 million
related to increases in property taxes, franchise fees and personnel costs. The
increase in programming costs included $340,000 related to the July 1, 1996
restructuring of The Disney Channel discussed above.
General and administrative expenses increased from $42.2 million to $46.4
million, or by 10.1%, during 1997 compared to 1996. Of the $4.2 million
increase, $2.9 million related to increases in bad debt expense, $1.0 million
related to the absence in 1997 of reimbursed expenses from FCSC, which was
managed by the Partnership prior to July 12, 1996, $810,000 related to increases
in personnel costs and $677,000 related to a reduction in reimbursement from FIC
of expenses incurred in connection with international investments. These
increases were partially offset by a decrease of $797,000 related primarily
30
<PAGE>
to reduced insurance premiums as a result of self-insuring the Partnership's
cable distribution plant and subscriber connections during 1997 and a $334,000
decrease in costs associated with reregulation by the FCC.
Operating income before income taxes, depreciation and amortization
("EBITDA") is a commonly used financial analysis tool measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
54.6% during 1996 to 52.3% in 1997. The decrease was primarily caused by
increases in programming costs and bad debt expense as a percent of revenue.
EBITDA remained relatively unchanged at $133.8 million during 1997 and 1996.
Excluding the Eastern Georgia cable systems sold on July 1, 1996, the
Partnership's EBITDA increased from $132.9 million to $133.8 million, or by
0.7%. 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 decreased from $126.8 million to
$118.8 million, or by 6.3%, during 1997 compared with 1996. The $8 million
decrease in depreciation and amortization expense was primarily due to
accelerated 1996 depreciation related to asset retirements and to intangible
assets becoming fully amortized.
Operating income increased from $6.9 million to $14.9 million, or by 115.1%,
during 1997 compared to 1996. The $8 million increase was primarily due to a
decrease in depreciation and amortization expense as discussed above. Excluding
the Eastern Georgia cable systems sold on July 1, 1996, the Partnership's
operating income increased $8.9 million.
Interest expense, including the effects of interest rate hedging agreements,
decreased from $83.3 million to $79.1 million, or by 5%, during 1997 compared to
1996. The decrease was primarily due to lower average interest rates (8.9%
during 1997 compared to 9.1% during 1996) and lower average debt balances
outstanding. Payment-in-kind interest expense associated with the Notes (under
which interest payment requirements are met by delivery of additional Notes)
amounted to $20.4 million during 1997 compared to $26.6 million in 1996.
Interest rate hedging agreements resulted in additional interest expense of
$350,000 during 1997 and $1.0 million in 1996.
Due to the factors described above, the Partnership's net loss decreased
from $74.7 million to $60.8 million, or by 18.5%, during 1997 compared to 1996.
1996 COMPARED TO 1995 (AS ADJUSTED FOR THE ACQUISITIONS OF FALCON FIRST AND
FCSC)
The Partnership's revenues increased from $231.5 million to $244.9 million,
or by 5.8%, during 1996 compared to 1995. Of the $13.4 million net increase in
revenues, $13 million was due to increased cable service revenues and $444,000
was due to increases in management fees. The $13 million increase in cable
service revenues was caused principally by increases of $13.3 million due to
increases in regulated service rates implemented in April and October 1996, $3.1
million due to increases related to other revenue producing items (primarily
advertising sales) and $1.7 million due to the restructuring of The Disney
Channel from a premium channel to a tier channel on July 1, 1996. These
increases were partially offset by decreases of $1.7 million due to reductions
in the number of regulated subscriptions for cable service, $1.6 million related
to cable systems sold during 1996, $1.4 million due to reductions in the number
of premium subscriptions for cable service and $388,000 related to rate
decreases implemented in 1995 to comply with the 1992 Cable Act. As of December
31, 1996, the Owned Systems had approximately 571,000 basic subscribers and
approximately 204,000 premium service units. Excluding the Eastern Georgia cable
systems sold on July 1, 1996, the Partnership's revenues increased 6.6% during
1996 compared to 1995.
Service costs increased from $67.9 million to $69 million, or by 1.6%,
during 1996 compared to 1995. Service costs represent costs directly
attributable to providing cable services to customers. The $1.1 million increase
in service costs was primarily caused by a $1.8 million increase in programming
fees paid to
31
<PAGE>
program suppliers (including primary satellite fees), partially offset by a
$759,000 decrease in property taxes. The increase in programming costs included
a $340,000 increase related to the restructuring of The Disney Channel discussed
above.
General and administrative expenses decreased from $44.3 million to $42.2
million, or by 4.7%, during 1996 compared to 1995. Of the $2.1 million decrease,
$900,000 related to certain one-time charges occurring in 1995, $500,000 related
to the recovery of previously reserved bad debt expense, and $687,000 related
primarily to decreases in personnel costs and other expenses.
EBITDA as a percentage of revenues increased from 51.6% during 1995 to 54.6%
in 1996. The increase was primarily caused by revenue increases as described
above. EBITDA increased from $119.4 million to $133.8 million, or by 12.1%.
Excluding the Eastern Georgia cable systems sold on July 1, 1996, the
Partnership's EBITDA increased from $117.7 million to 132.9 million, or by
12.9%. 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 $118.8 million to
$126.8 million, or by 6.8%, during 1996 compared with 1995. Depreciation expense
increased by approximately $6.8 million due to accelerated depreciation related
to asset retirements and adjustments of the estimated useful lives of certain
tangible assets due to rebuilds and by approximately $4.5 million due to the
depreciation of property, plant and equipment additions. These increases were
substantially offset by intangible assets becoming fully amortized and as a
result of the estimated useful lives of certain other intangible assets being
extended.
Operating income increased from $585,000 to $6.9 million during 1996
compared to 1995. The $6.4 million increase was principally due to increases in
revenues in excess of increases in operating expenses as discussed above.
Excluding the Eastern Georgia cable systems sold on July 1, 1996, the
Partnership's operating income increased by $7.2 million.
Interest expense, including the effects of interest rate hedging agreements,
decreased from $95 million to $83.3 million, or by 12.3%, during 1996 compared
to 1995. The decrease was due to interest expense of $3.5 million related to the
increased amortization of deferred loan costs recorded during 1995, the effect
of lower average interest rates (9.1% during 1996 compared to 9.4% during 1995)
and lower average debt balances outstanding. Payment-in-kind interest expense
associated with the Notes, (under which interest payment requirements are met by
delivery of additional Notes) and, in 1995 only, payment-in-kind interest
expense associated with the $20 million Falcon Telecable's $20 million aggregate
principal amount of 11.56% notes payable, amounted to $26.6 million during 1996
compared to $27.1 million in 1995. Interest rate hedging agreements resulted in
additional interest expense of $1.0 million during 1996 and $729,000 in 1995.
Due to the factors described above, the Partnership's net loss increased
from $68 million to $74.7 million, or by 9.8%, during 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Partnership's primary need for capital has been to acquire
cable systems and to finance plant extensions, rebuilds and upgrades, and to add
addressable converters to certain of the Owned Systems. The Partnership spent
$76.3 million during 1997 on capital expenditures. In addition to the purchase
of substantially all of the Falcon Classic Systems in March 1998 for $76.8
million and the anticipated subsequent purchase of Classic's Somerset system for
approximately $6.4 million, management's current plan calls for the expenditure
of approximately $101 million in capital expenditures in 1998, including
approximately $68.2 million to rebuild and upgrade certain of the Owned Systems.
The Partnership's proposed spending plans (including its plans for 1998) are
constantly being reviewed and revised with respect to changes in technology,
acceptable leverage parameters (including those specified in its debt
agreements), franchise requirements, competitive circumstances and other
factors.
32
<PAGE>
As discussed in Note 3 to the consolidated financial statements, on July 12,
1996 the Partnership amended its principal credit facility with a $775 million
Amended and Restated Credit Agreement (the "Amended and Restated Credit
Agreement") in order to finance the $247.4 million acquisition of the assets of
FCSC, pay transaction and financing costs of approximately $5.6 million and
prepay $28.6 million of subordinated debt. The Amended and Restated Credit
Agreement provides for maximum available borrowings of $774 million at December
31, 1997, reducing to $185 million at December 31, 2004. As of December 31,
1997, the amount outstanding under the Amended and Restated Credit Agreement was
$606 million and, subject to complying with covenants, the Partnership had
available to it additional borrowings thereunder of approximately $38.3 million.
On a proforma basis to reflect the March 1998 acquisition of substantially all
of the Falcon Classic systems, the amount outstanding would have been $682.8
million and the Partnership would have had available to it additional borrowings
of approximately $20.2 million. The Amended and Restated Credit Agreement
requires that interest be tied to the ratio of consolidated total debt to
consolidated annualized cash flow (in each case, as defined therein), and
further requires that the Partnership maintain hedging arrangements with respect
to at least 50% of the outstanding borrowings thereunder. As of December 31,
1997, borrowings under the Amended and Restated Credit Agreement bore interest
at an average rate of 7.69% (including the effect of interest rate hedging
agreements). The Partnership has entered into fixed interest rate hedging
agreements with an aggregate notional amount at December 31, 1997 of $560
million. Agreements in effect at December 31, 1997 totaled $520 million, with
the remaining $40 million to become effective as certain of the existing
contracts mature during 1998. The agreements serve as a hedge against interest
rate fluctuations associated with the Partnership's variable rate debt. These
agreements expire through July 2001. In addition to these agreements the
Partnership has one interest rate swap contract with a notional amount of $25
million under which it pays variable LIBOR rates and receives fixed rate
payments, and one $25 million interest rate cap contract under which the
Partnership pays variable Libor rates, subject to a cap of 5.49%. In The Amended
and Restated Credit Agreement also contains various restrictions relating to,
among other things, mergers and acquisitions, a change in control and the
incurrence of additional indebtedness and also requires compliance with certain
financial covenants. The Partnership's management believes that it was in
compliance with all such requirements as of December 31, 1997.
On March 29, 1993, the Partnership issued $175 million aggregate principal
amount of its 11% Senior Subordinated Notes (the "Notes") in connection with the
Partnership's formation. As a result of payment-in-kind interest payments under
the Notes, the aggregate principal of the Notes outstanding as of December 31,
1997 had increased to $282.2 million. Future interest payments are permitted to
be paid in kind until the year 2000, when cash payment is required. However the
Partnership, as permitted by the terms of the Indenture, has elected to begin to
pay interest payments in cash beginning with the payment due March 15, 1998.
This election required an amendment to the Amended and Restated Credit
Agreement, which had prohibited cash interest payments on the Notes until
September 30, 2000. The Notes also contain various restrictions relating to,
among other things, mergers and acquisitions, a change in control and the
incurrence of additional indebtedness. The incurrence of additional indebtedness
test limits the ratio of the total debt of the Partnership to Operating Cash
Flow (as defined in the indenture) to 7.5 to 1 if such indebtedness is incurred
through December 31, 1999 and to 6.5 to 1 thereafter.
The Partnership is presently pursuing a private placement of $500 million
gross proceeds of Debentures. The net proceeds of the Offering are to be used to
repay certain outstanding indebtedness, including all outstanding Notes. The
offering is being made in a private placement only to certain specified
qualified institutional buyers, non-United States persons and a limited number
of accredited institutional investors. Such offering will only be made by
confidential offering memorandum delivered to specified qualified investors.
There can be no assurance that such placement will be successfully completed.
The Partnership is also negotiating a new Bank Credit Agreement which would
replace the Amended and Restated Credit Agreement and provide funds for the
closing of the TCI Transaction. There can be no assurance that the Partnership
will be able to negotiate a new Bank Credit Facility on acceptable terms.
33
<PAGE>
At the closing of the TCI Transaction, New Falcon will assume the rights and
obligations of FHGLP under the indenture for any of the Notes then outstanding,
if any, and will be substituted for FHGLP as the obligor under the Notes. In
addition, New Falcon will assume certain other indebtedness of FHGLP and TCI,
including amounts outstanding under Amended and Restated Credit Agreement. The
TCI Transaction is conditioned upon New Falcon's obtaining new financing in an
amount sufficient to pay off the indebtedness under the Amended and Restated
Bank Agreement and the other indebtedness to be assumed by New Falcon as a
result of the TCI Transaction.
The Contribution Agreement provides that immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to New Falcon II, subject to certain indebtedness to be
assumed by New Falcon II, including the Notes and the New Credit Facility. Thus,
New Falcon II will be substituted for New Falcon as the obligor under the Notes
and the New Credit Facility. Any of the Notes then outstanding will be redeemed
in full by New Falcon II prior to October 1998 in accordance with the redemption
provisions of the indenture if the related financings described herein are
completed and the TCI Transaction is consummated. The Partnership has received
the necessary approvals from its senior lenders to effect such redemption. The
Notes are redeemable at the option of the obligor, in whole or in part, at any
time on or after September 15, 1998, at 105.5% of the outstanding principal
amount, plus accrued interest to the redemption date.
In connection with the decision to make interest payments on the Notes in
cash and the anticipated redemption of the Notes, the Partnership entered into
various interest rate swap agreements with three banks on February 10, 1998 in
order to reduce the interest cost. The agreements call for the Partnership to
receive payments at 11%; and to make payments at 7.625% for the period September
16, 1997 through September 15, 1998 on a notional principal amount of $282.2
million. The contracts further call for the Partnership to pay at a fixed rate
of 7.625% and receive interest at variable LIBOR--based rates for the period
September 16, 1998 through September 15, 2003 on a notional principal amount of
$297.7 million.
As discussed in Item 1., "Business--Other Investments," on June 6, 1997, the
Partnership and Enstar formed EFC. On September 30, 1997, EFC obtained a secured
bank facility with $35 million of availability from two agent banks in order to
obtain funds that would be loaned to certain Enstar Limited Partnerships. The
lenders advanced $7.5 million to EFC, which in turn advanced those funds to a
number of Enstar Limited Partnerships at closing. The EFC bank facility is
non-recourse to the Partnership and matures on August 31, 2001 at which time all
funds previously advanced will be due in full.
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.
The Partnership (I.E., FHGLP) is a separate, stand-alone holding company
which employs all of the management personnel. Prior to October 1995, the
Partnership conducted certain international investment and development
activities. In October 1995, the Partnership sold certain of its international
investments to FIC for approximately $6.3 million. The Partnership was
reimbursed $1.9 and $1.1 million in 1995 and 1996, respectively, for operating
costs related to these investments. The Partnership expects to incur no further
liquidity obligations in respect of international investments, although the
amount of reimbursement FHGLP receives from FIC with respect to the salaries of
certain of its employees has been significantly reduced for 1997. All of the
Owned Systems are owned by subsidiaries of the Partnership. Accordingly, the
Partnership is financially dependent on the receipt of permitted payments from
the Owned Systems, management and consulting fees from domestic cable ventures,
and the reimbursement of specified expenses by certain of the Affiliated Systems
to fund its operations. Expected increases in the funding requirements of the
Partnership combined with limitations on its sources of cash may create
liquidity issues for the Partnership in the future. Specifically, the former
Bank Credit Agreement permitted the Owned
34
<PAGE>
Partnerships to remit to FHGLP no more than 3.75% of their net cable revenues,
as defined, in any year. The Amended and Restated Credit Agreement increased
that amount to 4.25% effective July 12, 1996. For the year ended December 31,
1996 the limit was approximately $8.4 million ($3.5 million was actually
remitted), and for 1997 the limit was approximately $10.4 million, with $6.8
million actually remitted. As a result of the 1998 acquisition of the Falcon
Classic systems, the Partnership will no longer receive management fees and
reimbursed expenses from Falcon Classic. Receivables from the Affiliated Systems
for services and reimbursements described above amounted to approximately $11.3
million at December 31, 1997, which amount includes $7.5 million of notes
receivable from the Enstar Systems. If the TCI Transaction is consummated as
presently structured, of which there can be no assurance, the management
personnel will become employees of New Falcon, but New Falcon II will be the
obligor under the new bank financing and certain other debt. Consequently, New
Falcon will have the same liquidity issues as outlined above and continue to be
dependent on distributions from New Falcon II, subject to lender restrictions.
The Partnership has historically pursued a strategy of seeking to acquire
attractive acquisition candidates, with an emphasis on the acquisition of
systems which can be integrated with its existing operations. Over the past two
years, the Partnership has emphasized the acquisition of Affiliated Systems due
to its familiarity with these assets and because, in many cases, these assets
were already operationally integrated with Owned Systems located nearby. The
Partnership cannot predict whether it will have access to adequate capital in
the future to make further acquisitions of cable systems. The Partnership
frequently considers opportunities to sell assets that it views as
non-strategic.
Effective as of December 31, 1997, as discussed in Item 1.,
"Business--Recent Developments," FHGLP and certain other parties entered into a
settlement agreement resolving and settling a putative class action lawsuit
relating to the Partnership's acquisition of the Falcon Classic Systems. In
exchange for a complete dismissal of the Lawsuit with prejudice and releases,
and without admitting or conceding any fault, liability or wrongdoing
whatsoever, FHGLP and the other defendants agreed to establish a settlement fund
which, net of agreed-upon insurance proceeds, amounted to $750,000 plus interest
at 10% on the gross settlement amount of $1,250,000 from January 1, 1998 through
closing of the sale as defined in the settlement agreement. The Partnership
estimates the total net amount of the settlement, including its legal fees, will
be approximately $1.0 million. The defendants also agreed to pay interest at 10%
on the projected net sales proceeds of $64 million from January 1, 1998 through
closing of the sale. This aspect increased the sale price of the systems closed
in March 1998 by $1.1 million.
A putative class action complaint has been filed against certain Falcon
Systems in Missouri alleging that the systems' practice of charging a fee to
subscribers whose payments are late constitutes an invalid liquidated damages
provision. Plaintiffs seek recovery of all late fees paid to those systems as a
class purporting to consist of all subscribers in Missouri who were assessed
such fees during the applicable limitations period. Similar lawsuits have been
filed against various other MSOs around the country. Although there can be no
assurances, based in part upon the outcome of other similar lawsuits against
other MSOs, the Company's management does not believe that the disposition of
the Missouri lawsuit will have a material adverse effect on the Company. In
addition, the Company understands that certain of the TCI Systems are involved
with similar lawsuits.
As more fully described in Note 2 to the consolidated financial statements,
the Existing FHGLP Partnership Agreement contains provisions that may require
FHGLP to purchase substantially all of the limited partnership interests in
FHGLP held by its Group I, Group II and Group III limited partners (constituting
approximately 60% of the common equity of FHGLP), at the holders' option.
Certain of these interests are mandatorily redeemable at certain dates. Limited
partnership interests held by the Group IV limited partner become redeemable in
at a later date, subject to certain shared liquidity rights. In contemplation of
the TCI Transaction, by agreement of the Group I, Group II, Group III and Group
IV partners, the dates on which the partners may exercise certain put rights and
the dates by which FHGLP is required to redeem certain partnership interests
were tolled in accordance with the Contribution Agreement. The new dates are
determined by adding to the original date the number of days in the period
beginning on December 1, 1997 and ending ninety days after the earlier of
December 31, 1998 or the date
35
<PAGE>
that the Contribution Agreement is terminated accordance with its terms. As a
result, assuming that the Contribution Agreement is not terminated prior to
December 31, 1998, FHGLP may be required to purchase the partnership interests
held by the Group I, Group II and Group III partners during the period of
January 2000 to October 2000, with the Class C partnership interests held by the
Group IV partner becoming mandatorily redeemable in July 2005. If the
Contribution Agreement is terminated prior to December 31, 1998, FHGLP may be
required to redeem certain partnership interests earlier than the dates set
forth above. Subject to certain customary exceptions, the Contribution Agreement
may not be terminated without the consent of FHGLP prior to December 31, 1998.
The purchase price for such partnership interests (other than Class C
partnership interests, which are valued at their liquidation value as determined
in accordance with the Existing FHGLP Partnership Agreement) will generally be
determined through a third party appraisal mechanism, as specified in the
Existing FHGLP Partnership Agreement, at the time such interests are redeemed,
or through negotiation. The purchase price is to be paid in cash or, under
certain circumstances, may be paid through the issuance of debt or equity
securities. The redemption value of the Class C partnership interests will
generally be determined based on a formula due to the preferred status of such
Class C interests. Certain of the Partnership's debt agreements (including the
Amended and Restated Credit Agreement and the Notes) restrict the Partnership's
ability to (i) make distributions to fund the purchase of these partnership
interests pursuant to the provisions described above, (ii) incur indebtedness or
issue debt securities in connection with such purchase or (iii) sell a
substantial amount of its assets. The obligations of FHGLP to redeem any
significant amount of its limited partnership interests would result in a
material liquidity demand on FHGLP, and there can be no assurance that FHGLP
would be able to raise such funds on terms acceptable to FHGLP, or at all.
However, upon completion of the TCI Transaction, the existing liquidity rights
will be terminated and be replaced by certain new liquidity rights provided to
the non-management limited partners in the New FHGLP Partnership Agreement.
The "Year 2000" issue refers to certain contingencies that could result from
computer programs being written using two digits rather than four to define the
year. Many existing computer systems, including certain of the Partnership's,
process transactions based on two digits for the year of the transaction (for
example, "97" for 1997). These computer systems may not operate effectively when
the last two digits become "00," as will occur on January 1, 2000. The
Partnership's management has commenced an assessment of its Year 2000 business
risks and its exposure to computer systems, to operating equipment which is date
sensitive and to its vendors and service providers. Based on a preliminary
study, the Partnership's management has concluded that certain of its
information systems were not Year 2000 compliant and has elected to replace such
software and hardware with Year 2000 compliant applications and equipment,
although the decision to replace major portions of such software and hardware
had previously been made without regard to the Year 2000 issue based on
operating and performance criteria. Replacement costs will be capitalized in
accordance with generally accepted accounting principles and amortized over the
lives of the assets. Maintenance costs will be expensed as incurred. The
Partnership's management expects to install substantially all of the new systems
in 1998, with the remaining systems to be installed in the first half of 1999.
The total anticipated cost, including replacement software and hardware, is
expected to be approximately $1.5 million.
In addition to evaluating internal systems, the Partnership's management has
also initiated communications with its significant third party vendors and
service suppliers to determine the extent to which the Partnership's interface
systems are vulnerable should those third parties fail to solve their own Year
2000 problems on a timely basis. There can be no assurance that the systems of
other companies on which the Partnership's systems rely will be timely converted
and that the failure to do so would not have an adverse impact on the
Partnership's systems. The Partnership continues to closely monitor developments
with its vendors and service suppliers.
36
<PAGE>
The following table sets forth, on a historical basis, for the periods
indicated, certain items from the Consolidated Statements of Cash Flows of the
Partnership:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities:
Net loss................................................... $ (25,235) $ (49,985) $ (60,838)
Payment-in-kind interest expense........................... 27,127 26,580 20,444
Depreciation and amortization.............................. 54,386 100,415 118,856
Gain on sale of securities................................. (13,267) (2,264) --
Other...................................................... 151 15,885 (1,075)
--------- --------- ---------
$ 43,162 $ 90,631 $ 79,537
--------- --------- ---------
--------- --------- ---------
Net cash used in investing activities:
Capital expenditures....................................... $ (37,149) $ (57,668) $ (76,323)
Sale of available-for-sale securities...................... 13,487 9,502 --
Acquisitions of cable television systems, net of cash...... 2,655 (247,397) --
Proceeds from sale of cable systems........................ -- 15,000 --
Other...................................................... (1,667) (3,684) 36
--------- --------- ---------
$ (22,674) $(284,247) $ (76,287)
--------- --------- ---------
--------- --------- ---------
Net cash provided by (used in) financing activities:
Net borrowings, (repayments)............................... $ (9,866) $ 191,022 $ (3,222)
Capital contributions...................................... -- 5,000 93
Deferred loan costs........................................ (6,320) (3,823) (29)
Other...................................................... 280 -- 192
--------- --------- ---------
$ (15,906) $ 192,199 $ (2,966)
--------- --------- ---------
--------- --------- ---------
</TABLE>
1997 COMPARED TO 1996 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) decreased from $90.6 million to $79.5 million, or by
12.3%, for the year ended December 31, 1997 compared to the corresponding period
in 1996. The $11.1 million decrease resulted primarily from a net decrease of $5
million in other operating items (changes in receivables, cable materials and
supplies, payables, accrued expenses and subscriber deposits and prepayments)
and a $6.1 million decrease in payment-in-kind interest expense related to the
Notes.
Cash used in investing activities decreased from $284.2 million to $76.3
million, or by 73.2%, for the year ended December 31, 1997 compared to the
corresponding period in 1996. The decrease was primarily due to the 1996
acquisition of FCSC's cable assets for $247.4 million, partially offset by an
increase in capital expenditures of $18.7 million. Additionally, 1996 included
cash proceeds from the sale of a system and net proceeds received by the
Partnership upon the 1996 sale of its shares in Comcast UK.
Cash from financing activities decreased from cash provided of $192.2
million for the year ended December 31, 1996 to a use of cash of $3 million in
1997. The change was due primarily to decreased borrowing activity in 1997.
1996 COMPARED TO 1995 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) increased from $43.2 million to $90.6 million or by
109.7%, for the year ended December 31, 1996 compared to the corresponding
period in 1995. The $47.4 million increase resulted primarily from a net
37
<PAGE>
increase of $47.9 million of cash provided or used by other operating items
(changes in receivables, cable materials and supplies, payables, accrued
expenses and subscriber deposits and prepayments).
Cash used in investing activities increased from $22.7 million to $284.2
million, or by 1,152.0%, for the year ended December 31, 1996 compared to the
corresponding period in 1995. The change was due primarily to the $247.4 million
acquisition on July 12, 1996 of the FCSC assets, and an increase in capital
expenditures of $20.5 million. These increases were partially offset by $15
million of cash provided in 1996 in connection with the sale of a system an by
$4 million less proceeds from the sale of securities.
Cash flows from financing activities increased from a use of cash of $15.9
million for the year ended December 31, 1995 to cash provided of $192.2 million
in 1996, or a change of $208.1 million. The change was due primarily to
increased borrowings in 1996.
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 re-regulation 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.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Existing FHGLP Partnership Agreement provides for the establishment of a
Board of Representatives of the Partnership, which has the authority to approve
annual budgets and whose approval is required in order for the Partnership to
undertake certain actions specified in the Existing FGHLP Partnership Agreement.
The Board of Representatives consists of eleven members, six of whom are
appointed by FHGI (of whom a minimum of two must be outsiders since they may not
be members of Falcon management), two of whom are appointed by Hellman &
Friedman Capital Partners II, L.P., one of whom is appointed by Hellman &
Friedman Capital Partners, one of whom is appointed by Boston Ventures Limited
Partnership II and one of whom is appointed by Madison Dearborn Partners VI.
Pursuant to the Existing FHGLP Partnership Agreement, the size of the Board of
Representatives and the identity of the partners appointing its members will
change if certain current partners cease to be partners.
The directors and executive officers of FHGI are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
Pursuant to certain management rights agreements with the Partnership,
Hellman & Friedman Capital Partners and Hellman & Friedman Capital Partners II,
L.P. have the right until December 31, 1999 to designate an aggregate of two
directors of FHGI. To date such entities have concurred in the designation of
Marc B. Nathanson and Stanley S. Itskowitch as the sole directors of FHGI. In
the event such entities did not so concur, Mr. Nathanson, through his voting
control of FHGI, would have the option of increasing the size of the Board of
Directors of FHGI to a maximum of nine members. Upon consummation of the TCI
Transaction, the foregoing management rights agreements will terminate.
BOARD OF REPRESENTATIVES OF FHGLP
The members of the Board of Representatives of FHGLP who also are members of
Falcon management are: Marc B. Nathanson, Frank J. Intiso, Stanley S. Itskowitch
and Michael K. Menerey. The other members of the Board of Representatives of
FHGLP are:
<TABLE>
<S> <C>
Leonard J. Baxt (1)(2) Joseph M. Niehaus
John L. Bunce, Jr. (1)(2) Steven Rattner (2)
Roy F. Coppedge, III (1)(2) Lawrence M. Unrein
Paul J. Finnegan
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
39
<PAGE>
The following sets forth certain biographical information with respect to
the directors and executive officers of FHGI and the members of the Board of
Representatives of FHGLP who are also members of Falcon management.
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.
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
40
<PAGE>
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.
The following sets forth certain biographical information with respect to
the members of the Board of Representatives of the Partnership who are not
members of management. Each of such persons has been a member of the Board of
Representatives since the formation of the Partnership except for Messrs.
Finnegan, Unrein and Niehaus, each of whom was first appointed in 1995, 1996 and
1997, respectively.
LEONARD J. BAXT, 50, has been a partner in the Washington, D.C. office of
the law firm of Dow Lohnes & Albertson since 1980. Mr. Baxt heads the Corporate
Department of Dow Lohnes & Albertson and specializes in the acquisition and
financing of media and telecommunications companies.
JOHN L. BUNCE, JR., 39, is a General Partner of Hellman & Friedman. Prior to
joining Hellman & Friedman in 1988, Mr. Bunce was a Vice President with the
venture capital firm of TA Associates. Previously, he was employed in the
Mergers & Acquisitions and Corporate Finance Departments of Lehman Brothers Kuhn
Loeb. Mr. Bunce is a director of Western Wireless Corporation, MobileMedia
Corporation and T.V. Por Cable Nacional, S.A. de C.V. and numerous private
companies. Mr Bunce is also a director of FIC.
ROY F. COPPEDGE, III, 49, has been a General Partner of Boston Ventures and
a director of Boston Ventures Management, Inc. since August 1983. Prior to that
date he was a First Vice President of The First National Bank of Boston and
headed the bank's U.S. Merchant Banking group. He is currently a director of
American Media, Inc. and Sinclair Broadcast Group, Inc. Mr. Coppedge is also a
director of FIC.
PAUL J. FINNEGAN, 45, has been a Vice President of Madison Dearborn
Partners, Inc., the general partner of Madison Dearborn Capital Partners, L.P.
since January 1993. Previously, he served in various positions at First Capital
Corporation of Chicago and its affiliates. Mr. Finnegan currently serves a
director of Omnipoint Corporation and as a member of the Board of Trustees of
The Skyline Fund.
JOSEPH M. NIEHAUS, 35, is a General Partner of Hellman & Friedman. Prior to
joining Hellman & Friedman in 1989, Mr. Niehaus was employed in the Merchant
Banking and Mergers & Acquisitions
41
<PAGE>
Departments of Morgan Stanley & Co. Incorporated. Mr. Niehaus is a director of
Hoyts Cinemas Limited, Hoyts Cinemas America Limited and numerous private
companies. Mr. Niehaus is also a director of FIC.
STEVEN RATTNER, 45, is a Managing Director of Lazard Freres & Co. LLC.
Between 1986 and 1989, Mr. Rattner was a Managing Director at Morgan Stanley &
Co. Incorporated.
LAWRENCE M. UNREIN, 42, is Vice President at J.P. Morgan Investment
Management ("JPMIM"). Mr. Unrein is head of the Private Equity Group. Prior to
joining JPMIM in 1997, Mr. Unrein spent 17 years with AT&T Investment Management
Corp. ("ATTIMCO"), an investment management subsidiary of AT&T where he was
responsible for managing the public and private equity and fixed income portion
of $80 billion in corporate employee benefit funds. Mr. Unrein serves on the
Board of Directors at Hamilton Services Corp.; is the Treasurer at Malcolm
Baldridge, Quality Award Foundation and also serves on numerous private equity
Advisory Boards such as Morgan Stanley Capital Partners, New Enterprises
Associates, APA Excelsior, Accel, Asian Infrastructure, Butler Capital, Hellman
& Friedman, TA Associates, Saunders, Karp, Megrue, North Bridge Ventures and
Prudential Asia.
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:
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.
42
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the
Partnership to the Chief Executive Officer of FHGI and to each of the four other
most highly compensated executive officers of FHGI for services rendered during
the three years ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL
--------------------------- OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------------------------- ----------- ----------- --------
<S> <C> <C> <C>
Marc B. Nathanson, Chairman and Chief Executive Officer
1997................................................................ $ 615,424(2) $ 122,460(2) $2,400
1996................................................................ 291,020(2) 56,998(2) 2,610
1995................................................................ 619,619(2) 123,952(2) 2,174
Frank J. Intiso, President and Chief Operating Officer
1997................................................................ 588,432 111,072 2,400
1996................................................................ 587,923 106,800 2,610
1995................................................................ 539,085 98,753 2,530
Stanley S. Itskowitch, Executive Vice President and General Counsel
1997................................................................ 309,976(2) 52,530(2) 2,047
1996................................................................ 191,962(2) 32,845(2) 2,140
1995................................................................ 95,154(2) 14,287(2) 461
Michael K. Menerey, Executive Vice President, Chief Financial Officer
and Secretary
1997................................................................ 255,548(2) 47,754(2) 1,721
1996................................................................ 247,023(2) 45,806(2) 1,725
1995................................................................ 227,938 42,642 1,564
Jon W. Lunsford Executive Vice President--Finance
1997................................................................ 200,769 40,000 1,440
1996................................................................ 191,461 38,000 1,425
1995................................................................ 170,000 34,000 1,255
</TABLE>
- ------------------------
(1) These amounts relate to term life insurance premiums paid by the
Partnership.
(2) Net of reimbursement for salary and bonus the Partnership received from FIC
related to the time of Mr. Nathanson ($204,000 and $41,000, $500,000 and
$100,002, and $107,216 and $21,448) Mr. Itskowitch ($71,000 and $18,000,
$175,000 and $35,000, and $242,640 and $48,513) and Mr. Menerey ($431 and
$86, $968 and $194), spent on international activities in 1997, 1996 and in
1995, respectively.
43
<PAGE>
PROFIT SHARING PLAN
The Partnership maintains a cash or deferred profit sharing plan referred to
as the Smart 401K Plan (the "Plan"), covering substantially all of its
employees. The Plan allows participants to elect to make a contribution in an
amount up to 20% of their annual compensation, which otherwise would have been
payable to the participant as salary. Additionally, subject to certain
limitations, the Partnership can contribute to the Plan on a discretionary
basis, as determined by management, an amount that does not exceed 15% of the
annual aggregate compensation, as defined, paid to participating employees. In
general, participants in the Plan vest in any Partnership contributions
according to the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE PERCENTAGE VESTED
- --------------------------------------------- -------------------
<S> <C>
Less than 3 years............................ 0%
3............................................ 20
4............................................ 40
5............................................ 60
6............................................ 80
7............................................ 100
</TABLE>
The following executive officers named in the Summary Compensation Table are
participants in the Plan and, as of December 31, 1997 were 100% vested: Marc B.
Nathanson, Frank J. Intiso, Stanley S. Itskowitch and Michael K. Menerey.
There were no contributions charged against operations for the Plan in 1995,
1996 or 1997.
1993 INCENTIVE PERFORMANCE PLAN
On December 30, 1993, the Partnership assumed the obligations of FHGI for
its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the
interests in the Incentive Plan is tied to the equity value of certain
Partnership Units in FHGLP held by FHGI. In connection with the assumption by
the Partnership, FHGI agreed to fund any benefits payable under the Incentive
Plan through additional capital contributions to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its Partnership Units to the Partnership.
The benefits which are payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
3,780.14 of the Units of the Partnership held by FHGI, 237.98 of the Class A
Units of the Partnership held by FHGI, and a portion of FHGI's interest in
certain of the partnerships that are the general partners of the Affliated
Partnerships. Benefits are payable under the Incentive Plan only when
distributions would otherwise be paid to FHGI with respect to the above-
described Units and interests. The Incentive Plan is scheduled to terminate on
January 5, 2003, at which time the Partnership is required to distribute the
Units described above to the participants in the Incentive Plan. At such time,
FHGI is required to contribute the Units to the Partnership to fund such
distributions. The participants in the Incentive Plan are present and former
employees of the Partnership and its operating affiliates, all of whom are 100%
vested. Prior to the closing of the TCI Transaction, FHGLP will amend the
Incentive Plan to provide for payments by FHGLP at the closing of the TCI
Transaction to participants in an aggregate amount of approximately $6.6 million
and to reduce by such amount FHGLP's obligations to make future payments to
participants under the Incentive Plan. At the closing of the TCI Transaction,
New Falcon will assume the obligations of FHGLP under the Incentive Plan, as so
amended, other than the obligation to make the payments at closing of the TCI
Transaction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, Marc B. Nathanson, Chairman
of the Board and Chief Executive Officer, Frank J. Intiso, President and Chief
Operating Officer, Stanley S. Itskowitch, Executive Vice President and General
Counsel, and Michael K. Menerey, Executive Vice President, Chief
44
<PAGE>
Financial Officer and Secretary, participated in deliberations with the Board of
Representatives of the Partnership with respect to executive officer
compensation.
The Partnership leases certain office space for its corporate financial
center (located in Pasadena, California) from a partnership owned by Marc B.
Nathanson and his wife (the "Pasadena Lease"). The Pasadena Lease commenced on
October 1, 1990 and was for a term of five years. The Partnership has negotiated
a new lease expiring September 30, 2005. The base rent is currently
approximately $31,000 per month, and will increase to approximately $35,000 per
month in the first quarter of 1998 due to additional space required in
connection with the TCI transaction. The Partnership believes that the terms of
the new Pasadena lease are consistent with leases between unaffiliated parties
involving similarly situated properties. The Partnership also assumed a lease
for office space in a building owned by Marc B. Nathanson and his wife in
connection with the acquisition of the assets of FCSC. The rent on this property
is less than $60,000 per year. This property will be purchased by the
Partnership in March, 1998 for a purchase price determined by two independent
appraisals.
In addition, the Partnership provides certain accounting, bookkeeping and
clerical services to Marc B. Nathanson. Mr. Nathanson pays for a portion of the
costs relating to these services, and the Partnership pays the balance. The net
amount paid by the Partnership in 1997 was approximately $163,000. See Note 10
to the consolidated financial statements.
COMPENSATION OF DIRECTORS
The directors of FHGI receive no compensation for their services as
directors thereof. The members of the Board of Representatives of the
Partnership receive no compensation for their service on the board other than
reimbursement of expenses.
MANAGEMENT LOANS
As a condition of his employment in September 1994, the Partnership loaned
Jon W. Lunsford, Vice President-Finance and Corporate Development, an aggregate
of $125,000 pursuant to a promissory note secured by a second trust deed on real
property. This loan bears interest at the rate of 7.05% per annum, payable
annually, and the unpaid principal and related accrued interest is due and
payable on December 31, 2002. Effective December 31, 1994 and continuing until
the loan is repaid, two-thirds of each annual bonus payment, if any, payable to
Mr. Lunsford will be applied first as payment against accrued interest payable
and secondly as a principal payment against the loan balance.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and footnotes set forth, as of December 31, 1997, the
beneficial ownership of general partnership interests and Class A and Class B
limited partnership interests of the Partnership by (i) each person who is known
to the Partnership to own beneficially more than 5% of such Partnership
interests and (ii) all executive officers of the Partnership and the members of
the Board of Representatives of the Partnership.
<TABLE>
<CAPTION>
NUMBER OF UNITS
TYPE OF ASSIGNED TO
PARTNERSHIP PARTNERSHIP PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERS INTEREST INTEREST OWNERSHIP
- ------------------------------------------------------------- ------------------ ------------------- -----------
<S> <C> <C> <C>
General Partner -- 100.0%
Limited Partner 36,107 36.1%
Marc B. Nathanson(1)(2)......................................
Hellman & Friedman(3)........................................ Limited Partner 35,446 35.4%
Leeway & Co.(4).............................................. Limited Partner 10,732 10.7%
Boston Ventures(5)........................................... Limited Partner 6,816 6.8%
Falcon First Communications, LLC(6)(7)....................... Limited Partner 2,043 2.1%
Frank J. Intiso(1)(8)........................................ Limited Partner 1,808 1.8%
Stanley S. Itskowitch(1)(9).................................. Limited Partner 645 *
Michael K. Menerey(1)(10).................................... Limited Partner 67 *
Steven Rattner(11)........................................... Limited Partner 310 *
Leonard J. Baxt(12).......................................... Limited Partner 82 *
All executive officers and members of the Board of
Representatives of the Partnership as a group (13
persons)(13)............................................... General Partner 39,019 100.0%
Limited Partner 39.0%
</TABLE>
- ------------------------
* Less than 1%
(1) The address for each of such persons is c/o Falcon Cable TV, 10900 Wilshire
Blvd., 15th Floor, Los Angeles, California 90024.
(2) Marc B. Nathanson individually holds of record no partnership units of the
Partnership. However, by virtue of Mr. Nathanson's ownership of a majority
of the voting securities of FHGI, the general partner of the Partnership,
he has voting and investment power as to the 11,195 limited partnership
units of the Partnership held of record by FHGI. Although FHGI has equity
ownership, and therefore investment power, over 11.2% of the partnership
units of the Partnership, pursuant to the Existing FHGLP Partnership
Agreement, this constitutes only a 9.1% voting power percentage. In
addition, because Mr. Nathanson is co-trustee of two irrevocable trusts
that own a majority of the voting securities of Advance TV of California
Inc., he shares voting and investment power as to the 3,308 limited
partnership units of the Partnership held of record by such entity. Mr.
Nathanson also is the general partner of Advance Company, Ltd. And
therefore has voting and investment power as to the 1,254 limited
partnership units of the Partnership held of record by such limited
partnership. As the owner of a majority of the voting securities of
Blackhawk Holding Company, Inc., Mr. Nathanson has voting and investment
power as to the 6,472 limited partnership units of the Partnership held by
such corporation. Also, as trustee of a revocable trust, the Falcon Cable
Trust, Mr. Nathanson has voting and investment power as to the 13,878
limited partnership units of the Partnership held by such trust. Mr.
Nathanson also beneficially owns .46% of Falcon Classic Cable Income
Properties, L.P. and 2.58% of Falcon Video Communications, L.P., each an
Affiliated Partnership.
(3) Of such 35,446 limited partnership units, 8,924 are held of record by
Hellman & Friedman Capital Partners and 26,522 are held of record by
Hellman & Friedman Capital Partners II, L.P., both of which entities are
controlled by Hellman & Friedman. Hellman & Friedman has equity ownership,
46
<PAGE>
and therefore investment power over only 35.4% of the partnership units of
the Partnership pursuant to the Existing FHGLP Partnership Agreement,
Hellman & Friedman Capital Partners has an 8.9% voting power percentage and
Hellman & Friedman Capital Partners II, L.P. has a 28.7% voting power
percentage, which results in Hellman & Friedman having voting power over
37.6% of the partnership units of the Partnership. The address is One
Maritime Plaza, 12th Floor, San Francisco, California 94111.
(4) Of such 10,732 limited partnership units, 5,342 are held of record by
Leeway & Co. An additional 5,390 are held of record by MLC Investors, L.P.,
of which Leeway & Co. is the general partner. The address is c/o State
Street Bank and Trust Company, Master Trust Division-W6C, One Enterprise
Drive, North Quincy, Massachusetts 02171.
(5) Of such 6,816 limited partnership units, 6,644 are held of record by Boston
Ventures Limited Partnership II and 172 are held of record by Boston II A
Investment Corporation, both of which entities are controlled by Boston
Ventures. The address is 21 Custom House Street, Boston, Massachusetts
02110.
(6) Represents Class B partnership interests held of record by Falcon First
Communications, LLC ("FFC"). Madison Dearborn Partners VI, of which Mr.
Finnegan is a general partner, is the sole manager of FFC. Excludes the
Class C partnership units held of record by FFC which generally do not have
voting rights and are entitled to participate in the profits of the
Partnership under limited circumstances after receipt of a preferred return
as described in the Existing FHGLP Partnership Agreement. Except for its
partnership interest in the Partnership, FFC is otherwise unaffiliated with
any other Falcon entity. The address is c/o Madison Dearborn Partners Inc.,
Three First National Plaza, Suite 3800, Chicago, IL 60670-0501.
(7) All information in this table excludes Class C Partnership interests which
generally do not have voting rights and participate in the profits of the
Partnership under limited circumstances after receipt of a preferred return
as described in the Partnership Agreement. All such Class C partnership
interests are held of record by FFC.
(8) Frank J. Intiso beneficially owns 0.04% of Falcon Classic Cable Income
Properties, L.P. and 0.35% of Falcon Video Communications, L.P., each an
Affiliated Partnership.
(9) Stanley S. Itskowitch beneficially owns 0.09% of Falcon Classic Cable
Income Properties, L.P., and 0.35% of Falcon Video Communications, L.P.,
each an Affiliated Partnership.
(10) Michael K. Menerey beneficially owns 0.04% of Falcon Classic Cable Income
Properties, L.P. and 0.15% of Falcon Video Communications, L.P., each an
Affiliated Partnership.
(11) The address is c/o Lazard Freres & Co. LLC., Thirty Rockefeller Plaza, New
York, New York 10020.
(12) The address is c/o Dow, Lohnes & Albertson PLLC, 1200 New Hampshire
Avenue, N.W., Washington, D.C. 20036-6802.
(13) Each of John L. Bunce, Roy F. Coppedge, III, Paul J. Finnegan, Joseph M.
Niehaus and Lawrence M. Unrein serves on the Board of Representatives as
the designee of an affiliated partner of the Partnership. Each such person
disclaims beneficial ownership of the partnership interest owned by the
related entity. Except as otherwise identified in the table, no member of
the Board of Representatives is the record owner of any partnership
interests in the Partnership.
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AFFILIATED PARTNERSHIPS
The Partnership and its affiliates, including Marc B. Nathanson and other
members of Falcon's senior management team, currently own varying interests in,
and the Partnership controls the general partners of, the Affiliated
Partnerships and certain other entities engaged in the cable television
business. The Partnership receives management fees from the Affiliated
Partnerships, and receives additional reimbursement of certain expenses from
Falcon Classic.
FALCON CABLE SYSTEMS COMPANY. On July 12, 1996, the Partnership acquired
the assets of FCSC. See "Business." In connection with this transaction, FCSC
paid a $6.2 million disposition fee to Falcon Cable Investors Group, its general
partner, ("FCIG"), which in turn distributed the fee, along with cash on hand of
approximately $1.6 million, to its partners. As a result, FCIG distributed funds
as follows: Marc B. Nathanson, approximately $3.9 million; Hellman and Friedman
Capital Partners, II, L.P. approximately $2.3 million; Frank J. Intiso
approximately $759,000; Steven Rattner approximately $68,000; and the
Partnership approximately $758,000. FCSC also paid the Partnership approximately
$5.2 million of previously deferred fees.
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. In March 1998, the Partnership
acquired substantially all of the assets of Falcon Classic. See Item 1.,
"Business--Recent Developments." In connection with this sale, Falcon Classic
paid a partial distribution of approximately $587,000 to Falcon Classic Cable
Investors Group ("FCCIG"), its general partner, in respect of its ownership
interest in Falcon Classic. After repaying its $221,000 note payable to Falcon
Classic, FCCIG distributed $365,600 as follows: Marc B. Nathanson, approximately
$103,800 million; Hellman and Friedman Capital Partners II, L.P. approximately
$193,900; Frank J. Intiso approximately $6,700; Stanley S. Itskowitch
approximately $14,600; Michael K. Menerey approximately $6,700; Leonard Baxt
approximately $1,400; Steven Rattner approximately $5,300; and the Partnership
approximately $33,200. The remaining distribution relates to the sale of the
Somerset system, which is expected to result in proceeds of approximately
$63,200 to FCCIG, which proceeds will be distributed to the FCCIG partners in
the same proportion as the payments enumerated above.
FALCON VIDEO COMMUNICATIONS, L.P. As discussed in Item 1.,
"Business--Recent Developments" and in Note 2 to the consolidated financial
statements, the partners of Falcon Video have agreed to combine Falcon Video's
assets with those of the Partnership concurrent with the TCI Transaction. If the
TCI Transaction has not occurred, then at any time subsequent to May 15, 1999,
either the Partnership or certain limited partners of Falcon Video may initiate
the sale of the partnership based on an appraised value. In such a circumstance,
the Partnership may submit a bid for the assets of Falcon Video at or above
their appraised value. If a limited partner initiates the sale process, then the
limited partners may agree to either (i) sell the assets to the Partnership at
its bid, (ii) sell such assets to an unaffiliated third party at a price equal
to at least 105% of the price which the Partnership agreed to pay or (iii) not
effect a sale of the assets. If the Partnership initiates the sale process, any
such sale to an unaffiliated third party must be at a price equal to at least
102.5% of the price which the Partnership agreed to pay. The limitations on the
price at which sales may be made described above terminate on May 15, 2001. In
addition, the Amended and Restated Partnership Agreement of Falcon Video
prohibits any Falcon entity from directly or indirectly acquiring, managing,
operating or otherwise participating in any business or operation which (i)
constitutes a media property or provides the same or equivalent services as a
media property (including, by way of example, a satellite master antenna
television system, multi-point distribution service or direct broadcast
service), and is conducted wholly or partially within any community or other
area served by the cable television systems owned by Falcon Video or (ii) which
otherwise competes in any material respect with any investments of Falcon Video.
FALCON INTERNATIONAL COMMUNICATIONS LLC. On October 4, 1995, the
Partnership sold its investments and loans in the Philippines and India to FIC,
a newly-formed, separately capitalized entity, the members of which include
members of management of the Partnership and certain of its limited partners.
The sales
48
<PAGE>
price of approximately $6.3 million in cash was determined to be the fair market
value of the assets and was supported by an appraisal conducted by an
independent third party. In addition, the Partnership received an additional
$1.9 million, $1.1 million and $398,000 in cash as reimbursement for 1995, 1996
and 1997 operating costs related to international investments. There is also an
insurance cost allocation agreement between the Partnership and FIC. In order to
focus its limited capital resources on the upgrade and rebuild needs of the
Owned Systems, the Partnership does not expect to pursue any further
international investments. There is an insurance cost allocation agreement
between the Partnership and FIC. See Item 1. "Business--International
Activities."
INDEMNIFICATION OF THE GENERAL PARTNER
The Existing FHGLP Partnership Agreement provides that FHGI, as the General
Partner of FHGLP will be indemnified by the Partnership for acts performed
within the scope of its authority under the Partnership Agreement if such
General Partner (i) acted in good faith and in a manner that it reasonably
believed to be in, or not opposed to, the best interests of the Partnership and
the partners, and (ii) had no reasonable grounds to believe that its conduct was
negligent. In addition, the Existing FHGLP Partnership Agreement provides that
the General Partner will not be liable to the Partnership or its limited
partners for errors in judgment or other acts or omissions not amounting to
negligence or misconduct. Therefore, limited partners will have a more limited
right of action than they would have absent such provisions. In addition, the
Partnership maintains, at its expense and in such reasonable amounts as its
management shall determine, insurance on behalf of the General Partner, 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 Existing FHGLP Partnership Agreement for certain wrongful or
allegedly wrongful acts, including certain errors, misstatements, misleading
statements, omissions, neglect or breaches of duty. To the extent that the
exculpatory provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, it is the opinion of the Securities
and Exchange Commission that such indemnification is contrary to public policy
and therefore unenforceable.
OTHER
The Partnership 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, Jane Nathanson. The lease commenced on October 1, 1990
and has been extended through September 30, 2005. The rent is currently
approximately $31,000 per month, will increase to approximately $35,000 per
month in the first quarter of 1998 due to additional space required in
connection with the TCI transaction 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 the Partnership other than Marc B.
Nathanson. The Partnership also assumed a lease for office space in a building
owned by Marc B. Nathanson and his wife in connection with the acquisition of
the assets of FCSC. The rent on this property is less than $60,000 per year.
This property will be purchased by the Partnership in 1998 for $282,500, a price
determined by two independent appraisals.
As noted herein, certain executive officers of the Partnership have
ownership interests in the Affiliated Partnerships and in other domestic and
international cable operations in addition to their equity interests in the
Partnership. Conflicts of interest may arise at various times in respect of the
allocation of time, personnel and other resources as between the Owned Systems
the Affiliated Systems and other ventures. However, the Affiliated Partnerships
each have Advisory Committees or similar bodies which, among other things, act
in the case of conflicts of interest.
For a description of certain other transactions involving management, see
"Compensation Committee Interlocks and Insider Participation."
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements and Schedules on page F-1.
2. Financial Statement Schedules
Reference is made to the Index to Financial Statements and Schedules on page F-1.
3. Exhibits
Reference is made to the Index to Exhibits on Page E-1.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated December 30, 1997 reporting under Item 5 its
execution of a Contribution and Purchase Agreement with Falcon Communications,
L.P., TCI Falcon Holdings, LLC, and certain other persons.
</TABLE>
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997................................................ F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1997................................................................................................... F-4
Consolidated Statements of Partners' Deficit for each of the three years in the period ended December 31,
1997................................................................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1997................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Schedule II--Valuation and Qualifying Accounts........................................................... F-33
</TABLE>
All other schedules have been omitted because they are either not required,
not applicable or the information has otherwise been supplied.
F-1
<PAGE>
FALCON HOLDING GROUP, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................... $ 13,633 $ 13,917
Receivables:
Trade, less allowance of $907,000 and $825,000 for
possible losses..................................... 10,942 13,174
Affiliates............................................ 6,458 11,254
Other assets............................................ 10,555 14,576
Other investments....................................... 3,446 1,776
Property, plant and equipment, less accumulated
depreciation and amortization......................... 309,128 324,559
Franchise cost, less accumulated amortization of
$173,742,000 and $203,700,000......................... 256,461 222,281
Goodwill, less accumulated amortization of $12,454,000
and $18,531,000....................................... 72,956 66,879
Customer lists and other intangible costs, less
accumulated amortization of $8,793,000 and
$25,517,000........................................... 76,448 59,808
Deferred loan costs, less accumulated amortization of
$5,755,000 and $7,144,000............................. 14,296 12,134
------------ ------------
$ 774,323 $ 740,358
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable........................................... $ 885,786 $ 911,221
Accounts payable........................................ 10,561 9,169
Accrued expenses........................................ 47,228 52,789
Customer deposits and prepayments....................... 1,627 1,452
Deferred income taxes................................... 10,301 7,553
Minority interest....................................... 193 354
Equity in losses of affiliated partnerships in excess of
investment............................................ 3,224 3,202
------------ ------------
TOTAL LIABILITIES......................................... 958,920 985,740
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY............................... 271,902 171,373
------------ ------------
PARTNERS' DEFICIT:
General partner......................................... (12,591) (13,200)
Limited partners........................................ (443,908) (403,555)
------------ ------------
TOTAL PARTNERS' DEFICIT................................... (456,499) (416,755)
------------ ------------
$ 774,323 $ 740,358
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FALCON HOLDING GROUP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES.................................................. $ 151,208 $ 217,320 $ 255,886
------------ ------------ ------------
EXPENSES:
Service costs........................................... 41,626 60,302 75,643
General and administrative expenses..................... 30,026 36,878 46,437
Depreciation and amortization........................... 54,386 100,415 118,856
------------ ------------ ------------
Total expenses........................................ 126,038 197,595 240,936
------------ ------------ ------------
Operating income...................................... 25,170 19,725 14,950
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net................................... (57,777) (71,602) (79,137)
Equity in net income (loss) of investee partnerships.... (5,705) (44) 443
Other income, net....................................... 13,077 814 885
Income tax benefit...................................... -- 1,122 2,021
------------ ------------ ------------
NET LOSS.................................................. $ (25,235) $ (49,985) $ (60,838)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FALCON HOLDING GROUP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
AVAILABLE-
GENERAL LIMITED FOR-SALE
PARTNER PARTNERS SECURITIES TOTAL
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PARTNERS' DEFICIT,
January 1, 1995......................................... $ (11,839) $ (257,770) $ 12,851 $ (256,758)
Acquisition of Falcon First, Inc...................... -- 61,268 -- 61,268
Reclassification to redeemable partners' equity....... -- (177,938) -- (177,938)
Net loss for year..................................... (252) (24,983) -- (25,235)
Sale of marketable securities......................... -- -- (12,133 ) (12,133)
Unrealized loss on available-for-sale securities
(included in other investments)..................... -- -- (885 ) (885)
------------ ------------ ------------ ------------
PARTNERS' DEFICIT,
December 31, 1995....................................... (12,091) (399,423) (167 ) (411,681)
Net loss for year..................................... (500) (49,485) -- (49,985)
Sale of marketable securities......................... -- -- 167 167
Capital contribution.................................. -- 5,000 -- 5,000
------------ ------------ ------------ ------------
PARTNERS' DEFICIT,
December 31, 1996....................................... (12,591) (443,908) -- (456,499)
Reclassification from redeemable partners' equity..... -- 100,529 -- 100,529
Net loss for year..................................... (609) (60,229) -- (60,838)
Capital contribution.................................. -- 53 -- 53
------------ ------------ ------------ ------------
PARTNERS' DEFICIT,
December 31, 1997....................................... $ (13,200) $ (403,555) $ -- $ (416,755)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FALCON HOLDING GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $ (25,235) $ (49,985) $ (60,838)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Payment-in-kind interest expense......................................... 27,127 26,580 20,444
Depreciation and amortization............................................ 54,386 100,415 118,856
Amortization of deferred loan costs...................................... 5,840 2,473 2,192
Gain on sale of securities............................................... (13,267) (2,264) --
Gain on casualty losses.................................................. -- -- (3,476)
Equity in net losses of investee partnerships............................ 5,705 44 (443)
Provision for losses on receivables, net of recoveries................... 3,076 2,417 5,714
Deferred income taxes.................................................... -- (2,684) (2,748)
Other.................................................................... (17) 764 1,319
Increase (decrease) from changes in:
Receivables.............................................................. (348) (2,420) (9,703)
Other assets............................................................. (1,269) (274) (4,021)
Accounts payable......................................................... (214) 4,750 (1,357)
Accrued expenses......................................................... (12,542) 10,246 13,773
Customer deposits and prepayments........................................ (80) 569 (175)
----------- ----------- ---------
Net cash provided by operating activities................................ 43,162 90,631 79,537
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures....................................................... (37,149) (57,668) (76,323)
Proceeds from sale of available-for-sale securities........................ 13,487 9,502 --
Increase in intangible assets.............................................. (2,631) (4,847) (1,770)
Acquisitions of cable television systems................................... -- (247,397) --
Cash acquired in connection with the acquisition of Falcon First, Inc...... 2,655 -- --
Proceeds from sale of cable system......................................... -- 15,000 --
Other...................................................................... 964 1,163 1,806
----------- ----------- ---------
Net cash used in investing activities.................................... (22,674) (284,247) (76,287)
----------- ----------- ---------
Cash flows from financing activities:
Borrowings from notes payable.............................................. 408,707 700,533 37,500
Repayment of debt.......................................................... (418,573) (509,511) (40,722)
Deferred loan costs........................................................ (6,320) (3,823) (29)
Capital contributions...................................................... -- 5,000 93
Minority interest capital contributions.................................... 280 -- 192
----------- ----------- ---------
Net cash provided by (used in) financing activities...................... (15,906) 192,199 (2,966)
----------- ----------- ---------
Increase (decrease) in cash and cash equivalents............................. 4,582 (1,417) 284
Cash and cash equivalents, at beginning of year.............................. 10,468 15,050 13,633
----------- ----------- ---------
Cash and cash equivalents, at end of year.................................... $ 15,050 $ 13,633 $ 13,917
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Falcon Holding Group, L.P., a Delaware limited partnership (the
"Partnership" or "FHGLP"), owns and operates cable television systems serving
small to medium-sized communities and the suburbs of certain cities in 23 states
(the "Owned Systems") as of December 31, 1997. The Partnership also controls,
holds varying equity interests in and manages certain other cable television
systems for a fee (the "Affiliated Systems" and, together with the Owned
Systems, the "Systems"). As of December 31, 1997, the Affiliated Systems
operated cable television systems in 16 states. FHGLP is a limited partnership,
the sole general partner of which is Falcon Holding Group, Inc., a California
corporation ("FHGI").
The consolidated financial statements include the consolidated accounts of
FHGLP, its subsidiary cable television operating partnerships and corporations
(the "Owned Subsidiaries") and those operating partnerships' general partners,
which are owned by FHGLP. The consolidated financial statements include the
accounts of Enstar Communications Corporation, ("ECC"), a wholly-owned
subsidiary of one of the operating partnerships, which is the general partner of
the 15 limited partnerships operating under the name "Enstar" (the "Enstar
Systems", which are Affiliated Systems). The consolidated financial statements
also include the accounts of Enstar Finance Company, LLC ("EFC"), which ECC and
the Partnership formed on June 6, 1997 in order to provide financing to certain
of the Enstar limited partnerships. See Note 7.
All significant inter-company accounts and transactions have been eliminated
in consolidation. The consolidated financial statements do not give effect to
any assets that the partners may have outside their interests in the
Partnership, nor to any obligations, including income taxes, of the partners.
On December 28, 1995, the Partnership completed the acquisition of all of
the direct and indirect ownership interests in Falcon First, Inc. ("Falcon
First") which it did not previously own. Falcon First was previously managed by
the Partnership and, as such, classified as an "Affiliated Partnership" in prior
periods. Due to the proximity of the acquisition date to December 31, 1995, no
operating results were included for Falcon First for 1995, except for the
management fees received by FHGLP pursuant to its management agreement with
Falcon First. On July 12, 1996, the Partnership acquired the assets of Falcon
Cable Systems Company ("FCSC"), an Affiliated Partnership. The results of
operations of these Systems have been included in the consolidated financial
statements of FHGLP from July 12, 1996. Management fees and reimbursed expenses
received by the Partnership from FCSC for the period of January 1, 1996 through
July 11, 1996 are also included in the consolidated financial statements and
have not been eliminated in consolidation. See Note 3.
CASH EQUIVALENTS
For purposes of the consolidated 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 and 1997 included $4.1 million and $4.5 million of investments in
commercial paper and short-term investment funds of major financial
institutions.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Partnership is the general partner of certain entities, which in turn
act as general partner of related partnerships which own, directly or through
subsidiaries, cable television systems managed by the Partnership (the
"Affiliated Partnerships"). The Partnership's effective ownership interests in
the Affiliated
F-7
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Partnerships are less than one percent. The Affiliated Partnerships are
accounted for using the equity method of accounting. Equity in net losses are
recorded to the extent of the investments in and advances to the partnerships
plus obligations for which the Partnership, as general partner, is responsible.
The liabilities of the Affiliated Partnerships, other than amounts due the
Partnership, principally consist of debt for borrowed money and related accrued
interest.
OTHER INVESTMENTS
Certain investments in which the Partnership exercises significant influence
over the operations of the investee are carried on the equity method. Other
investments are carried at cost.
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.
<TABLE>
<CAPTION>
<S> <C>
CABLE TELEVISION SYSTEMS:
Headend buildings and equipment............................................... 10-16 years
Trunk and distribution........................................................ 5-15 years
Microwave equipment........................................................... 10-15 years
OTHER:
Furniture and equipment....................................................... 3-7 years
Vehicles...................................................................... 3-10 years
Leasehold improvements........................................................ Life of lease
</TABLE>
FRANCHISE COST AND GOODWILL
The excess of cost over the fair values 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 and in the renewal of existing franchises. These costs
are amortized using the straight-line method over the lives of the franchises,
ranging up to 25 years (composite 12 year average). Goodwill is amortized over
20 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, covenants
not to compete and organization costs which are amortized using the
straight-line method over two to five years.
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to interest
expense over the life of the related loan.
F-8
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing 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 estimates 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.
Management fees are recognized on the accrual basis based on a percentage of
gross revenues of the respective cable television systems managed.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market risk and as
required by certain covenants in its Amended and Restated Credit Agreement, the
Partnership enters into various transactions that involve contracts and
financial instruments with off-balance-sheet risk, including interest rate swap
and interest rate cap agreements. The Partnership enters into these agreements
in order to manage the interest-rate sensitivity associated with its
variable-rate indebtedness. The differential to be paid or received in
connection with interest rate swap and interest rate cap agreements is
recognized as interest rates change and is charged or credited to interest
expense over the life of the agreements. Gains or losses for early termination
of those contracts are recognized as an adjustment to interest expense over the
remaining portion of the original life of the terminated contract.
INCOME TAXES
The Partnership and its direct and indirect subsidiaries, except for Falcon
First and ECC, are limited partnerships or limited liability companies and pay
no income taxes as entities. All of the income, gains, losses, deductions and
credits of the Partnership are passed through to its partners. Nominal taxes are
assessed by certain state jurisdictions. 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 exceeded its tax basis
by $58.8 million.
Falcon First and ECC are corporations and are subject to federal and state
income taxes, which have not been significant. Deferred taxes relate principally
to the difference between book and tax basis of the cable television assets of
Falcon First, partially offset by the tax effect of related net operating loss
carryforwards.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
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.
F-9
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS
In connection with the acquisition of Falcon First, the Third Amended and
Restated Partnership Agreement (the "Existing FHGLP Partnership Agreement")
became effective on December 28, 1995. The Existing FHGLP Partnership Agreement
provides for Class A, Class B and Class C partnership interests. At December 31,
1997, there were 6,237.05 Class A partnership units and 93,762.95 Class B
partnership units. Class C partnership interests are generally not expressed in
units but are carried at liquidation value. Income and losses of the Partnership
are generally allocated to the General Partner and limited partners in
proportion to the partnership interest held by each Partner. The Class C
partnership interests have certain preferences with respect to the allocation of
income and distributions of the Partnership. On August 1, 1996, the Partnership
received $5 million from certain existing limited partners who purchased
additional partnership interests, the proceeds of which were used to temporarily
repay outstanding debt under the Amended and Restated Credit Agreement. These
limited partners also entered into an option agreement to acquire additional
partnership interests in the future for a purchase price of $10 million.
Holders of Class A and B partnership units have voting rights in all
partnership matters requiring a vote; the votes of the holder of Class C
partnership interests are required for certain transactions, generally related
to distributions. Class C partnership interests have a stated value of
approximately $51.4 million which will increase at the annual rate of 8% from
December 28, 1997 to December 27, 1999, 10% from December 28, 1999 to December
27, 2001, and 12% from December 28, 2001 until redemption. The Class C
partnership interests must be redeemed by the Partnership in March 2004 at their
then stated value. Class C partnership interests also have priority in
liquidation over other partnership units in the amount of stated value.
The Existing FHGLP Partnership Agreement provides for certain groups of
holders of partnership units to have certain rights and priorities with respect
to other holders of partnership units. Among these rights are stated obligations
of the Partnership to redeem partnership units at fair value for Class A and B
partnership units, or in the case of Class C partnership interests, as described
above, at stated value. As more fully described below, partnership interests
held by specified groups are subject to mandatory redemption and/or have the
option to require redemption ("puts") of such partnership interests. As
discussed in more detail below, these rights and priorities will be
significantly revised and partially satisfied upon the closing of the TCI
Transaction (as described below). Set forth below is a description of the rights
and priorities contained in the Existing FHGLP Partnership Agreement.
The following table sets forth the holdings and the estimated redemption
rights of each of these groups of holders.
<TABLE>
<CAPTION>
CLASS A CLASS B ESTIMATED
PARTNERSHIP PARTNERSHIP REDEMPTION REDEMPTION VALUE AT
UNITS UNITS RIGHTS DECEMBER 31, 1997
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Group I Partners.................................... -- 8,658.02 Put $ 17,446,000
Group II Partners................................... 1,368.13 36,748.96 Mandatory 76,809,000
Group III Partners.................................. -- 10,732.30 Put 21,627,000
Group IV Partner (Class B).......................... -- 2,043.33 Put 4,118,000
Group IV Partner (Class C).......................... -- -- Mandatory 51,373,000
----------- ----------- -------------------
Redeemable Partners' Equity......................... 1,368.13 58,182.61 $ 171,373,000
----------- ----------- -------------------
----------- ----------- -------------------
</TABLE>
F-10
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
The estimated redemption values at December 31, 1997 were based on
management's estimate of the relative fair value of such interests under current
market conditions. The actual redemption value of all partnership interests
(other than Class C partnership interests) will generally be determined through
negotiation or a third party appraisal mechanism at the time such units are put,
and the appraisers will not be bound by historical estimates. Accordingly, such
appraised valuations may be greater than or less than management's estimates and
any such variations could be significant. The redemption value of the Class C
partnership interests will generally be determined based on a formula due to the
preferred status of such Class C interests.
Group I holders have the option to require redemption of one-third of their
partnership units at fair value effective September 1996; two-thirds of their
partnership units effective September 1997; and all of their partnership units
effective September 1998. The September 1996 and 1997 put rights were not
exercised. Subject to certain conditions, the Partnership is required to redeem
the Group II partnership units at fair value during the period July 1, 1998
through June 30, 1999. If Group I holders exercise their put rights (election is
required to be made between December and March prior to the above effective
dates), the Group II partnership units cannot be redeemed until the Group I
redemption has been completed. The Group III partnership units must be redeemed
concurrently with the redemption of the Group II partnership units unless the
Group III holders exercise an option to not be so redeemed. If the Group III
holders exercise their option not to be so redeemed, on the earlier of March 31,
2000 or approximately nine months after the Partnership's purchase of the Group
II partnership units and for every two years thereafter, there will be a 90-day
period during which the Partnership may elect to redeem the Group III
partnership units and the Group III holders may elect to put their Group III
partnership units (which redemption or put shall be effective within 180 days
after the election to redeem or put, as applicable).
The Class C partnership interests held by the Group IV holder may be
repurchased by the Partnership at any time, and from time to time, at a price
equal to the stated value thereof, and are subject to mandatory redemption at
stated value in March 2004. The Group IV holder has the option to require
redemption of its Class B partnership units at fair value at any time after June
30, 2004. Under certain circumstances, the Group IV holder may elect to share in
the existing liquidity rights of the Group II holders. Certain of the
Partnership's debt agreements (including the Amended and Restated Credit
Agreement and the Notes) restrict the Partnership's ability to: (i) make
distributions to fund the purchase of partnership units pursuant to the
redemption provisions described above, (ii) incur indebtedness or issue debt
securities in connection with such purchase, and (iii) sell a substantial amount
of its assets. Absent the TCI Transaction discussed below, there can be no
assurance that the Partnership would be able to satisfy the above obligations
without a recapitalization of the Partnership and a renegotiation of its debt
obligations. If the Partnership fails to purchase certain of the limited
partnership interests within a specified period after the Partnership's purchase
obligations arise, absent an alternative arrangement with the partners,
liquidation of the Partnership's assets would be necessary.
In the event of liquidation, the Partnership is required to distribute
assets and/or the proceeds from liquidation first, to pay all debts and
liabilities outstanding; second, to the holder of the Class C partnership
interests; and finally, to holders of the Class A and Class B partnership
interests in proportion to their respective percentage interests.
In contemplation of the TCI Transaction, by agreement of the Group I, Group
II, Group III and Group IV partners, the dates on which the partners may
exercise certain put rights and the dates by which
F-11
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
FHGLP is required to redeem certain partnership interests were tolled in
accordance with the Contribution Agreement. The new dates are determined by
adding to the original date the number of days in the period beginning on
December 1, 1997 and ending ninety days after the earlier of December 31, 1998
or the date that the Contribution Agreement is terminated in accordance with its
terms. As a result, assuming that the TCI Transaction has not closed and the
Contribution Agreement is not terminated prior to December 31, 1998, the tolling
period will be approximately sixteen months and the Partnership would not be
required to purchase the partnership interests held by the Group I, Group II and
Group III partners until the period of January 2000 to October 2000, with the
Class C partnership interests held by the Group IV partner not becoming
mandatorily redeemable until July 2005. If the Contribution Agreement is
terminated prior to December 31, 1998, these new dates would be pushed forward
accordingly and FHGLP may be required to redeem certain partnership interests
earlier than the dates set forth above. Subject to certain customary exceptions,
the Contribution Agreement may not be terminated without the consent of FHGLP
prior to December 31, 1998.
Upon completion of the TCI Transaction, the existing liquidity rights will
be terminated and be replaced by certain new liquidity rights provided to the
non-management limited partners in the new FHGLP Partnership Agreement.
TCI TRANSACTION
On December 30, 1997 FHGLP entered into a Contribution and Purchase
Agreement (as it may be amended, the "Contribution Agreement") with Falcon
Communications, L.P., a California limited partnership ("New Falcon"), TCI
Falcon Holdings, LLC, a Delaware limited liability company ("TCI"), an affiliate
of Tele-Communications, Inc., the existing partners of FHGLP and certain other
persons (the transactions contemplated by the Contribution Agreement being
referred to collectively as the "TCI Transaction"). The parties to the
Contribution Agreement have agreed to consolidate under the ownership and
control of New Falcon substantially all of the Systems and all of the TCI
systems. The Systems to be contributed to New Falcon include the Systems owned
by Falcon Video Communications, L.P. ("Falcon Video"), an Affiliated
Partnership, which had revenues of $32.1 million for the year ended December 31,
1997. The contributed Systems will represent all of the Owned Systems and all of
the Affiliated Systems currently under the control of FHGLP except for the
Enstar Systems. The TCI systems will be contributed to New Falcon subject to
$429.7 million of existing debt, which will be refinanced. The TCI systems,
which had revenues of $119.5 million for the year ended December 31, 1997, are
located in California, Oregon, Washington, Missouri and Alabama. Following
completion of the TCI Transaction (the "Closing"), the TCI systems will be
consolidated into and operated by the Owned Subsidiaries of the Partnership.
New Falcon was organized as a California limited partnership in October
1997. Concurrently with the execution of the Contribution Agreement, FHGLP and
TCI entered into an Amended and Restated Agreement of Limited Partnership of New
Falcon (the "New Falcon Partnership Agreement"). FHGLP will own, subject to
possible adjustment pursuant to the Contribution Agreement, approximately 53% of
the equity of New Falcon and will serve as the managing general partner of New
Falcon. TCI will own, subject to possible adjustment pursuant to the
Contribution Agreement, approximately 47% of the equity of New Falcon. FHGI will
continue to serve as the sole general partner of FHGLP. As such, subject to
certain governance provisions set forth in the New Falcon Partnership Agreement,
FHGI and its senior management will manage the business and day-to-day
operations of New Falcon.
F-12
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
As a result of the TCI Transaction, it is contemplated that New Falcon will
initially assume (subject to a subsequent assumption by New Falcon II, as
described below) the rights and obligations of FHGLP under the indenture (the
"Indenture") governing FHGLP's 11% Senior Subordinated Notes due 2003 (the
"Notes"). Accordingly, New Falcon will be substituted for FHGLP as an obligor
under the Notes (subject to such subsequent assumption by New Falcon II). As of
December 31, 1997, the aggregate principal amount of the Notes outstanding was
$282.2 million. In addition, New Falcon will assume certain other indebtedness
of FHGLP and TCI. The TCI Transaction is conditioned upon New Falcon's obtaining
new financing in an amount sufficient to refinance its then existing
indebtedness to be assumed by New Falcon as a result of the TCI Transaction.
The Contribution Agreement provides that immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to Falcon Communications, LLC, a newly-formed limited
liability company wholly-owned by New Falcon ("New Falcon II"), subject to
certain indebtedness to be assumed by New Falcon II, including the Notes and the
indebtedness resulting from New Falcon's new financing. Thus, New Falcon II will
be substituted for New Falcon as the obligor under the Notes (which the
Partnership expects to repurchase or redeem prior to October 15, 1998--See Note
7) and the new financing. Any of the Notes then outstanding (see Note 7) will be
redeemed in full by FHGLP (or New Falcon II if the TCI Transaction has closed)
prior to October 15, 1998 in accordance with the redemption provisions of the
Indenture. Although there can be no assurances, the Partnership expects that it
will receive the necessary approvals from its senior lenders to effect such
redemption. The Notes are redeemable at the option of the obligor, in whole or
in part, at any time on or after September 15, 1998, at 105.5% of the
outstanding principal amount, plus accrued interest to the redemption date.
As part of the TCI Transaction, FHGLP will redeem a specified portion of the
partnership interests in FHGLP currently held by certain of the non-management
limited partners of FHGLP (the "Redeemed Partners") in exchange for a portion of
FHGLP's limited partnership interest in New Falcon (the "New Falcon Interests").
Following the redemption, TCI will purchase the New Falcon Interests from the
Redeemed Partners for cash in the approximate aggregate amount of $154.7
million.
The consummation of the TCI Transaction is also subject to, among other
things, the satisfaction of customary closing conditions and the receipt of
certain third-party or governmental approvals, including the consent of
franchising authorities. Although there can be no assurance that such closing
conditions will be satisfied, that the Partnership will be able to obtain new
financing on acceptable terms or that the TCI Transaction will be consummated,
management presently anticipates that the TCI Transaction will be completed in
the third quarter of 1998.
THE AMENDED PARTNERSHIP AGREEMENT OF FHGLP
Concurrently with the closing of the TCI Transaction, the existing partners
of the Partnership will enter into a Fourth Amended and Restated Agreement of
Limited Partnership of Falcon Holding Group, L.P. (the "New FHGLP Partnership
Agreement"), and two additional persons will be admitted to the Partnership as
limited partners (by virtue of their contribution to the Partnership at the
closing of their interests in Falcon Video). FHGI will remain the general
partner of the Partnership.
The New FHGLP Partnership Agreement will substantially alter the rights and
preferences of the partnership interests held by the Group I, Group II, Group
III and Group IV limited partners. Among other changes, the New FHGLP
Partnership Agreement will (1) provide for only one class of limited
F-13
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
partnership interests; (2) eliminate the existing repurchase/put and conversion
rights that currently apply to the partnership interests held by the Group I,
Group II, Group III and Group IV limited partners and substitute a right of
certain partners under certain circumstances to require that the Partnership or
New Falcon purchase their interests and a right of the Partnership or New Falcon
to purchase those interests; and (3) substantially alter the existing
partnership governance provisions, including eliminating the Board of
Representatives and substantially reducing the scope of partnership matters that
require limited partnership approval and the percentage-in-interest required for
such approval.
The New FHGLP Partnership Agreement will also alter the allocation and
distribution preferences that currently exist. Profits and losses will be
allocated, and distributions will be made, in proportion to the partners'
percentage interests, except that following a dissolution of the Partnership,
distributions will be made first, to the two holders of certain interests which
are entitled to the Preferred Return (the "Preferred Interests") until such
partners have received the Preferred Return; second, to all other partners
(excluding the holders of the Preferred Interests) until all partners (including
the holders of the Preferred Interests) have received distributions in
proportion to their percentage interests; thereafter, to all partners (including
the holders of the Preferred Interests) in proportion to their percentage
interests. "Preferred Return" will equal $6 million, plus a 10% return from the
date of the closing of the TCI Transaction.
Prior to closing, the Partnership intends to amend its existing Incentive
Plan to provide for payments by the Partnership at closing to Participants (as
defined under the Plan) in an aggregate amount of approximately $6.6 million and
to reduce by such amount the Partnership's obligations to make future payments
to Participants under the Plan. At closing, New Falcon will assume the
obligations of the Partnership under the Incentive Plan, as so amended, other
than the obligation to make payments at closing. Other than additional
contributions by the General Partner in the amount of payments made by New
Falcon under the Incentive Plan, the partners will not be required to make any
additional capital contributions to the Partnership.
The Partnership is the managing general partner and a limited partner of New
Falcon, and TCI will be a general partner of New Falcon. Other than with respect
to certain partnership matters that require the approval of New Falcon's
Advisory Committee and certain additional partnership matters that require the
approval of TCI, the Partnership has the exclusive authority to manage the
business and operations of New Falcon.
The Amended and Restated Agreement of Limited Partnership of New Falcon
generally provides that profits and losses will be allocated, and distributions
will be made, in proportion to the partners' percentage interests. Other than
the contributions contemplated by the Contribution Agreement and certain
additional contributions that may be required by the Partnership in connection
with payments by New Falcon under the Incentive Plan, neither the Partnership
nor TCI will be required to make any additional capital contributions to New
Falcon.
NOTE 3 -- ACQUISITIONS AND SALES
FALCON FIRST
Falcon First, through wholly-owned subsidiaries, owns cable television
systems in Georgia, Alabama, Mississippi and New York. Prior to the acquisition
of Falcon First on December 28, 1995, the Partnership had managed the Falcon
First Systems for a fee and held an indirect, minority interest in its former
parent
F-14
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
company, Falcon First Communications, L.P. ("FFCLP"). As a result of the
acquisition, the Falcon First Systems became Owned Systems; previously they were
Affiliated Systems.
The holders of the direct and indirect partnership interests in FFCLP,
excluding the Partnership's affiliates, received newly issued partnership
interests (Class B partnership interests) in the Partnership. In addition,
certain holders of subordinated notes of FFCLP, through a newly-established
holding company, received Class C partnership interests in the Partnership. The
Class C partnership interests are entitled to a stated preference on liquidation
and are mandatorily redeemable in 2004, subject to certain liquidity sharing
rights. As of the closing of the Falcon First acquisition, the Class C
partnership interests were entitled to an aggregate liquidation preference of
approximately $51.4 million. See Note 2.
FALCON CABLE SYSTEMS COMPANY
The Systems of FCSC, acquired through a newly-formed subsidiary operating
partnership on July 12, 1996, serve customers in California and Oregon and were
previously managed by the Partnership as Affiliated Systems. As a result of the
acquisition, the FCSC Systems became Owned Systems.
The assets were acquired at a price determined by an appraisal process
defined in the FCSC partnership agreement. Various legal challenges have been
filed and are pending regarding the appraisal valuations. See Note 8.
The acquisitions of Falcon First and FCSC were accounted for by the purchase
method of accounting, whereby the purchase price of Falcon First was allocated
to the assets and liabilities assumed based on the estimated fair values at the
date of acquisition, and the purchase price of the FCSC assets was allocated
based on an appraisal, as follows:
<TABLE>
<CAPTION>
FALCON
FIRST FCSC
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PURCHASE PRICE:
Class B partnership interests issued................................. $ 9,895 $ --
Class C partnership interests issued................................. 51,373 --
Debt assumed......................................................... 120,621 --
Other liabilities assumed............................................ 3,274 --
Transaction costs.................................................... 5,278 5,625
Asset purchase price determined by appraisal......................... -- 247,397
----------- ----------
190,441 253,022
----------- ----------
FAIR MARKET VALUE OF ASSETS AND LIABILITIES ACQUIRED:
Property, plant and equipment........................................ 33,992 81,941
Franchise costs...................................................... 88,003 69,936
Customer lists and other intangible assets........................... 3,411 75,840
Other assets......................................................... 5,705 7,060
Deferred taxes related to step-up of intangible assets............... 9,048 --
----------- ----------
140,159 234,777
----------- ----------
Excess of Purchase Price over Fair Value of Assets and Liabilities
Acquired......................................................... $ 50,282 $ 18,245
----------- ----------
----------- ----------
</TABLE>
F-15
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
The excess of purchase price over the fair value of net assets acquired has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
The Class B partnership interests issued in the Falcon First transaction
were valued in proportion to the Partnership's estimated fair value, which was
agreed upon by all holders of Partnership interests in the Third Amended and
Restated Partnership Agreement, which became effective December 28, 1995. See
Note 2.
The Class C partnership interests were valued at current stated liquidation
value which was equivalent to the unpaid amounts due on the subordinated notes
of FCC.
In connection with the Falcon First transaction, the Partnership entered
into a $435 million Senior Secured Reducing Revolver (the "Bank Credit
Agreement") in order to refinance its existing indebtedness and Falcon First's
existing indebtedness, repay other notes, fund capital expenditures and provide
for general liquidity requirements. On July 12, 1996, in connection with the
acquisition of the FCSC assets, the Partnership further amended the terms of the
Bank Credit Agreement and increased the available borrowings to $775 million
(the "Amended and Restated Credit Agreement") in order to acquire the FCSC
assets, repay other notes, pay transaction and financing costs, and provide
future working capital. See Note 7.
Sources and uses of funds for each of the transactions were as follows:
<TABLE>
<CAPTION>
FALCON
FIRST FCSC
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SOURCES OF FUNDS
Cash in Owned Systems................................................ $ 5,325 $ 7,757
Advance under bank credit facilities................................. 379,000 616,500
----------- ----------
Total sources of funds............................................. $ 384,325 $ 624,257
----------- ----------
----------- ----------
USES OF FUNDS
Repay existing bank debt of the Partnership and of First, including
accrued interest................................................... $ 376,611 $ 370,285
Purchase price of FCSC assets........................................ -- 247,397
Transaction fees and expenses........................................ 5,278 5,625
Available funds...................................................... 2,436 950
----------- ----------
Total uses of funds................................................ $ 384,325 $ 624,257
----------- ----------
----------- ----------
</TABLE>
The following unaudited condensed consolidated pro forma statements of
operations present the consolidated results of operations of the Partnership as
if the acquisitions had occurred at the beginning of the
F-16
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
periods presented and are not necessarily indicative of what would have occurred
had the acquisitions been made as of those dates or of results which may occur
in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues.............................................................. $ 231,498 $ 244,905
Expenses.............................................................. 230,913 237,956
---------- ----------
Operating income.................................................... 585 6,949
Other expenses........................................................ 74,554 82,728
---------- ----------
Loss before income tax benefits..................................... (73,969) (75,779)
Income tax benefit.................................................... 5,994 1,122
---------- ----------
Net loss.............................................................. $ (67,975) $ (74,657)
---------- ----------
---------- ----------
</TABLE>
On July 1, 1996, the Partnership sold certain of the Falcon First assets for
$15 million, the proceeds being used to temporarily repay outstanding debt under
the former Bank Credit Agreement. The cable assets sold generated approximately
1.9% of consolidated revenues for the six months ended June 30, 1996. Given the
proximity of the sale date to the December 28, 1995 acquisition date, the
resulting gain on sale of $3.6 million was recorded as a reduction to goodwill.
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 fair value of the Partnership's subordinated notes payable is based on
quoted market prices for similar issues of debt with similar remaining
maturities. The carrying amount of the Partnership's remaining debt outstanding
approximates fair value due to its variable rate nature.
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-17
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
CARRYING CARRYING
VALUE(1) FAIR VALUE VALUE(1) FAIR VALUE
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................................ $ 13,633 $ 13,633 $ 13,917 $ 13,917
Notes Payable (Note 7):
11% Senior subordinated notes(2)............................... 253,537 225,648 282,193 299,125
Amended and Restated Bank Credit Agreement(3).................. 616,000 616,000 606,000 606,000
Other subordinated notes(2).................................... 15,000 16,266 15,000 16,202
Capitalized lease obligations.................................. 141 141 10 10
Other.......................................................... 1,108 1,108 8,018 8,018
----------- ---------- ----------- ----------
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT(4) VALUE(5) AMOUNT(4) VALUE(5)
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Rate Hedging Agreements (Note 7):
Interest rate swaps............................................ $ 690,000 $ 79 $ 585,000 $ (371)
Interest rate caps............................................. 70,000 (305) 25,000 (148)
</TABLE>
The carrying value of interest rate swaps and caps was $865,000 and $402,000
at December 31, 1996 and 1997, respectively. See Note 7(e).
- ------------------------
(1) Carrying amounts represent cost basis.
(2) Determined based on quoted market prices of individual trades for those or
similar notes. Accordingly, no inference may be drawn that such valuation
would apply to the entire issue.
(3) Due to the variable rate nature of the indebtedness, the fair value is
assumed to approximate the carrying value.
(4) The amount of debt on which current interest expense has been affected is
$495 million and $520 million for swaps and $45 million and $25 million for
caps, respectively, at December 31, 1996 and 1997. The balance of the
contract totals presented above reflect contracts entered into as of
December 31 which do not become effective until 1998, at which time
effective contracts expire.
(5) The amount that the Partnership estimates it would receive (pay) to
terminate the hedging agreements. This amount is not recognized in the
consolidated financial statements.
NOTE 5 -- INVESTMENTS IN AFFILIATED PARTNERSHIPS
FHGLP is the general partner of the Affiliated Partnerships shown below.
FHGLP's effective ownership interest in the respective Affiliated Partnerships
is less than one percent. FHGLP's investment in net losses in excess of equity
of the Affiliated Partnerships was approximately $3.2 million at December 31,
1996 and 1997. FHGLP has the right, under certain circumstances, to acquire the
assets of certain of the Affiliated Partnerships. See Notes 2 and 12.
F-18
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INVESTMENTS IN AFFILIATED PARTNERSHIPS (CONTINUED)
Investments in affiliated partnerships include:
Falcon Classic Cable Investors, L.P., general partner of Falcon Classic
Cable Income Properties, L.P. ("Falcon Classic" or "Classic").
Falcon Video Communications Investors, L.P., general partner of Falcon
Video.
Enstar Partnerships, 15 limited partnerships of which ECC is the
corporate general partner.
Falcon Cable Investors Group, L.P., general partner of FCSC (through July
11, 1996 only. See Note 3).
Falcon First Investors, L.P., general partner of Falcon First
Communications, L.P. (through December 28, 1995 only. See Note 3).
Investments in these partnerships are accounted for on the equity method of
accounting. Equity in net losses are recorded to the extent of FHGLP's
obligations as the general partner of the partnerships, except when the
Partnership, as general partner or through subsidiaries, has guaranteed
obligations of the partnerships.
Summarized unaudited financial information of these partnerships is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT PERIOD END
Total assets............................................. $ 333,422 $ 216,352 $ 203,885
Total liabilities........................................ 367,383 178,448 171,607
Partners' equity (deficit)............................... (33,961) 37,904 32,278
FOR THE PERIOD
Revenues................................................. $ 164,671 $ 116,241 $ 92,613
Depreciation and amortization............................ 70,994 41,363 32,506
Operating income......................................... 4,460 13,117 9,266
Net loss................................................. (36,648) (7,658) (3,678)
</TABLE>
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cable television systems................................................................ $ 500,697 $ 555,253
Furniture and equipment................................................................. 17,915 19,067
Vehicles................................................................................ 10,861 12,067
Land, buildings and improvements........................................................ 10,575 10,723
----------- -----------
540,048 597,110
Less accumulated depreciation and amortization.......................................... (230,920) (272,551)
----------- -----------
$ 309,128 $ 324,559
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FHGLP Only:
11% Senior Subordinated Notes(a)........................................................ $ 253,537 $ 282,193
Capitalized lease obligations........................................................... 141 10
Owned Subsidiaries:
Amended and Restated Credit Agreement(b)................................................ 616,000 606,000
Other Subordinated Notes(c)............................................................. 15,000 15,000
Other(d)................................................................................ 1,108 8,018
---------- ----------
$ 885,786 $ 911,221
---------- ----------
---------- ----------
</TABLE>
(A) 11% SENIOR SUBORDINATED NOTES
On March 29, 1993, FHGLP issued $175 million aggregate principal amount of
11% Senior Subordinated Notes due 2003. Interest payment dates are semi-annual
on each March 15 and September 15 commencing September 15, 1993. Through
September 15, 2000 FHGLP, at its option, may pay all or any portion of accrued
interest on the Notes by delivering to the holders thereof, in lieu of cash,
additional Notes having an aggregate principal amount equal to the amount of
accrued interest not paid in cash. Through December 31, 1997, the Partnership
has elected to issue $107.2 million additional notes as payment-in kind for
interest. The Partnership has elected to pay the interest payment due March 15,
1998 in cash, and under the terms of the Notes is required to continue to make
cash payments. The Partnership obtained an amendment to the Amended and Restated
Credit Agreement to permit payment of interest on the Notes in cash. The Notes
represent unsecured general obligations of FHGLP, subordinated in right of
payment to all senior indebtedness of FHGLP in the manner and to the extent set
forth in the Indenture governing the Notes. In addition, the Notes are
effectively subordinated to the claims of creditors of FHGLP's subsidiaries,
including the Owned Partnerships. The Indenture contains, among others,
covenants with respect to: (i) the incurrence of additional indebtedness, (ii)
the making of investments, (iii) the making of restricted payments (as defined
therein), (iv) transactions with affiliates, (v) asset sales (as defined) and
(vi) mergers, consolidations and sales of substantially all assets. The
Indenture's limitation on the incurrence of additional indebtedness limits the
ratio of the total debt of the Partnership to Operating Cash Flow (as defined in
the Indenture) to 7.5 to 1 if such indebtedness is incurred through December 31,
1999 and to 6.5 to 1 thereafter. Management believes that the Partnership was in
compliance with such covenants as of December 31, 1997.
The Notes are redeemable at the option of the Partnership, in whole or in
part, at any time on or after September 15, 1998, initially at 105.5% of the
outstanding principal amount, plus accrued interest, to the redemption date.
The Partnership is presently pursuing a sale of $300 million of Senior
Debentures due 2010 and of $200 million gross proceeds of Senior Discount
Debentures due 2010 (collectively the "Senior Debentures"). If the Partnership
is successful in selling the Senior Debentures, of which there can be no
assurance, the net proceeds would be used to temporarily repay debt outstanding
under the Amended and Restated Credit Agreement, and the Partnership would
commence a tender offer for the Notes shortly thereafter.
F-20
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
(B) AMENDED AND RESTATED CREDIT AGREEMENT
The Partnership has a $775 million senior secured Amended and Restated
Credit Agreement that matures on July 11, 2005 (see Note 3). The Amended and
Restated Credit Agreement requires the Partnership to make annual reductions of
$1.0 million on the Term Loan commencing December 31, 1997 and requires the
Partnership to make quarterly reductions on the Reducing Revolver commencing
March 31, 1999. Maximum available borrowings under the Amended and Restated
Credit Agreement are $774 million at December 31, 1997 reducing to $185 million
at December 31, 2004. The Amended and Restated Credit Agreement also includes a
$75 million Acquisition Facility that the Partnership may, prior to December 31,
1998, request the Lenders to fund for the sole purpose of acquiring other
businesses or assets and paying the applicable costs of such transactions,
subject to certain terms and conditions. If any borrowings are advanced under
this facility, quarterly repayments shall commence March 31, 1999 or later,
(based on the amounts outstanding under the Reducing Revolver and Term Loan) and
will not have a maturity date earlier than July 11, 2005. The Amended and
Restated Credit Agreement requires interest on the amount outstanding under the
Reducing Revolver to be tied to the ratio of consolidated total debt (as
defined) to consolidated annualized cash flow (as defined). Interest rates are
based on LIBOR or prime rates at the option of the Partnership. The LIBOR margin
under the Reducing Revolver ranges from 0.75% to 1.625%, while interest on the
Term Loan will be the LIBOR rate plus 2.375%.
At December 31, 1997, the weighted average interest rate on borrowings
outstanding under the Amended and Restated Credit Agreement (including the
effects of the interest rate hedging agreements) was 7.69%. The Partnership is
also required to pay a commitment fee per annum on the unused portion. The
commitment fee is computed at 0.375% if the ratio of consolidated total debt to
consolidated annualized operating cash flow is greater than or equal to 4.75x;
if the ratio is less than 4.75x, the fee is computed at 0.25%. As of December
31, 1997, subject to covenant limitations, the Partnership had available
borrowings under the Amended and Restated Credit Agreement of $38.3 million.
Borrowings are collateralized by substantially all of the borrowers' assets
(i.e. substantially all of the operating assets of the Partnership). In
addition, FHGLP pledged certain of its assets to secure the borrowings,
including its stock and partnership interests in its subsidiaries. However, the
lending banks do not have recourse against the assets of FHGI or the limited
partners of FHGLP.
The Amended and Restated Credit Agreement contains various restrictions
relating to, among other items, mergers and acquisitions, investments,
indebtedness, contingent liabilities and sale of property and also contains
restrictions regarding distributions and a change of management or a change in
control (as defined). Additionally, the Amended and Restated Credit Agreement
contains financial covenants which may, among other things, limit the amount the
Partnership may borrow. The Amended and Restated Credit Agreement currently
contains, among others, the following covenants, which provide that (i)
consolidated cash flow to consolidated cash interest expense (as defined) shall
exceed 2.00x; (ii) consolidated total debt (as defined, which definition does
not include the Notes) to consolidated annualized cash flow (as defined) shall
not exceed 5.50 prior to June 29, 1999 reducing to 2.50 after June 30, 2002 and
thereafter; and (iii) consolidated annualized cash flow to consolidated pro
forma debt service (as defined) shall be greater than 110%. Management believes
that the Partnership was in compliance with all financial covenants as of
December 31, 1997.
F-21
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
Substantially all of the assets of the Partnership are held by the Owned
Subsidiaries. The Amended and Restated Credit Agreement contains restrictions
that prohibit the Owned Subsidiaries from transferring assets or making
distributions to FHGLP except for payments on account of management services
provided by FHGLP, which were limited by the former Bank Credit Agreement based
on the lesser of FHGLP's cash flow shortfall (as defined) or 3.75% of
consolidated cable revenues (as defined). The 3.75% limit was raised to 4.25%
under the Amended and Restated Credit Agreement, effective July 12, 1996. For
1996 and 1997 the permitted amount of distributions to FHGLP was $8.4 and $10.4
million; the actual amounts distributed were $3.5 and $6.8 million,
respectively. Accordingly, at December 31, 1997, FHGLP faces a liquidity risk if
it were to experience liquidity requirements in excess of the permitted
distributions.
The Partnership is presently negotiating a new Bank Credit Agreement which
would replace the Amended and Restated Credit Agreement and provide funds for
the Partnership's tender offer for the Notes and the closing of the TCI
Transaction. There can be no assurance that the Partnership will be able to
negotiate a new Bank Credit Facility on acceptable terms.
(C) OTHER SUBORDINATED NOTES
Other Subordinated Notes consist of 11.56% Subordinated Notes due March
2001. The subordinated note agreement contains certain covenants which are
substantially the same as the covenants under the Amended and Restated Credit
Agreement described in (b) above. At December 31, 1997, management believes that
the Partnership was in compliance with such covenants.
(D) OTHER
Other notes payable consist of $7.5 million owed by EFC. On September 30,
1997, EFC obtained a secured bank facility with $35 million of availability from
two agent banks in order to obtain funds that would be loaned to certain Enstar
limited partnerships. The lenders advanced $7.5 million to EFC, which in turn
advanced those funds to a number of Enstar limited partnerships at closing. The
notes bear interest at LIBOR or prime rates at the option of EFC, plus margin
add-ons as defined. The EFC bank facility is non-recourse to the Partnership and
matures on August 31, 2001 at which time all funds previously advanced will be
due in full. The Enstar partnerships utilized these funds to refinance existing
debt and pay deferred management fees due ECC.
(E) INTEREST RATE HEDGING AGREEMENTS
The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on a portion of its variable-rate debt. The
Amended and Restated Credit Agreement requires that the Partnership maintain
hedging arrangements with respect to at least 50% of its total outstanding
indebtedness, excluding the Notes, for a two year period at rates satisfactory
to the Administrative Agent in order to manage the interest rate sensitivity on
its borrowings. At December 31, 1997, the Partnership participated in interest
rate hedging contracts with an aggregate notional amount of $560 million under
which the Partnership pays interest at fixed rates ranging from 5.22% to 6.55%,
(weighted average rate of 5.79%), and receives interest at variable LIBOR rates.
$40 million of these contracts were not yet effective at December 31, 1997, but
are scheduled to go into effect during 1998 as certain of the existing contracts
mature. The Partnership has reduced this position by entering into an interest
rate hedging contract with a notional amount of $25 million under which it
receives a fixed interest payment at 5.49% and pays interest at a variable LIBOR
rate. The hedging contracts expire between January 1998 and July 2001. Certain
of
F-22
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
these contracts with an aggregate notional amount of $145 million provide the
counterparties with an option to extend the maturity of the contracts for one
year on substantially similar terms. The Partnership has also entered into one
LIBOR interest rate cap agreement aggregating $25 million as of December 31,
1997.
The hedging agreements resulted in additional interest expense of $729,000,
$1.0 million and $350,000 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.
In connection with the decision to make interest payments on the Notes in
cash, the Partnership entered into various interest rate swap agreements with
three banks on February 10, 1998 in order to reduce its interest cost. The
agreements call for the Partnership to receive payments at 11%; and to make
payments at 7.625% for the period September 16, 1997 through September 15, 1998
on a notional principal amount of approximately $282.2 million. The contracts
further call for the Partnership to pay at a fixed rate of 7.625% and receive
interest at variable LIBOR rates for the period September 16, 1998 through
September 15, 2003 on a notional principal amount of approximately $297.7
million. The interest rate benefit received by the Partnership will be
recognized over the life of the second interest rate swap agreement.
(F) DEBT MATURITIES
The Partnership's notes payable outstanding at December 31, 1997 mature as
follows:
<TABLE>
<CAPTION>
11% SENIOR OTHER
SUBORDINATED NOTES TO SUBORDINATED
YEAR NOTES BANKS NOTES OTHER TOTAL
- ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998 $ -- $ 1,000 $ -- $ 527 $ 1,527
1999 -- 1,000 -- 1 1,001
2000 -- 1,000 -- -- 1,000
2001 -- 67,000 15,000 7,500 89,500
2002 -- 96,000 -- -- 96,000
Thereafter 282,193 440,000 -- -- 722,193
------------ ------------ ------------ ------ ------------
$ 282,193 $ 606,000 $ 15,000 $ 8,028 $ 911,221
------------ ------------ ------------ ------ ------------
------------ ------------ ------------ ------ ------------
</TABLE>
The maturity date of notes payable may be accelerated upon the occurrence of
certain events. See Note 2.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Partnership leases land, office space and equipment under operating
leases expiring at various dates through the year 2039. See Note 10.
F-23
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rentals for operating leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------- TOTAL
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998...................................................... $ 1,954
1999...................................................... 1,798
2000...................................................... 1,651
2001...................................................... 1,488
2002...................................................... 1,386
Thereafter................................................ 2,841
------------
$ 11,118
------------
------------
</TABLE>
In most cases, management expects that, in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense amounted
to $1.8 million in 1995, $2.1 million in 1996 and $2.4 million in 1997.
In addition, the Partnership rents line space on utility poles in some of
the franchise areas it serves. These rentals amounted to $1.9 million for 1995,
$2.8 million for 1996 and $3.1 million for 1997. Generally, such pole rental
agreements are short-term; however, the Partnership anticipates such rentals
will continue in the future.
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. 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.
FHGLP holds a general partnership interest in each of the limited
partnerships which are the general partners of the Affiliated Partnerships,
excluding the Enstar Partnerships. Although all the indebtedness for borrowed
money owed by these Affiliated Partnerships to third party institutions is
non-recourse, and each of their respective partnership agreements provide for
indemnification of its general partner, FHGLP may have liability, as a result of
its position as a general partner, with respect to all other obligations of the
Affiliated Partnerships. The Partnership believes, however, that based on
current values of the Affiliated Partnerships, the likelihood of any potential
loss from such obligations is remote.
Other commitments include approximately $29 million at December 31, 1997 to
rebuild certain existing cable systems.
The Partnership is regulated 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
F-24
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
service tiers ("CPSTs") and equipment and installation services. Regulations
issued in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Partnership's cable services. The Partnership believes that compliance with the
1992 Cable Act has had a negative impact on its operations and cash flow. It
also presently believes that any potential future liabilities for refund claims
or other related actions would not be material. The Telecommunications Act of
1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it
pertains to cable television, the 1996 Telecom Act, among other things, (i) ends
the regulation of certain CPSTs in 1999; (ii) expands the definition of
effective competition, the existence of which displaces rate regulation; (iii)
eliminates the restriction against the ownership and operation of cable systems
by telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. 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.
The Partnership has various contracts to obtain basic and premium
programming for its Systems from program suppliers whose compensation is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership. The
Partnership's programming contracts are generally for a fixed period of time and
are subject to negotiated renewal. The Partnership does not have long-term
programming contracts for the supply of a substantial amount of its programming.
Accordingly, no assurances 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 is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business, and management presently 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.
The Partnership, certain of its affiliates, and certain third parties have
been named as defendants in an action entitled FRANK O'SHEA I.R.A. ET AL. v.
FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386, pending in the
Superior Court of the State of California, County of Los Angeles (the "Action").
Plaintiffs in the Action are certain former unitholders of FCSC purporting to
represent a class consisting of former unitholders of FCSC other than those
affiliated with FCSC and/or its controlling persons. The complaint in the Action
alleges, among other things, that defendants breached their fiduciary and
contractual duties to unitholders, and acted negligently, with respect to the
purchase from former unitholders of their interests in FCSC in 1996. In
particular, the complaint in the Action alleges, among other things, (a) that
the appraisals conducted to determine the price at which the purchase of the
former unitholders' interests would occur were "inadequate", "defective" and
"unreasonable" and that the appraisal firms who conducted the appraisals (two
out of three of which are named as defendants) acted negligently or recklessly
in performing the appraisals; (b) that the price paid per unit was unfair and
was intended to unfairly benefit the defendants at the expense of the public
unitholders, in that allegedly the price paid did not fairly reflect the
intrinsic value of the partnership assets, was not based on arms-length
negotiation, and was less than the per unit value that could be derived from an
alleged estimate of asset value submitted by
F-25
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
FCSC to its lenders in connection with its borrowings; and (c) that the sums
paid the unitholders should not have been based on a calculation that reflected
payment to the General Partner of a "sales fee" as defined in the partnership
agreement. As relief, the complaint seeks damages (and prejudgment interest) in
an unspecified amount, and/or the imposition of a constructive trust upon the
partnership assets purchased by certain defendants, and/or rescission of the
transaction. The defendants have filed answers denying the material allegations
of the complaint in the Action, and the Action is currently in the pre-trial
discovery stage. The Court has set a trial date for October 1998 in this matter.
The Partnership believes it has substantial and meritorious defenses to the
claims.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
The subsidiaries of the Partnership have a cash or deferred profit sharing
plan (the "Profit Sharing Plan") covering substantially all of their employees.
FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as
of March 31, 1993. The provisions of this plan were amended to be substantially
identical to the provisions of the Profit Sharing Plan.
The Profit Sharing Plan provides that each participant may elect to make a
contribution in an amount up to 20% 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 for the Profit Sharing Plan in 1995, 1996 or 1997.
On December 30 1993, the Partnership assumed the obligations of FHGI for its
1993 Incentive Performance Plan (the "Incentive Plan"). The value of the
interests in the Incentive Plan is tied to the equity value of certain
partnership units in FHGLP held by FHGI. In connection with the assumption by
the Partnership, FHGI agreed to fund any benefits payable under the Incentive
Plan through additional capital contribution to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its partnership units to the Partnership.
The benefits which are payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
3,780.14 of the Class B units of the Partnership and 237.98 of the Class A units
of the Partnership held by FHGI and a portion of FHGI's interest in certain of
the general partners of the Affiliated Partnerships. Benefits are payable under
the Incentive Plan only when distributions would otherwise be paid to FHGI with
respect to the above-described units and interests. The Incentive Plan is
scheduled to terminate on January 5, 2003, at which time the Partnership is
required to distribute the units described above to the participants in the
Incentive Plan. At such time, FHGI is required to contribute the units to the
Partnership to fund such distributions. The participants in the Incentive Plan
are present and former employees of the Partnership and its operating
affiliates, all of whom are 100% vested. Prior to the closing of the TCI
Transaction, FHGLP expects to amend the Incentive Plan to provide for payments
by FHGLP at the closing of the TCI Transaction to participants in an aggregate
amount of approximately $6.6 million and to reduce by such amount FHGLP's
obligations to make future payments to participants under the Incentive Plan. At
the closing of the TCI Transaction, New Falcon will assume the obligations of
FHGLP under the Incentive Plan, as so amended, other than the obligation to make
the payments at closing of the TCI Transaction.
F-26
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS
The Partnership (I.E., FHGLP) is a separate, stand-alone holding company
which employs all of the management personnel. In addition, prior to October
1995, the Partnership conducted certain international investment and development
activities. In October 1995, the Partnership sold certain of its international
investments and loans to cable ventures in India and the Philippines to Falcon
International Communications, LLC ("FIC"), a newly-formed, separately
capitalized entity (or FIC's affiliates), for approximately $6.3 million in
cash. FHGLP was reimbursed approximately $1.9 and $1.1 million by FIC for 1995
and 1996 operating costs related to these investments. The Partnership expects
to incur no further liquidity obligations in respect of international
investments, although the amount of reimbursement FHGLP receives from FIC with
respect to the salaries of certain of its employees has been significantly
reduced for 1997. Certain members of the Partnership's management also are
officers of, and hold equity interests in, FIC.
FHGLP is financially dependent on the receipt of permitted payments from the
Owned Systems, management and consulting fees from domestic cable ventures, and
the reimbursement of specified expenses by certain of the Affiliated Systems to
fund its operations. Expected increases in the funding requirements of the
Partnership combined with limitations on its sources of cash may create
liquidity issues for the Partnership in the future. Specifically, the Amended
and Restated Credit Agreement permits the subsidiaries of the Partnership to
remit to FHGLP no more than 4.25% of their net cable revenues, as defined, in
any year, effective July 12, 1996. As a result of the 1998 acquisition by FHGLP
of the Falcon Classic Systems, FHGLP will no longer receive management fees and
reimbursed expenses from Classic.
The management and consulting fees and expense reimbursements earned from
the Affiliated Partnerships amounted to approximately $8.6 million and $5.5
million, $6.3 million and $3.7 million (including the $1.9 and $1.1 million
mentioned above related to international expenses) and $5.2 million and $2.1
million for the years ended December 31, 1995, 1996 and 1997, respectively. The
fees of $8.6 million earned in 1995 include $1.6 million from Falcon First
(based on 5% of its net cable revenues, as defined). The fees and expense
reimbursements of $6.3 million and $3.7 million earned in 1996 included $1.5
million and $1.0 million earned from FCSC from January 1, 1996 through July 11,
1996. Subsequent to these acquisitions, the amounts payable to FHGLP in respect
of its management of the former Falcon First and FCSC Systems became subject to
the 4.25% limitation contained in the Amended and Restated Credit Agreement.
Receivables from the Affiliated Partnerships for services and reimbursements
described above amounted to approximately $6.5 million and $11.3 million (which,
in 1997, includes $7.5 million of notes receivable from the Enstar Systems) at
December 31, 1996 and 1997. The amount due at December 31, 1996 includes
approximately $3.6 million related to fees and reimbursements deferred as a
result of the liquidity constraints experienced by the Affiliated Partnerships,
or decisions made by the Partnership.
Included in Commitments and Contingencies (Note 8) are two facility lease
agreements with the Partnership's Chief Executive Officer and his wife, or
entities owned by them, requiring annual future minimum rental payments
aggregating $2.1 million through 2001, one facility being assumed by an Owned
Subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That Owned
Subsidiary intends to acquire the property for $282,500, a price determined by
two independent appraisals. During the years ended December 31, 1995, 1996 and
1997 rent expense on the first facility amounted to $416,000, $397,000
F-27
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)
and $383,000, respectively. The rent paid for the second facility for the period
July 12, 1996 through December 31, 1996 amounted to approximately $18,000, and
the amount paid in 1997 was approximately $41,000.
In addition, the Partnership provides certain accounting, bookkeeping and
clerical services to the Partnership's Chief Executive Officer. The costs of
services provided were determined based on allocations of time plus overhead
costs (rent, parking, supplies, telephone, etc.). Such services amounted to
$180,000, $118,300 and $163,000 for the years ended December 31, 1995, 1996 and
1997, respectively. These costs were net of amounts reimbursed to the
Partnership by the Chief Executive Officer amounting to $66,000, $75,000 and
$55,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 11 -- OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of Available-for-Sale Securities................. $ 13,267 $ 2,264 $ --
Gain on insured casualty losses............................... -- -- 3,476
Write down of investment...................................... -- (1,000) --
Loss on sale of investment.................................... -- -- (1,360)
Net lawsuit settlement costs.................................. -- -- (1,030)
Other, net.................................................... (190) (450) (201)
--------- --------- ---------
$ 13,077 $ 814 $ 885
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 12 -- SUBSEQUENT EVENTS
In March 1998 the Partnership paid to Classic $76.8 million, including $1.1
million of interest as required by an agreement settling certain litigation
arising from the acquisition by the Partnership of substantially all of the
assets of Falcon Classic, other than the system serving the City of Somerset,
Kentucky. The Partnership also paid approximately $1.2 million to the settlement
fund, a portion of which will be reimbursed by insurance. The acquisition of the
City of Somerset assets will be completed as soon as regulatory approvals can be
obtained, of which there can be no assurance. Falcon Classic had revenue of
approximately $32.1 million for the year ended December 31, 1997, including
approximately $1.5 million from the City of Somerset.
NOTE 13 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
OPERATING ACTIVITIES
During the years ended December 31, 1995, 1996 and 1997, the Partnership
paid cash interest amounting to approximately $30.8 million, $39.7 million and
$48.1 million, respectively.
F-28
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
INVESTING ACTIVITIES
See Note 3 regarding the non-cash investing activities related to the
acquisitions of Falcon First and the cable systems of FCSC.
FINANCING ACTIVITIES
See Note 3 regarding the non-cash financing activities relating to the
acquisitions of Falcon First and the cable systems of FCSC. See Note 2 regarding
the reclassification to redeemable partners' equity.
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY)
The following parent-only condensed financial information presents Falcon
Holding Group, L.P.'s balance sheets and related statements of operations and
cash flows by accounting for the investments in the Owned Subsidiaries on the
equity method of accounting. The accompanying condensed financial information
should be read in conjunction with the consolidated financial statements and
notes thereto.
F-29
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................. $ 6,706 $ 8,177
Receivables:
Intercompany notes and accrued interest receivable.................................. 203,827 226,437
Due from affiliates and other entities, of which $17,839,000 and $23,374,000 are
contractually restricted or otherwise deferred (see Note 10)...................... 20,944 25,340
Prepaid expenses and other............................................................ 202 711
Investments in affiliated partnerships................................................ 12,830 12,827
Other investments..................................................................... 3,580 1,519
Property, plant and equipment, less accumulated depreciation and amortization......... 1,180 1,323
Deferred loan costs, less accumulated amortization.................................... 5,721 4,846
----------- -----------
$ 254,990 $ 281,180
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable......................................................................... $ 141 $ 10
11% Senior Subordinated Notes......................................................... 253,537 282,193
Accounts payable...................................................................... 266 179
Accrued expenses...................................................................... 11,702 14,025
Equity in net losses of Owned Subsidiaries in excess of investment.................... 173,941 230,155
----------- -----------
TOTAL LIABILITIES....................................................................... 439,587 526,562
REDEEMABLE PARTNERS' EQUITY............................................................. 271,902 171,373
PARTNERS' DEFICIT....................................................................... (456,499) (416,755)
----------- -----------
$ 254,990 $ 281,180
----------- -----------
----------- -----------
</TABLE>
F-30
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Management fees:
Affiliated Partnerships................................................... $ 6,196 $ 3,962 $ 2,873
Owned Subsidiaries........................................................ 8,509 12,020 13,979
International and other................................................... 639 413 281
---------- ---------- ----------
Total revenues.......................................................... 15,344 16,395 17,133
---------- ---------- ----------
EXPENSES:
General and administrative expenses......................................... 10,309 9,096 11,328
Depreciation and amortization............................................... 608 375 274
---------- ---------- ----------
Total expenses.......................................................... 10,917 9,471 11,602
---------- ---------- ----------
Operating income........................................................ 4,427 6,924 5,531
OTHER INCOME (EXPENSE):
Interest income............................................................. 17,623 19,884 22,997
Interest expense............................................................ (24,796) (27,469) (30,485)
Equity in net losses of Owned Subsidiaries.................................. (16,392) (50,351) (56,422)
Equity in net losses of investee partnerships............................... (5,843) (73) (4)
Other, net.................................................................. (254) 1,100 (2,455)
---------- ---------- ----------
NET LOSS...................................................................... $ (25,235) $ (49,985) $ (60,838)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-31
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities.............................................................. $ 1,427 $ (8,969) $ 1,478
--------- --------- ---------
Cash flows from investing activities:
Distributions from affiliated partnerships........................................ -- 773 --
Capital expenditures.............................................................. (444) (242) (417)
Investments in affiliated partnerships and other investments...................... (666) (9,000) (254)
Proceeds from sale of investments and other assets................................ 1,856 3 702
Proceeds from sale of available-for-sale securities............................... -- 9,502 --
--------- --------- ---------
Net cash provided by investing activities........................................... 746 1,036 31
--------- --------- ---------
Cash flows from financing activities:
Repayment of debt................................................................. (121) (120) (131)
Capital contributions............................................................. -- 5,000 93
--------- --------- ---------
Net cash provided by (used in) financing activities................................. (121) 4,880 (38)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................ 2,052 (3,053) 1,471
Cash and cash equivalents, at beginning of year..................................... 7,707 9,759 6,706
--------- --------- ---------
Cash and cash equivalents, at end of year........................................... $ 9,759 $ 6,706 $ 8,177
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
FALCON HOLDING GROUP, L.P.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) OTHER(B) END OF PERIOD
- ---------------------------------------------------- ------------- ----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on receivables........
Year ended December 31,
1995.............................................. $ 201 $ 2,499 $ (1,928) $ 58 $ 830
1996.............................................. $ 830 $ 2,817 $ (2,740) -- $ 907
1997.............................................. $ 907 $ 5,714 $ (5,796) -- $ 825
</TABLE>
- ------------------------
(a) Write-off uncollectible accounts.
(b) Allowance for losses on receivable acquired in connection with the
acquisition of Falcon First.
F-33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 1995 Contribution, Purchase and Partnership Amendment Agreement, dated as of December 28, 1995 by and
among Falcon Holding Group, L.P., its current limited partners, Falcon Holding Group, Inc., Falcon
First Communications, L.L.C., Falcon First communications, L.P., its limited partners and Falcon First
Investors, L.P.(16)
3.1 Certificate of Limited Partnership of FHGLP(1)
3.2 Amended and Restated Agreement of Limited Partnership of FHGLP(1)
3.3 Third Amended and Restated Agreement of Limited Partnership of FHGLP(7)
4.1 Indenture for the Old Notes, dated as of March 29, 1993, between FHGLP and United States Trust Company
of New York, as trustee(1)
4.2 Form of Old Note (included in Exhibit No. 4.1)(1)
4.3 Form of Amended and Restated Indenture for the Notes, between FHGLP and United States Trust Company of
New York, as trustee(1)
4.4 Form of New Note (included in Exhibit No. 4.3)(1)
4.5 Registration Rights Agreement, dated as of March 29, 1993, between FHGLP and Morgan Stanley & Co.
Incorporated and Lazard Freres & Co.(1)
4.6 Notice to MONY Mutual Life Insurance Company of New York of Prepayment of Falcon Cablevision's, a
California limited partnership's, 12% Subordinated Notes due December 31, 1995.(8)
10.1 Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships, and certain lenders
and agents named therein(1)
10.2 Pledge and Subordination Agreement, dated as of March 29, 1993, between Falcon, FHGLP and certain
lenders and agents named therein(1)
10.3 Guarantors Contribution Agreement, dated as of March 29, 1993, among certain subsidiaries of FHGLP(1)
10.4 Management Compensation Agreement, dated as of March 29, 1993, by and among Falcon and the limited
Partners signatory thereto(1)
10.5 Management Rights Agreement, dated as of March 29, 1993, by and between FHGLP and Hellman & Friedman
Capital Partners(1)
10.6 Management Rights Agreement, dated as of March 29, 1993, by and between FHGLP and Hellman & Friedman
Capital Partners II, L.P.(1)
10.7 Lease, dated December 1989, between Raymond Business Center and Falcon(1)
10.8 Lease, dated as of June 25, 1992, by and between Sumitomo Life Realty (N.Y.), Inc. and Falcon(1)
10.9 Cash or Deferred Profit Sharing Plan of Falcon(1)
10.10 Money Purchase Pension Plan of Falcon(1)
10.11 Combined Incentive Performance Plan of FHGLP.(1)
10.12 Falcon Holding Group 401(k) Plan.(1)
10.13 Ordinance No. 93-75 of the City of Santa Clara, Utah granting to Falcon Telecable a Franchise to
Construct, Operate and Maintain a Cable Television System.(2)
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.14 Ordinance No. 93-01 of the Board of Trustees for the Town of Stratford, Oklahoma granting to Falcon
Cable Media a permit to construct, operate and maintain a cable television system and declaring an
emergency.(2)
10.15 Resolution of the City Council of Hardy, Arkansas extending the Cable Television Franchise of Falcon
Telecable.(2)
10.16 Ordinance No. 1064 N.S. of the City Council of the City of Colville passing an Ordinance amending
Ordinance No. 768 N.S. Section 5. Extending the length of time for the existing Franchise for one
year.(1)
10.17 Ordinance #3 an ordinance to amend the franchise tax for the Town of Leeds, Utah.(1)
10.18 Ordinance No. 1077 regulating rates charged by cable television operators within the City of Pleasanton,
Texas.(4)
10.19 Permit for the Town of Bethel Acres, Oklahoma authorized Falcon Cable TV to provide cable communication
services to the Town of Bethel Acres.(4)
10.20 Ordinance No. 93-01, An ordinance setting forth regulations, terms and conditions under which cable
television systems shall operate in Stratford, Oklahoma; and granting to Falcon Cable Media, its
successors and assigns, a permit to construct, operate and maintain a cable television system and
declaring and emergency.(4)
10.21 Confirmation of offer of employment with Jon Lunsford and Promissory Note.(3)
10.22 Loan agreement between Falcon Holding Group L.P., Lender, and Neil McCarthy Borrower including Short
Form Deed of Trust and Assignment of Rents (Individual) and Promissory Note.(8)
10.23 Amendment No. 1 to Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships,
and certain lenders and agents named therein.(6)
10.24 Amendment No. 2 to Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships,
and certain lenders and agents named therein.(6)
10.25 Bank Credit Agreement, dated as of December 28, 1995, among certain affiliates of Falcon Holding Group,
L.P., their respective subsidiaries that are from time to time party thereto, The First National Bank
of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative Agent, Chemical Bank,
as Co-Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent, and the several lenders
from time to time party thereto.(7)
10.26 Agreement and Plan of Merger, dated as of December 28, 1995, by and among Falcon First Communications,
L.L.C., Falcon First Communications, L.P., its limited partners and Falcon First Investors, L.P.(7)
10.27 Amendment to Contingent Interest Agreement, dated as of December 28, 1995, between Falcon First
Communications, L.P., Continental Equity Capital Corporation, First Chicago Investment Corporation,
Madison Dearborn Partners VIII and William Blair Venture Partners III Limited Partnership.(7)
10.28 Tax-Sharing Agreement, dated as of December 28, 1995, by and between WB Cable Investors II, Inc.,
Madison Dearborn Partners VI, Continental Equity Capital Corporation, Avy Stein, John Willis, Burton
McGillevray, Hellman & Friedman Capital Partners II, L.P., Falcon Cable Trust and Falcon Holding
Group, L.P.(7)
10.29 Employment Termination and Settlement Agreement between Neil McCarthy and Falcon Holding Group, L.P.,
dated September 1, 1995.(8)
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.30 First Amendment to and Extension of office Lease between Raymond Business Center and Falcon Holding
Group, L.P.(9)
10.31 Asset purchase agreement by and among subsidiaries of Falcon Holding Group, L.P. and Teleview, Inc.(9)
10.32 Amendment No. 1 to Bank Credit Agreement, dated as of December 28, 1995, among certain affiliates of
Falcon Holding Group, L.P., their respective subsidiaries that are from time to time party thereto,
The First National Bank of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative
Agent, Chemical Bank, as Co-Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent,
and the several lenders.(9)
10.33 Restricted Subordination Agreement dated as of March 26, 1993 as restated as of December 28, 1995
between Falcon Holding Group, L.P., Falcon Holding Group, Inc. and AUSA Life Insurance Company, Inc.
and MONY Life Insurance Company of America.(9)
10.34 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Malarkey-Taylor
Associates, Inc., dated April 29, 1996 (filed as Exhibit 1 to the June 13 Falcon Cable Systems Company
Report file no. 19332 and incorporated by reference).(10)
10.35 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Kane-Reece Associates,
Inc., dated April 29, 1996 (filed as Exhibit 2 to the June 13 Falcon Cable Systems Company Report file
no. 19332 and incorporated by reference).(10)
10.36 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Waller Capital Corporation
(filed as Exhibit 3 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated
by reference).(10)
10.37 Asset Purchase Agreement by and between the Partnership and New Falcon, dated as of June 13, 1996 (filed
as Exhibit 4 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated by
reference).(10)
10.38 Amended and Restated Credit Agreement dated July 12, 1996.(10)
10.39 Limited Partnership Interest Purchase Agreement dated July 15, 1996, by and among Falcon Holding Group,
L.P., Marc B. Nathanson, Trustee of the Falcon Cable Trust and Advance TV of California, Inc.(11)
10.40 Partnership Option Agreement dated July 15, 1996, by and among Marc. B. Nathanson, Trustee of the Falcon
Cable Trust and Falcon Holding Group, L.P.(11)
10.41 Partnership Option Agreement dated July 15, 1996, between Advance TV of California, Inc. and Falcon
Holding Group, L.P.(11)
10.42 Fourth Amendment to Note Purchase and Exchange Agreement dated July 12, 1996, between Falcon Telecable,
AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America.(11)
10.43 Second Restated Subordination Agreement between Registrant and AUSA Life Insurance Company, Inc. and
MONY Life Insurance Company of America dated July 12, 1996.(11)
10.44 Second Restated Guaranty Agreement, dated July 12, 1996, by Falcon Cablevision, Falcon Cable Media,
Falcon Community Cable, L.P., Falcon Community Ventures I Limited Partnership, Falcon Investors Group,
LTD., Falcon Telecable Investors Group, Falcon Media Investors Group, Falcon Community Investors,
L.P., Falcon Telecom, L.P., Falcon Cable Systems Company II, L.P., and Falcon First, Inc. in favor of
each of AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America with respect to
the Notes.(11)
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.45 Certificate, dated (July 12, 1996), of Falcon Holding Group, Inc. with respect to the common ownership
of certain partnership guarantors.(11)
10.46 Insurance Cost Allocation Agreement, dated July 1, 1996, between Falcon Holding Group, L.P. and Falcon
International Communications, L.L.C..(12)
10.47 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.(12)
10.48 Valuation Analysis for Falcon Classic Cable Income Properties, L.P., as of December 31, 1996, dated
March 3, 1997, prepared by Communications Equity Associates.(12)
10.49 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 Associates, Inc.(12)
10.50 Assignment and Acceptance Agreement, dated December 4, 1996, between Banque Paribas and City National
Bank.(13)
10.51 Enstar Finance Company, LLC Limited Liability Company Agreement dated June 6, 1997.(14)
10.52 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..(14)
10.53 Second Amendment to the 1993 Incentive Performance Plan of FHGLP.(14)
10.54 Third Amendment to the 1993 Incentive Performance Plan of FHGLP.(14)
10.55 Fourth Amendment to the 1993 Incentive Performance Plan of FHGLP.(14)
10.56 Credit Agreement dated as of September 30, 1997 among Enstar Finance Company, LLC, Banque Paribas, as
Administrative Agent, and Bank of America National Trust and Savings Association, as Documentation
Agent.(15)
10.57 Amended and Restated Credit Agreement Consent No. 1 dated as of July 11, 1997 between the affiliates of
Falcon Holding Group, L.P., BankBoston, The First National Bank of Boston, as Managing Agent,
Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication
Agent.(15)
10.58 Amended and Restated Credit Agreement Amendment No. 2 dated as of September 3, 1997, among the
affiliates of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other
lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as
Syndication Agent.(15)
10.59 Amended and Restated Credit Agreement Amendment No. 3 dated as of February 6, 1998, among the affiliates
of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other Lenders,
Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication
Agent.
10.60 Amended and Restated Credit Agreement Amendment No. 4 dated as of March 17, 1998, among the affiliates
of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other Lenders,
Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication
Agent.
12.1 Subsidiaries: None.
</TABLE>
- ------------------------
(1) Incorporated by reference to the exhibits to the Registrant's Registration
Statement on Form S-4, Registration No. 33-60776.
E-4
<PAGE>
(2) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30,
1993.
(3) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30,
1995.
(4) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1993.
(5) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1994.
(6) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1995.
(7) Incorporated by reference to the exhibit to the Registrant's current Report
on Form 8-K, File No. 33-60776 dated December 28, 1995.
(8) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1995.
(9) Incorporated by reference to the exhibit to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1996.
(10) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1996.
(11) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30,
1996.
(12) Incorporated by reference to the exhibits to the Registrant's Annual Report
on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1996.
(13) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1997.
(14) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1997.
(15) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30,
1997.
(16) Incorporated by reference to the exhibit to the Registrant's Current Report
on Form 8-K, File No. 33-60776, dated December 30, 1997.
E-5
<PAGE>
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 23rd day of March,
1998.
<TABLE>
<S> <C> <C>
FALCON HOLDING GROUP, L.P.
by its general partner,
Falcon Holding Group, Inc.
By: /s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
CHIEF FINANCIAL OFFICER
</TABLE>
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 23rd day of March 1998.
SIGNATURE TITLE
- ------------------------------ --------------------------
Director of Falcon Holding
Group, Inc.
/s/ MARC B. NATHANSON and Chief Executive
- ------------------------------ Officer of the
Marc B. Nathanson Registrant
(Principal Executive
Officer)
Executive Vice President,
Chief Financial Officer
/s/ MICHAEL K. MENEREY and Secretary of the
- ------------------------------ Registrant
Michael K. Menerey (Principal Financial and
Accounting Officer)
Director of Falcon Holding
Group, Inc.
/s/ STANLEY S. ITSKOWITCH and Executive Vice
- ------------------------------ President and General
Stanley S. Itskowitch Counsel of the
Registrant
S-1
<PAGE>
Exhibit 10.59
FALCON RESTRICTED COMPANIES
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 3
This Agreement, dated as of February 6, 1998, is among the affiliates of
Falcon Holding Group, L.P., a Delaware limited partnership, set forth on the
signature pages hereto, BankBoston, N.A., as Managing Agent for itself and
the other Lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and
NationsBank of Texas, N.A., as Syndication Agent. The parties agree as
follows:
1. Reference to Credit Agreement; Definitions. Reference is made to the
Amended and Restated Credit Agreement, dated as of July 12, 1996, among the
parties hereto (as amended, modified and in effect prior to giving effect to
this Consent, the "Credit Agreement"). Terms defined in the Credit Agreement
as amended hereby (the "Amended Credit Agreement") and not otherwise defined
herein are used herein with the meanings so defined.
2. Amendments to Credit Agreement. In reliance upon the representations
and warranties set forth in Section 4, the Credit Agreement is amended as
follows, effective upon the date hereof:
2.1. Amendment of Section 1.39. The definition of "Consolidated Cash
Interest Expense" in Section 1.39 of the Credit Agreement is amended to read
in its entirety as follows:
"1.39. "Consolidated Cash Interest Expense" means, for any period, the
aggregate amount of interest, including payments in the nature of interest
under Capitalized Leases and Interest Rate Protection Agreements, accrued by
the Restricted Companies on Consolidated Total Debt (whether such interest is
reflected as an item of expense or capitalized) in accordance with GAAP on a
Consolidated basis; provided, however, that Consolidated Cash Interest
Expense shall include commitment fees and other Lender fees included in
interest expense in accordance with GAAP and Distributions to Holding, L.P.
described in Section 7.10.3(a) on account of interest on Indebtedness
incurred by Holding, L.P., but shall not include PIK Interest Payments."
2.2. Amendment of Section 7.5.2. Section 7.5.2 of the Credit
Agreement is amended to read in its entirety as follows:
"7.5.2. Consolidated Operating Cash Flow to Consolidated Cash Interest
Expense. On the last day of each quarter, Consolidated Operating Cash Flow
for the three-month period then ending shall exceed (a) through December
1998, 150% and (b) from and after March 1999, 200% of Consolidated Cash
Interest Expense for such period."
<PAGE>
2.3. Amendment of Section 7.10.3. Section 7.10.3 of the Credit
Agreement is amended to read in its entirety as follows:
"7.10.3. So long as immediately before and after giving effect thereto
no Default exists, the Restricted Companies may make (a) Distributions to
Holding, L.P. on or about March 15 and September 15 in each year in an amount
on each such date not exceeding $15,525,000, which Distributions are used
exclusively for Holding, L.P. to pay mandatory scheduled payments then due of
principal of, and accrued interest on, Holding, L.P.'s Indebtedness for
borrowed money permitted to be incurred by Holding, L.P. under the Holding
Pledge and Subordination Agreement and (b) redemptions of equity interests in
any Holding Company owned by members of management (other than Marc B.
Nathanson) upon termination of employment in an aggregate amount not
exceeding $1,000,000 in any year."
3. Amendment of Holding Pledge and Subordination Agreement. In reliance
upon the representations and warranties set forth in Section 4, Section 5.6
of the Holding Pledge and Subordination Agreement is amended to read in its
entirety as follows, effective upon the date hereof:
"5.6. No Cash Payments on Senior Subordinated Debt. Prior to September
30, 2000, neither Pledgor shall make any cash payment of principal of or
interest on the Senior Subordinated Notes issued by Holding, L.P. except
directly from the proceeds of Distributions permitted by Section 7.10.3(a) of
the Credit Agreement."
4. Representation and Warranty. In order to induce the Lenders to enter
into this Agreement, each of the Restricted Companies jointly and severally
represents and warrants to the Lenders that immediately before and after
giving effect to the amendments set forth in Section 2, no Default will exist.
5. General. The Amended Credit Agreement and all of the other Credit
Documents are each confirmed as being in full force and effect. This
Agreement, the Amended Credit Agreement and the other Credit Documents
referred to herein or therein constitute the entire understanding of the
parties with respect to the subject matter hereof and thereof and supersede
all prior and current understandings and agreements, whether written or oral,
with respect to such subject matter. The invalidity or unenforceability of
any provision hereof shall not affect the validity or enforceability of any
other term or provision hereof, and any invalid or unenforceable provision
shall be enforced to the maximum extent of its validity or enforceability.
The headings in this Agreement are for convenience of reference only and
shall not alter, limit or otherwise affect the meaning hereof. Each of this
Agreement and the Amended Credit Agreement is a Credit Document and this
Agreement may be executed in any number of counterparts, which together shall
constitute one instrument, and shall bind and inure to the benefit of the
-2-
<PAGE>
parties and their respective successors and assigns, including as such
successors and assigns all holders of any Note. This Agreement shall be
governed by and construed in accordance with the laws (other than the
conflict of laws rules) of The Commonwealth of Massachusetts.
-3-
<PAGE>
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II, L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY CABLE, L.P.
FALCON COMMUNITY VENTURES I
LIMITED PARTNERSHIP
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY INVESTORS, L.P.
FALCON INVESTORS GROUP, LTD., A
CALIFORNIA LIMITED PARTNERSHIP
FALCON MEDIA INVESTORS GROUP, A
CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECABLE INVESTORS GROUP,
A CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECOM, L.P.
By FALCON HOLDING GROUP, INC., as
general partner, or general partner of
the general partner, of each of the
foregoing Restricted Companies
By /s/ Michael K. Menerey
----------------------------------------
Title: Michael K. Menerey
Chief Financial Officer
FALCON FIRST, INC.
By /s/ Michael K. Menerey
----------------------------------------
Title: Michael K. Menerey
Chief Financial Officer
<PAGE>
ATHENS CABLEVISION, INC.
AUSABLE CABLE TV, INC.
CEDAR BLUFF CABLEVISION, INC.
DALTON CABLEVISION, INC.
EASTERN MISSISSIPPI CABLEVISION, INC.
FALCON FIRST CABLE OF NEW YORK, INC.
FALCON FIRST CABLE OF THE SOUTHEAST,
INC.
FALCON FIRST HOLDINGS, INC.
FF CABLE HOLDINGS, INC.
LAUDERDALE CABLEVISION, INC.
MULTIVISION NORTHEAST, INC.
MULTIVISION OF COMMERCE, INC.
PLATTSBURG CABLEVISION, INC.
SCOTTSBORO CABLEVISION, INC.
SCOTTSBORO TV CABLE, INC.
By /s/ Michael K. Menerey
----------------------------------------
As an authorized officer of each of the
foregoing corporations
FALCON HOLDING GROUP, L.P.
By FALCON HOLDING GROUP, INC.,
general partner
By /s/ Michael K. Menerey
----------------------------------------
Title: Michael K. Menerey
Chief Financial Officer
FALCON HOLDING GROUP, INC.
By /s/ Michael K. Menerey
----------------------------------------
Title: Michael K. Menerey
Chief Financial Officer
<PAGE>
BANKBOSTON, N.A., as Managing Agent
By /s/ David B. Herter
----------------------------------------
Title: Managing Director
TORONTO-DOMINION (TEXAS) INC., as
Administrative Agent
By /s/ Sophia D. Sgarbi
----------------------------------------
Title: Sophia D. Sgarbi
Vice President
NATIONSBANK OF TEXAS, N.A., as Syndications
Agent
By /s/ Rosario Echeverria
----------------------------------------
Title: Vice President
The foregoing Agreement
is consented to by the following Lenders:
ABN AMRO BANK, N.V.
By: /s/ James Dunleavy
----------------------------------------
Title: James Dunleavy
Senior Vice President
By: /s/ William S. Bennett
----------------------------------------
Title: William S. Bennett
Vice President
<PAGE>
ABN-AMRO BANK N.V., LOS ANGELES
INTERNATIONAL BRANCH
By: ABN Amro North America, Inc., as agent
By
----------------------------------------
Title:
By
----------------------------------------
Title:
BANK OF AMERICA N.T. & S.A.
By /s/ Shannon T. Ward
----------------------------------------
Title: Shannon T. Ward
Vice President
BANK OF MONTREAL
By /s/ Karen S. Klapper
----------------------------------------
Title: Karen Klapper
Director
BANQUE FRANCAISE DU COMMERCE EXTERIEUR
By
----------------------------------------
Title:
By
----------------------------------------
Title:
<PAGE>
BANQUE NATIONALE DE PARIS
By /s/ Clive Bettles
----------------------------------------
Title: Senior Vice President & Manager
By /s/ Marc Schaefer
----------------------------------------
Title: Assistant Vice President
BANQUE PARIBAS
By Tom G. Brandt / Darlynn Ernst
----------------------------------------
Title: V.P. / AVP
BARCLAYS BANK PLC
By /s/ James K. Downey
----------------------------------------
Title: Associate Director
THE CHASE MANHATTAN BANK
By /s/ Mitch Geruis
----------------------------------------
Title: Vice President
CITY NATIONAL BANK
By /s/ Rod P. Bollins
----------------------------------------
Title: Rod Bollins
Vice President
<PAGE>
CIBC, INC.
By /s/ Lorain Granberg
----------------------------------------
Title: Executive Director CIBC
Oppenheimer Corp., as
agent
CREDIT LYONNAIS, NEW YORK BRANCH
By /s/ Mark D. Thorsheim
----------------------------------------
Title: Mark D. Thorsheim
Vice President
FLEET BANK, N.A.
By /s/ Garret Komjathy
----------------------------------------
Title: Garret Komjathy
Vice President
THE FUJI BANK, LIMITED LOS ANGELES AGENCY
By /s/ Masahito Fukuda
----------------------------------------
Title: Masahito Fukuda
Joint General Manager
THE LONG-TERM CREDIT BANK OF JAPAN, LTD. LOS
ANGELES AGENCY
By /s/ T. Morgan Edwards II
----------------------------------------
Title: Deputy General Manager
MEESPIERSON CAPITAL CORP.
By /s/ John Connors
----------------------------------------
Title: EVP
By /s/ Claudia J. Chifos
----------------------------------------
Title: Managing Director
<PAGE>
Octagon Credit Investors Loan Portfolio
(a unit of The Chase Manhattan Bank)
By /s/ Andrew D. Gordon
----------------------------------------
Title: Andrew D. Gordon
Managing Director
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By /s/ Dana W. Hemenway
----------------------------------------
Name: Dana W. Hemenway
Title: Vice President
By /s/ W. Pieter C. Kodde
----------------------------------------
Name: W. Pieter C. Kodde
Title: Vice President
RIGGS BANK N.A.
By /s/ Jeffrey P. White
----------------------------------------
Title: Jeffrey P. White
Vice President
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND
RESEARCH, as investment advisor
By /s/ Barbara Campbell
----------------------------------------
Title: Assistant Treasurer
SOCIETE GENERALE
By: /s/ Mark Vigil
-------------------------------
Title: Mark Vigil
Vice President
<PAGE>
THE SUMITOMO BANK, LIMITED
By
----------------------------------------
Title:
By
----------------------------------------
Title:
SUMMIT BANK
By /s/ C. J. Annas
----------------------------------------
Title: VP
SUNTRUST BANK, CENTRAL FLORIDA N.A.
By /s/ Janet P. Sammons
----------------------------------------
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ Bryan G. Petermann
----------------------------------------
Title: Bryan G. Petermann
Vice President
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By /s/ Jeffrey W. Maillet
----------------------------------------
Title: Jeffrey W. Maillet
Sr. Vice Pres. & Director
<PAGE>
Exhibit 10.60
FALCON RESTRICTED COMPANIES
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 4
This Agreement, dated as of March 17, 1998, is among the affiliates of
Falcon Holding Group, L.P., a Delaware limited partnership, set forth on the
signature pages hereto, BankBoston, N.A., as Managing Agent for itself and the
other Lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent, and
NationsBank of Texas, N.A., as Syndication Agent. The parties agree as follows:
1. Reference to Credit Agreement; Definitions. Reference is made to the
Amended and Restated Credit Agreement, dated as of July 12, 1996, among the
parties hereto (as amended, modified and in effect prior to giving effect to
this Consent, the "Credit Agreement"). Terms defined in the Credit Agreement as
amended hereby (the "Amended Credit Agreement") and not otherwise defined herein
are used herein with the meanings so defined.
2. Certain Amendments to Credit Agreement. In reliance upon the
representations and warranties set forth in Section 5, the Credit Agreement is
amended as follows, effective as of the date hereof when this Agreement is
consented to by such Lenders as own at least a majority of the Aggregate
Percentage Interests:
2.1. Addition of Section 1.89A. A new Section 1.89A is added to the Credit
Agreement immediately following Section 1.89 to read in its entirety as follows:
"1.89A. "Holding, L.P. Debentures" means, collectively, (i) the
$300,000,000 ___% Senior Debentures due 2010 and (ii) the ___% Senior Discount
Debentures due 2010 with gross proceeds not to exceed $200,000,000, each issued
jointly and severally by Holding, L.P. and its Wholly Owned Subsidiary Falcon
Funding Corporation pursuant to the Holding, L.P. Debentures Indentures."
2.2. Addition of Section 1.89B. A new Section 1.89B is added to the Credit
Agreement immediately following Section 1.89A to read in its entirety as
follows:
"1.89B. "Holding, L.P. Debentures Indentures" means, collectively, the two
respective Indentures dated as of the consummation of the issuance of the
Debentures, as in effect on such date, among Holding, L.P., Falcon Funding
Corporation and United States Trust Company of New York, as trustee, with
respect to the Holding, L.P. Debentures (and any subsequent indentures on
identical terms, except with respect to transfer restrictions,
<PAGE>
entered into for a registered exchange offer of the Holding, L.P. Debentures)."
2.3. Amendment of Section 5.2.1. Section 5.2.1 of the Credit Agreement is
amended to read in its entirety as follows:
"5.2.1. Officer's Certificate. The representations and warranties
contained in Sections 6.6 and 8, sections 2.3 and 5 of the Security Agreement
and in sections 2.2 and 4 of the Holding Pledge and Subordination Agreement
shall be true and correct on and as of the Closing Date with the same force and
effect as though originally made on and as of such date; no Default shall exist
on such Closing Date prior to or immediately after giving effect to the
requested extension of credit; as of such Closing Date, no Material Adverse
Change shall have occurred; the Borrowers shall be permitted to incur the
requested loan under section 4.03 of the Senior Subordinated Notes Indenture and
the equivalent section of the Holding, L.P. Debentures Indentures and the
Borrowers shall have furnished to the Administrative Agent on such Closing Date
a certificate to these effects (together with a notation of which Borrowers will
be directly using the proceeds of the requested loan and a schedule of
calculations demonstrating, as of such Closing Date, the Reference Consolidated
Annualized Operating Cash Flow Amount and compliance with the financial tests
set forth in Section 7.5), in substantially the form of Exhibit 5.2.1, signed by
a Financial Officer."
2.4. Amendment of Section 7.10.3. Section 7.10.3 of the Credit Agreement
is amended to read in its entirety as follows:
"7.10.3. So long as immediately before and after giving effect thereto no
Default exists, the Restricted Companies may make:
(a)(i) Distributions to Holding, L.P. on or about March 15 and September
15 in each year in an amount on each such date not exceeding $15,525,000, which
Distributions are used exclusively for Holding, L.P. to pay accrued interest on
the Holding, L.P. Senior Subordinated Notes,
(ii) Distributions to Holding, L.P. on or about April 15 and October 15
in each year in an amount on each such date not exceeding mandatory scheduled
cash payments then due of accrued interest on the Holding, L.P. Debentures,
which Distributions are used exclusively for Holding, L.P. to pay such interest
and
(iii) Distributions to Holding, L.P. in an amount necessary for Holding,
L.P. to pay in full the outstanding principal of, and interest and any premium
on, the Holding, L.P. Senior Subordinated Notes, whether pursuant to a voluntary
-2-
<PAGE>
redemption on or after September 15, 1998 or pursuant to an earlier tender
offer; and
(b) redemptions of equity interests in any Holding Company owned by
members of management (other than Marc B. Nathanson) upon termination of
employment in an aggregate amount not exceeding $1,000,000 in any year."
2.5. Addition of 8.2.2(f). A new Section 8.2.2(f) is added to the Credit
Agreement immediately following Section 8.2.2(e) to read in its entirety as
follows:
"(f) the Offering Memorandum relating to the Holding, L.P. Debentures
dated March 19, 1998 of Holding, L.P. and Falcon Funding Corporation."
2.6. Amendment of Section 9.1.5. Section 9.1.5 of the Credit Agreement is
amended so that the last parenthetical clause in paragraph (a) thereof reads in
its entirety as follows:
"(including, in any event, the Holding, L.P. Senior Subordinated Notes and the
Holding, L.P. Debentures);"
2.7. Amendment of Section 9.1.6. Section 9.1.6 of the Credit Agreement is
amended so that paragraph (d) thereof reads in its entirety as follows:
"(d) Any "Change in Control", as defined in the Senior Subordinated Notes
Indenture, or "Change of Control Triggering Event", as defined in the Holding,
L.P. Debentures Indentures, shall occur."
2.8. Amendment of Exhibit 5.2.1. Exhibit 5.2.1 to the Credit Agreement is
amended so that the last clause of the second paragraph thereof reads in its
entirety as follows:
"; and the Borrowers are permitted to incur the requested loan under section
4.03 of the Senior Subordinated Notes Indenture and the equivalent section of
the Holding, L.P. Debentures Indentures."
3. Certain Amendments to Credit Agreement. In reliance upon the
representations and warranties set forth in Section 5, the Credit Agreement is
amended as follows, effective as of the date hereof when this Agreement is
consented to by all the Lenders:
3.1. Amendment of Section 2.1.1. Section 2.1.1 of the Credit Agreement is
amended so that paragraph (b) thereof reads in its entirety as follows:
-3-
<PAGE>
"(b) The amount of Net Debt Proceeds to the extent that such amount is
allocated to the permanent reduction of the Maximum Amount of Revolving Credit
by Section 4.6."
3.2. Amendment of Section 4.6. The proviso contained in the second
sentence of Section 4.6 is amended to read in its entirety as follows:
"; provided, however, that (a) the Net Debt Proceeds of the Holding, L.P.
Debentures may be applied as follows:
(i) $100,000,000 to the prepayment of the Revolving Loan (and the
permanent reduction of the Maximum Amount of Revolving Credit) and the Term Loan
pro rata in proportion to the relative size of the Maximum Amount of Revolving
Credit to the Term Loan,
(ii) up to $25,000,000 to be used by Holding, L.P. for its lawful limited
partnership purposes and
(iii) the balance to the prepayment of the Revolving Loan (without
reducing the Maximum Amount of Revolving Credit); and
(b) any other Net Debt Proceeds shall not be required to prepay the Credit
Obligations to the extent such Designated Financing Debt is incurred by Holding,
L.P. (directly or jointly and severally) and the Net Debt Proceeds thereof are
used to refinance the Holding, L.P. Debentures at maturity."
4. Amendment of Holding Pledge and Subordination Agreement. In reliance
upon the representations and warranties set forth in Section 5, the Holding
Pledge and Subordination Agreement is amended as follows, effective as of the
date hereof when this Agreement is consented to by such Lenders as own at least
a majority of the Aggregate Percentage Interests:
4.1. Amendment of Section 5.5. Section 5.5 of the Holding Pledge and
Subordination Agreement is amended so that the portion prior to clause (a)
thereof reads in its entirety as follows:
"5.5. Restrictions on Financing Debt. Neither Pledgor shall create,
incur, assume or otherwise become or remain liable with respect to any Financing
Debt (other than notes evidencing PIK Interest Payments, Holding, L.P. Senior
Subordinated Notes, Holding, L.P. Debentures and Financing Debt outstanding on
the date hereof and reflected on the balance sheet referred to in Section 4.2
above) unless:"
4.2. Amendment of Section 5.6. Section 5.6 of the Holding Pledge and
Subordination Agreement is amended to read in its entirety as follows:
-4-
<PAGE>
"5.6. Payments on Certain Financing Debt. Prior to September 30, 2000,
neither Pledgor shall make any cash payment of principal of or interest on the
Holding, L.P. Senior Subordinated Notes or the Holding, L.P. Debentures except
directly from the proceeds of Distributions permitted by Section 7.10.3(a) of
the Credit Agreement."
5. Representation and Warranty. In order to induce the Lenders to enter into
this Agreement, each of the Restricted Companies jointly and severally
represents and warrants to the Lenders that immediately before and after giving
effect to the amendments set forth in Sections 2, 3 and 4, no Default will
exist.
6. General. The Amended Credit Agreement and all of the other Credit
Documents are each confirmed as being in full force and effect. This Agreement,
the Amended Credit Agreement and the other Credit Documents referred to herein
or therein constitute the entire understanding of the parties with respect to
the subject matter hereof and thereof and supersede all prior and current
understandings and agreements, whether written or oral, with respect to such
subject matter. The invalidity or unenforceability of any provision hereof
shall not affect the validity or enforceability of any other term or provision
hereof, and any invalid or unenforceable provision shall be enforced to the
maximum extent of its validity or enforceability. The headings in this
Agreement are for convenience of reference only and shall not alter, limit or
otherwise affect the meaning hereof. Each of this Agreement and the Amended
Credit Agreement is a Credit Document and this Agreement may be executed in any
number of counterparts, which together shall constitute one instrument, and
shall bind and inure to the benefit of the parties and their respective
successors and assigns, including as such successors and assigns all holders of
any Note. This Agreement shall be governed by and construed in accordance with
the laws (other than the conflict of laws rules) of The Commonwealth of
Massachusetts.
[The rest of this page is intentionally blank]
-5-
<PAGE>
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II, L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY CABLE, L.P.
FALCON COMMUNITY VENTURES I
LIMITED PARTNERSHIP
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY INVESTORS, L.P.
FALCON INVESTORS GROUP, LTD., A
CALIFORNIA LIMITED PARTNERSHIP
FALCON MEDIA INVESTORS GROUP, A
CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECABLE INVESTORS GROUP,
A CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECOM, L.P.
By FALCON HOLDING GROUP, INC., as
general partner, or general partner
of the general partner, of each of
the foregoing Restricted Companies
By _____________________________
Title:
FALCON FIRST, INC.
By ____________________________
Title:
-6-
<PAGE>
ATHENS CABLEVISION, INC.
AUSABLE CABLE TV, INC.
CEDAR BLUFF CABLEVISION, INC.
DALTON CABLEVISION, INC.
EASTERN MISSISSIPPI CABLEVISION, INC.
FALCON FIRST CABLE OF NEW YORK, INC.
FALCON FIRST CABLE OF THE SOUTHEAST,
INC.
FALCON FIRST HOLDINGS, INC.
FF CABLE HOLDINGS, INC.
LAUDERDALE CABLEVISION, INC.
MULTIVISION NORTHEAST, INC.
MULTIVISION OF COMMERCE, INC.
PLATTSBURG CABLEVISION, INC.
SCOTTSBORO CABLEVISION, INC.
SCOTTSBORO TV CABLE, INC.
By _______________________________
As an authorized officer of each of
the foregoing corporations
FALCON HOLDING GROUP, L.P.
By FALCON HOLDING GROUP, INC.,
general partner
By _______________________________
Title:
FALCON HOLDING GROUP, INC.
By ___________________________________
Title:
-7-
<PAGE>
BANKBOSTON, N.A., as Managing Agent
By ________________________________
Title:
TORONTO-DOMINION (TEXAS) INC., as
Administrative Agent
By ________________________________
Title:
NATIONSBANK OF TEXAS, N.A., as
Syndications Agent
By ________________________________
Title:
The foregoing Agreement is consented to
by the undersigned Lenders:
ABN AMRO BANK N.V.
By: ____________________________
Title:
By: ____________________________
Title:
-8-
<PAGE>
BANK OF AMERICA N.T. & S.A.
By ________________________________
Title:
BANK OF MONTREAL
By ____________________________________
Title:
BANQUE FRANCAISE DU COMMERCE EXTERIEUR
By ____________________________________
Title:
By ____________________________________
Title:
-9-
<PAGE>
BANQUE NATIONALE DE PARIS
By ____________________________________
Title:
By ____________________________________
Title:
BANQUE PARIBAS
By ________________________________
Title:
BARCLAYS BANK PLC
By ______________________________
Title:
THE CHASE MANHATTAN BANK
By __________________________________
Title:
CITY NATIONAL BANK
By _________________________________
Title:
-10-
<PAGE>
CIBC, INC.
By ________________________________
Title:
CREDIT LYONNAIS, NEW YORK BRANCH
By ________________________________
Title:
FLEET BANK, N.A.
By _____________________________
Title:
THE FUJI BANK, LIMITED LOS ANGELES
AGENCY
By _________________________________
Title:
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
LOS ANGELES AGENCY
By ________________________________
Title:
MEESPIERSON CAPITAL CORP.
By ________________________________
Title:
-11-
<PAGE>
OCTAGON CREDIT INVESTORS
By _______________________________
Title:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By _______________________________
Name:
Title:
By _________________________________
Name:
Title:
RIGGS BANK N.A.
By ____________________________
Title:
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND
RESEARCH, as investment advisor
By ____________________________________
Title:
SOCIETE GENERALE
By: ______________________________
Title:
-12-
<PAGE>
THE SUMITOMO BANK, LIMITED
By ____________________________________
Title:
By ________________________________
Title:
SUMMIT BANK
By ________________________________
Title:
SUNTRUST BANK, CENTRAL FLORIDA N.A.
By ________________________________
Title:
UNION BANK OF CALIFORNIA, N.A.
By _______________________________
Title:
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By ________________________________
Title:
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,917
<SECURITIES> 0
<RECEIVABLES> 25,253
<ALLOWANCES> 825
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 597,110
<DEPRECIATION> 272,551
<TOTAL-ASSETS> 740,358
<CURRENT-LIABILITIES> 74,519
<BONDS> 911,221
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 740,358
<SALES> 0
<TOTAL-REVENUES> 255,886
<CGS> 0
<TOTAL-COSTS> 240,936
<OTHER-EXPENSES> (1,328)
<LOSS-PROVISION> 5,714
<INTEREST-EXPENSE> 79,137
<INCOME-PRETAX> (62,859)
<INCOME-TAX> (2,021)
<INCOME-CONTINUING> (60,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,838)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
