<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-55755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FALCON HOLDING GROUP, L.P.
FALCON FUNDING CORPORATION
(Exact Name of Registrants as Specified in Their Charters)
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<S> <C> <C>
DELAWARE 4841 95-4408577
CALIFORNIA 4841 95-4681480
(States or Other Jurisdictions of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Numbers)
</TABLE>
10900 WILSHIRE BOULEVARD--15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 824-9990
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrants' Principal Executive Offices)
--------------------------
STANLEY S. ITSKOWITCH, ESQ.
FALCON HOLDING GROUP, INC.
10900 WILSHIRE BOULEVARD--15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 824-9990
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrants' Agent for Service)
--------------------------
Please address a copy of all communications to:
EDWARD J. O'CONNELL
THOMAS D. TWEDT
Dow, Lohnes & Albertson, PLLC
1200 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 776-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JULY 31, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
FALCON HOLDING GROUP, L.P.
[LOGO]
FALCON FUNDING CORPORATION
OFFER TO EXCHANGE 8.375% SERIES B SENIOR DEBENTURES DUE 2010 FOR ANY AND ALL
OUTSTANDING 8.375% SERIES A SENIOR DEBENTURES DUE 2010 AND TO EXCHANGE 9.285%
SERIES B SENIOR DISCOUNT DEBENTURES DUE 2010 FOR ANY AND ALL OUTSTANDING 9.285%
SERIES A SENIOR DISCOUNT DEBENTURES DUE 2010
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), and
Falcon Funding Corporation, a California corporation ("FFC," and each of FHGLP
and FFC being sometimes referred to herein individually as an "Issuer" and
collectively as the "Issuers"), hereby offer, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange (i)
$1,000 original principal amount of 8.375% Series B Senior Debentures due 2010
of the Issuers (the "Senior Exchange Debentures") for each $1,000 original
principal amount of the Issuers' issued and outstanding 8.375% Series A Senior
Debentures due 2010 (the "Old Senior Debentures," and collectively with the
Senior Exchange Debentures, the "Senior Debentures"), and (ii) $1,000 original
principal amount at maturity of 9.285% Series B Senior Discount Debentures due
2010 of the Issuers (the "Senior Discount Exchange Debentures," and collectively
with the Senior Exchange Debentures, the "Exchange Debentures") for each $1,000
original principal amount at maturity of the Issuers' issued and outstanding
9.285% Series A Senior Discount Debentures due 2010 (the "Old Senior Discount
Debentures," and collectively with the Senior Discount Exchange Debentures, the
"Senior Discount Debentures") (the Old Senior Discount Debentures and the Old
Senior Debentures being sometimes referred to herein collectively as the "Old
Debentures," and the Old Debentures and the Exchange Debentures being sometimes
referred to herein collectively as the "Debentures"). As of the date of this
Prospectus, $375,000,000 aggregate original principal amount of the Old Senior
Debentures are outstanding, and $435,250,000 aggregate original principal amount
at maturity of the Old Senior Discount Debentures are outstanding.
The form and terms of the Exchange Debentures are the same as the form and
terms of the corresponding Old Debentures except that (i) the issuance of the
Exchange Debentures will have been registered under the Securities Act and,
therefore, the Exchange Debentures will not bear legends restricting the
transfer thereof and (ii) holders of the Exchange Debentures will not be
entitled to certain rights of holders of Old Debentures under the Registration
Rights Agreement (as defined). The Exchange Debentures will evidence the same
debt as the Old Debentures (which they replace) and will be issued under and be
entitled to the benefits of the Indenture, dated as of April 3, 1998 (the
"Indenture"), by and among the Issuers and U.S. Trust Company of New York, as
Trustee, governing the Old Debentures. See "The Exchange Offer" and "Description
of the Debentures."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Debentures being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1998, unless the
Issuers, in their sole discretion, extend the Exchange Offer (as such date may
be so extended, the "Expiration Date"), in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended. Old
Debentures tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date; otherwise such tenders are irrevocable.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The Old Senior Discount Debentures were originally issued at a price of
$633.29 per $1,000 original principal amount at maturity, and each Senior
Discount Exchange Denbenture will be issued with original issue discount for
federal income tax purposes and will have an Accreted Value equal to that of the
Old Senior Discount Debenture exchanged therefor. No interest on the Senior
Discount Debentures will be payable prior to April 15, 2003; PROVIDED, HOWEVER,
that any time prior to April 15, 2003, the Issuers may elect to commence accrual
of cash interest on any interest payment date, in which case the outstanding
principal amount at maturity of a Senior Discount Debenture will be reduced to
the Accreted Value of such Debenture as of such interest payment date and
interest will be payable semiannually in cash on each interest payment date
thereafter.
The Debentures will mature on April 15, 2010. The Debentures will be
redeemable at the option of the Issuers, in whole or in part, at any time on or
after April 15, 2003, in the case of Senior Debentures, initially at 104.188% of
the principal amount thereof and, in the case of Senior Discount Debentures,
initially at 104.643% of the Accreted Value thereof, in each case plus accrued
and unpaid interest, if any, to the date of redemption, declining to 100% of
their principal amount, plus accrued and unpaid interest, if any, on or after
April 15, 2006. In addition, at any time prior to April 15, 2001, the Issuers
may redeem up to 35% of the aggregate principal amount or Accreted Value, as
applicable, of the Debentures with the net cash proceeds of one or more sales by
the Company of its Capital Stock (as defined) (other than Redeemable Capital
Stock (as defined)) at a redemption price, in the case of Senior Debentures,
equal to 108.375% of the principal amount thereof and, in the case of Senior
Discount Debentures, equal to 109.285% of the Accreted Value thereof, in each
case plus accrued and unpaid interest, if any, to the date of redemption. In the
event of a Change of Control (as defined), the holders of the Debentures will
have the right to require the Issuers to purchase their Debentures at a price
equal to 101% of their principal amount or Accreted Value, as the case may be,
plus accrued and unpaid interest, if any, to the date of purchase. There can be
no assurance, however, that the Company will have sufficient funds to pay the
purchase price for all of the Debentures that might be delivered by holders in
connection with a Change of Control. In addition, this provision may not afford
holders of the Debentures protection in the event of certain highly leveraged
transactions.
If the TCI Contribution (as defined) is not consummated on or before June
30, 1999, the interest rate on the Senior Debentures will increase by 0.75% per
annum, the Discount Debentures will bear cash interest on the Accreted Value
thereof (in addition to accretion of principal) at a rate of 0.75% per annum
until April 15, 2003, and thereafter the interest rate on the Senior Discount
Debentures will increase by 0.75% per annum; provided that such additional
interest will no longer be payable if the TCI Contribution is consummated on or
before December 31, 1999.
Although the Debentures are designated as senior obligations of the Issuers,
FHGLP currently has no indebtedness that is subordinated to the Debentures. In
addition, as described in greater detail below, because FHGLP is a holding
company, the Debentures effectively are subordinated in right of payment to all
of the outstanding indebtedness of FHGLP's subsidiaries. The Debentures will be
joint and several senior unsecured obligations of the Issuers, will rank PARI
PASSU in right of payment with all existing and future senior unsecured
obligations of the Issuers and will be senior in right of payment to all
subordinated indebtedness of the Issuers. The Issuers do not currently have any
plans to incur any such subordinated indebtedness with respect to which the
Debentures would be senior in right of payment. FHGLP is a holding company that
has no material operations and conducts substantially all of its business
through subsidiaries. As a result, FHGLP's ability to make interest and
principal payments when due to the holders of the Debentures is dependent upon
the receipt of sufficient funds from FHGLP's subsidiaries. The Debentures will
be the obligations of the Issuers only, and the Issuers' subsidiaries will not
have any obligation to pay any amounts due under the Debentures. Therefore, the
Debentures will be effectively subordinated to all existing and future
indebtedness and other liabilities of the Issuers' subsidiaries. As of March 31,
1998, after giving pro forma effect to the Offering (as defined), the
refinancing of the Bank Credit Agreement (as defined) with proceeds from the New
Credit Facility (as defined), the repurchase of all of the Notes pursuant to
both the Notes Tender (as defined) and the Notes Redemption (as defined), and
the consummation of the TCI Transaction, (i) the Issuers (excluding indebtedness
of their subsidiaries) would not have had any indebtedness outstanding other
than the Debentures (representing aggregate indebtedness of approximately $650.6
million as of the date of issuance) and (ii) the Issuers' subsidiaries
ii
<PAGE>
would have had $936.5 million of indebtedness outstanding, all of which would
have been effectively senior to the Debentures. In addition, the New Credit
Facility is collateralized by a pledge of the partnership and other equity
interests of substantially all of FHGLP's subsidiaries and a negative pledge on
the assets of such subsidiaries, subject to a subsequent grant of a security
interest in such assets if the TCI Transaction has not closed by December 31,
1998.
FFC is a wholly owned subsidiary of FHGLP and was incorporated solely for
the purpose of serving as a co-issuer of the Debentures. FFC does not have any
material operations or assets and will not have any revenues. Prospective
purchasers of the Debentures should not expect FFC to participate in servicing
the principal, interest, premium, if any, or any other payment obligations on
the Debentures.
The Exchange Offer is being made pursuant to the Registration Rights
Agreement, dated as of April 3, 1998 (the "Registration Rights Agreement"),
among the Issuers and Morgan Stanley & Co. Incorporated, Lazard Freres & Co.
LLC, Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancAmerica Robertson Stephens, BancBoston
Securities Inc., Chase Securities Inc., CIBC Oppenheimer, NationsBanc Montgomery
Securities LLC and TD Securities (USA) Inc., as the Placement Agents for the
initial offering of the Old Debentures (the "Placement Agents"). Upon
consummation of the Exchange Offer, holders of Old Debentures that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Debentures will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Debentures and, accordingly, such
Old Debentures will continue to be subject to the restrictions on transfer
contained in the legend thereon.
Based upon interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter
(April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5,
1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the
Issuers believe that the Exchange Debentures issued pursuant to the Exchange
Offer in exchange for Old Debentures may be offered for resale, resold and
otherwise transferred by any holder thereof (other than any such holder that is
an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")), without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such Exchange Debentures are acquired in the ordinary course
of such holder's business and that at the time of the consummation of the
Exchange Offer such holder has no arrangement or understanding with any person
to participate in the distribution of such Exchange Debentures. See "The
Exchange Offer--Resale of the Exchange Debentures." Holders of Old Debentures
wishing to accept the Exchange Offer must represent to the Issuers, as required
by the Registration Rights Agreement, that such conditions have been met and
that such holder is not an "affiliate" of the Issuers within the meaning of Rule
405 under the Securities Act. Each broker-dealer that is the beneficial owner
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), of Exchange Debentures received by such
broker-dealer for its own account pursuant to the Exchange Offer (a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Debentures. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by any person
subject to the prospectus delivery requirements of the Securities Act (other
than a Participating Broker Dealer (an "Excluded Participating Broker Dealer")
who either (x) acquired Debentures other than for its own account as a result of
market-making activities or other trading activities or (y) has entered into any
arrangement or understanding with any Issuer or any affiliate of any Issuer to
distribute the Exchange Debentures). See "Plan of Distribution."
The Old Debentures were originally issued and sold on April 3, 1998 in an
offering of $375,000,000 aggregate original principal amount of the Senior
Debentures and $435,250,000 aggregate original Principal Amount at Maturity of
the Discount Debentures (the "Offering"). The Offering was exempt from
registration under the Securities Act in reliance upon the exemptions provided
by Section 4(2), Rule 144A and Regulation S of the Securities Act. Accordingly,
the Old Debentures may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or
iii
<PAGE>
unless an exemption from the registration requirements of the Securities Act and
applicable state securities laws is available.
The Issuers have not entered into any arrangement or understanding with any
person to distribute the Exchange Debentures to be received in the Exchange
Offer, and to the best of the Issuers' information and belief, each person
participating in the Exchange Offer is acquiring the Exchange Debentures in its
ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the Exchange Debentures to be
received in the Exchange Offer. Any holder who is an "affiliate" of the Issuers
(within the meaning of Rule 405 under the Securities Act), who does not acquire
the Exchange Debentures in the ordinary course of business or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Debentures could not rely on the position of the staff of the
Commission enunciated in the no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Failure to comply with such requirements in such instance may result in such
holder incurring liability under the Securities Act for which the holder is not
indemnified by the Issuers.
There has not previously been any public market for the Old Debentures or
the Exchange Debentures. Although the Debentures are designated for trading in
the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
Market, there can be no assurance that an active market for the Exchange
Debentures will develop. Moreover, to the extent that Old Debentures are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Debentures could be adversely affected. The
Company has been advised by the Placement Agents that they presently intend to
make a market in the Exchange Debentures. However, the Placement Agents are not
obligated to do so, and any market-making activity with respect to the Exchange
Debentures may be discontinued at any time without notice. See "Risk
Factors--Lack of Public Market for the Debentures."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUERS ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD DEBENTURES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
ISSUERS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE DEBENTURES, WHETHER
OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Debentures will be available initially only in book-entry form
and the Issuers expect that the Exchange Debentures issued pursuant to the
Exchange Offer will be represented by one or more Global Debentures (as
defined), which will be deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Debentures will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants. After the initial issuance of the Global Debentures, Debentures in
certificated form will be issued in exchange for the Global Debentures only
under limited circumstances as set forth in the Indenture. See "Description of
the Debentures--Book-Entry; Delivery and Form."
iv
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................................................ 1
Risk Factors.............................................................. 17
The TCI Transaction....................................................... 26
Use of Proceeds........................................................... 30
Capitalization............................................................ 31
Selected Consolidated Financial Data...................................... 32
Pro Forma Condensed Combined Financial Data............................... 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 44
Business.................................................................. 57
Legislation and Regulation................................................ 77
Management................................................................ 84
Certain Relationships and Related Transactions............................ 92
Security Ownership of Certain Beneficial Owners and Management............ 95
Description of the Partnership Agreements................................. 97
Description of Certain Indebtedness....................................... 109
The Exchange Offer........................................................ 113
Description of the Debentures............................................. 123
Federal Income Tax Considerations......................................... 154
Plan of Distribution...................................................... 159
Legal Matters............................................................. 160
Experts................................................................... 160
Available Information..................................................... 160
Index to Financial Statements............................................. F-1
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THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES ACT. ALL STATEMENTS REGARDING THE ISSUERS' EXPECTED FINANCIAL
POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD LOOKING STATEMENTS. ALTHOUGH
THE ISSUERS BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD LOOKING
STATEMENTS ARE REASONABLE, THE ISSUERS CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN
CONJUNCTION WITH THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD LOOKING STATEMENTS
ATTRIBUTABLE TO THE ISSUERS OR PERSONS ACTING ON THE ISSUERS' BEHALF, ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
v
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PROSPECTUS SUMMARY
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS AND THE DEBENTURES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. AS USED IN THIS PROSPECTUS, THE "COMPANY" REFERS TO FALCON HOLDING
GROUP, L.P., A DELAWARE LIMITED PARTNERSHIP ("FHGLP"), AND ITS SUBSIDIARIES
(INCLUDING CONSOLIDATED PARTNERSHIPS) UNLESS THE CONTEXT REQUIRES OTHERWISE. THE
COMPANY HAS ENTERED INTO A DEFINITIVE AGREEMENT WITH TCI FALCON HOLDINGS, LLC
("TCI"), AN AFFILIATE OF TELE-COMMUNICATIONS, INC., FALCON COMMUNICATIONS, L.P.,
A NEWLY ORGANIZED HOLDING COMPANY ("NEW FALCON"), THE EXISTING PARTNERS OF FHGLP
AND INVESTORS IN FALCON VIDEO (AS DEFINED) TO CONSOLIDATE UNDER THE COMMON
OWNERSHIP AND CONTROL OF NEW FALCON SUBSTANTIALLY ALL OF THE COMPANY'S EXISTING
CABLE OPERATIONS (THE "FALCON SYSTEMS") AND CERTAIN CABLE TELEVISION SYSTEMS
OWNED AND OPERATED BY AFFILIATES OF TCI (THE "TCI SYSTEMS"). FHGLP WILL RETAIN
ITS OWNERSHIP INTERESTS (RANGING FROM 0.5% TO 1.0%) IN THE SYSTEMS UNDER THE
MANAGEMENT OF ENSTAR COMMUNICATIONS CORPORATION ("ENSTAR"), AN INDIRECT
SUBSIDIARY OF FHGLP (THE "ENSTAR SYSTEMS"), AS WELL AS CERTAIN OTHER
NON-OPERATING ASSETS THAT WILL NOT BE TRANSFERRED TO NEW FALCON. FHGLP WILL OWN,
SUBJECT TO POSSIBLE ADJUSTMENT PURSUANT TO THE CONTRIBUTION AGREEMENT (AS
DEFINED), WHICH SPECIFIES THE ASSETS THAT WILL BE CONTRIBUTED TO NEW FALCON,
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. IT IS CONTEMPLATED THAT, AS A RESULT OF THE TCI TRANSACTION, THE
DEBENTURES WILL BE ASSUMED BY NEW FALCON, WHICH WILL BE SUBSTITUTED FOR FHGLP AS
AN OBLIGOR UNDER THE DEBENTURES. THE TCI TRANSACTION IS PRESENTLY EXPECTED TO BE
COMPLETED IN THE THIRD QUARTER OF 1998, ALTHOUGH THERE CAN BE NO ASSURANCES AS
TO THE SUCCESSFUL COMPLETION OF THE TCI TRANSACTION. SEE "RISK
FACTORS--CONDITIONS OF CLOSING THE TCI TRANSACTION" AND "THE TCI TRANSACTION."
THE COMPANY
The Company owns or manages cable television systems in 26 states. On
December 30, 1997, FHGLP entered into a definitive agreement with TCI to
consolidate substantially all of the Company's cable television systems and
certain systems owned and operated by affiliates of TCI (the "TCI Transaction").
Upon consummation of the TCI Transaction, the Company will be the 13th largest
cable television operator in the United States, serving subscribers principally
in California, Oregon, Washington, Missouri and Alabama. After giving effect to
the TCI Transaction, the Company would have served approximately 1,070,000 basic
subscribers at March 31, 1998. Led by Marc B. Nathanson, the Chairman and Chief
Executive Officer, and Frank J. Intiso, the President and Chief Operating
Officer, the Company's senior management team has an average of over 19 years of
experience in the cable industry and has worked together for over a decade.
The Company's owned cable television systems (the "Owned Systems") are
located in 23 states, principally California, Oregon, Missouri, Georgia, North
Carolina, Texas and Kentucky. As of March 31, 1998, the Owned Systems passed
approximately 1,008,000 homes and served approximately 607,000 basic
subscribers. The Company also holds varying equity interests in and manages
certain other cable television systems (the "Affiliated Systems" and, together
with the Owned Systems, the "Falcon Systems"). The Affiliated Systems are
located in 14 states, including South Carolina, Kentucky, Illinois, Washington
and Tennessee. As of March 31, 1998, the Affiliated Systems passed approximately
262,000 homes and served approximately 170,000 basic subscribers.
The Company is a leading operator of cable systems primarily located in
small to medium-sized communities and suburban areas surrounding large and
medium-sized cities proximate to many of the major television markets in the
United States (also known as "Designated Market Areas" or "DMAs"). Management
believes that the Company's cable systems generally have higher operating cash
flow margins and more predictable operating cash flow and are subject to less
risk of increased competition than systems in large urban cities. In many of the
Company'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 urban cities.
Management also believes that its cable television
1
<PAGE>
systems generally have a more stable customer base and generally have lower
labor, operating and system construction costs than systems in urban markets.
The principal executive offices of the Company are located at 10900 Wilshire
Boulevard, 15th Floor, Los Angeles, California 90024, and the Company's
telephone number is (310) 824-9990.
BUSINESS STRATEGY
FOCUS ON SMALL AND MEDIUM-SIZED MARKETS. The Company's business strategy
has focused on serving small to medium-sized communities and the suburbs of
certain cities. The Company 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. The
Falcon Systems, taken as a whole, are not dependent on any single local economy,
are resistant to regional economic fluctuations, and provide the Company with
stable revenue and operating cash flow streams. However, it is the goal of the
Company to consolidate its operations in fewer states while continuing its
geographic and economic market diversity and maintaining or increasing its
current revenue and cash flow.
CLUSTERING OF CABLE SYSTEM PROPERTIES. Management plans to continue its
acquisition strategy by pursuing opportunities to purchase cable television
systems in the Company's existing DMAs as well as by entering new DMAs, if and
when attractive acquisition opportunities become available. In addition to
opportunities to acquire systems, management expects to pursue opportunities to
exchange certain of its systems for other cable television properties with both
TCI and other cable operators, to further facilitate the Company's clustering
strategy, and to concentrate in fewer states.
REBUILD AND UPGRADE CABLE SYSTEMS. Through the upgrade of its cable plant,
including the utilization of addressable technology, fiber optic cable and
digital compression, the Company seeks to benefit from providing additional
tiers of programming and from the further development of advertising,
pay-per-view and home shopping services, as well as possible future services
such as Internet access, video-on-demand and other interactive services. Through
a significant capital expenditure program, the Company plans to increase this
channel capacity in most of its clusters by deploying fiber optic cable, digital
compression or both. However, many of the Falcon Systems currently have almost
no available channel capacity with which to add new channels or to further
expand pay-per-view offerings to customers. See "Risk Factors--Lack of Available
Channel Capacity for New Channels or Expanded Services."
MAXIMIZE REVENUES AND CASH FLOW MARGINS. The Company seeks to maximize
revenues by increasing subscriptions to basic, expanded basic, and other tiers
of satellite services and premium programming services through a combination of
innovative marketing programs, an emphasis on customer service and active
community relations. As a result of the Company's success in facilitating
revenue growth, combined with operating efficiencies generated by the Company's
clustering strategy, economies of scale, volume discounts for cable programming
and decentralized management structure, the Company believes its operating cash
flow margins have been and continue to be among the highest in the cable
television industry. The Company has, however, historically reported net losses.
See "Risk Factors--Substantial Leverage; History of Net Losses."
BENEFIT FROM PARTNERSHIP WITH TCI. The Company expects that it will derive
numerous operational synergies from its partnership with TCI, including
increased concentration of cable systems, purchasing discounts and other
economies arising from more streamlined management of Company assets and those
assets contributed by TCI. The Company will also benefit from the expertise and
valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R.
Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of
the TCI Transaction.
2
<PAGE>
THE TCI TRANSACTION
On December 30, 1997, the Company entered into a definitive agreement with
TCI to consolidate substantially all of the Falcon Systems and all of the TCI
Systems into New Falcon, a newly organized holding company. Following the
consummation of the TCI Transaction, the Company will own approximately 53% and
TCI will own approximately 47% of the equity of New Falcon, subject to possible
adjustment pursuant to the Contribution Agreement. FHGLP will serve as the
managing general partner of New Falcon. Following the consummation of the TCI
Transaction, FHGLP will not own any cable television systems. FHGLP will
continue to hold its equity ownership interests (ranging from 0.5% to 1.0%) in
the Enstar Systems, and New Falcon will manage such systems. FHGLP's only other
assets following the TCI Transaction will be its interest in New Falcon and
certain immaterial, passive minority investments. See "Business--International
Activities" and "--Other Investments."
Under the terms of the TCI Transaction, TCI will contribute certain cable
television systems serving approximately 293,000 basic subscribers in small and
medium-sized markets in California, Oregon, Washington, Missouri and Alabama. As
adjusted for the TCI Transaction, the concentration of the Company's subscribers
will increase to 69% in these five states, resulting in increased capital,
personnel, marketing and advertising sales efficiencies. Additionally, the
Company's increased concentration will provide greater critical mass to launch
new services and enhance revenue opportunities.
The Company plans to improve and integrate the TCI Systems through the
consolidation of certain headends, the streamlining of management and the
leveraging of economies of scale for marketing and advertising promotions.
Giving pro forma effect to the consummation of the TCI Transaction, certain
subscriber and operating data for the Company as of and for the three months
ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1998(1)
--------------------------------------------------
FALCON
SYSTEMS(2) TCI SYSTEMS NEW FALCON SYSTEMS
---------------- ------------ ------------------
<S> <C> <C> <C>
Homes passed................................................. 1,118,735 438,950 1,557,685
Basic subscribers............................................ 681,734 293,266 975,000
Basic penetration............................................ 60.9% 66.8% 62.6%
Basic subscribers per headend................................ 2,738 6,817 3,339
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED MARCH 31, 1998(1)
--------------------------------------------------
FALCON
SYSTEMS(2) TCI SYSTEMS NEW FALCON SYSTEMS
---------------- ------------ ------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SUBSCRIBER
DATA)
<S> <C> <C> <C>
Total revenues............................................... $ 75,476 $ 30,071 $ 105,547
Operating loss............................................... $ (809) $ (5,347) $ (6,156)
Net loss..................................................... $ (25,974) $ (11,527) $ (37,501)
EBITDA(3).................................................... 38,610 11,525 50,135
EBITDA margin................................................ 51.2% 38.3% 47.5%
Average monthly revenue per basic subscriber................. $ 36.51 $ 34.20 $ 35.82
Average monthly EBITDA per basic subscriber.................. 18.88 13.10 17.14
</TABLE>
- ------------------------
(1) See "Selected Consolidated Financial Data" and "Pro Forma Condensed Combined
Financial Data."
(2) Includes Falcon Classic (as defined) and Falcon Video systems, but excludes
the Enstar Systems. Substantially all the Falcon Classic systems were
acquired in March 1998, and the remaining system was acquired in July 1998.
The Falcon Video systems are currently managed by FHGLP as part of the
Affiliated Systems, and Falcon Video will become an Owned Subsidiary of New
Falcon following consummation of the TCI Transaction. The Falcon Video
systems had approximately 70,607 basic subscribers as of March 31, 1998. The
Enstar Systems had approximately 95,000 basic subscribers as of March 31,
1998, and the Company will continue to manage the Enstar Systems following
consummation of the TCI Transaction.
(3) EBITDA is calculated as operating income before depreciation and
amortization. See footnote (6) to "Selected Consolidated Financial Data."
Upon consummation of the TCI Transaction, it is contemplated that FHGLP's
obligations under the Debentures will be assumed by New Falcon, which will be
substituted for FHGLP as an obligor
3
<PAGE>
thereunder. FHGLP commenced on April 20, 1998 an offer to purchase (the "Notes
Tender") all of the $282.2 million aggregate principal amount of the Company's
outstanding 11% Senior Subordinated Notes due 2003 (the "Notes"). The Notes
Tender expired on May 18, 1998, and FHGLP repurchased approximately $247.8
million aggregate principal amount of the Notes on May 19, 1998 pursuant to the
terms of the Notes Tender. The Company will redeem the remaining outstanding
Notes prior to October 15, 1998 in accordance with the redemption provisions of
the indenture governing the Notes. See "Description of Certain Indebtedness--11%
Senior Subordinated Notes due 2003." If the TCI Transaction is consummated
before all of the Notes have been 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. In addition, New Falcon will
assume certain other FHGLP and TCI indebtedness. See "Use of Proceeds" and
"Capitalization."
On June 30, 1998, the Company entered into a new $1.5 billion senior bank
credit agreement (the "New Credit Facility"), which provides for three committed
credit facilities (one revolving credit facility and two term loans) and one
uncommitted supplemental credit facility (the terms of which will be negotiated
at the time the Company makes a request to draw on such facility). See
"Description of Certain Indebtedness--New Credit Facility." The Owned
Subsidiaries (as defined), other than Falcon Video, are the initial borrowers
under the New Credit Facility. Immediately prior to the TCI Closing (as
defined), Falcon Video will use proceeds from borrowings under the New Credit
Facility to satisfy in part its obligations under certain financing notes. Upon
the TCI Closing, the Company will use proceeds from additional borrowings under
the New Credit Facility to refinance any other senior indebtedness of the
Company, including without limitation certain existing senior indebtedness of
Falcon Video, the initial borrowings of Falcon Video under the New Credit
Facility, and the indebtedness of TCI to be assumed by New Falcon at the TCI
Closing. See "The TCI Transaction."
The consummation of the TCI Transaction is 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 or that the TCI Transaction will be consummated, management
presently anticipates that the TCI Transaction will be consummated during the
third quarter of 1998. See "Risk Factors--Conditions of Closing the TCI
Transaction."
Immediately following the consummation of the TCI Transaction, New Falcon
will contribute substantially all of its assets to Falcon Cable Communications,
LLC ("New Falcon II"), a newly formed limited liability company wholly owned by
New Falcon. New Falcon II will assume certain indebtedness, including any Notes
that remain outstanding and any indebtedness outstanding under the New Credit
Facility, but excluding the Debentures. New Falcon II will thereupon be
substituted for New Falcon as the obligor under the Notes and become the sole
borrower under the New Credit Facility. New Falcon II will then contribute the
TCI Systems to the Owned Subsidiaries. See "Risk Factors--Dependence on Receipt
of Funds From Operating Subsidiaries to Service Debentures; Structural
Subordination."
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 (such portion being referred
to herein as 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. See "Risk Factors--Conditions of
Closing the TCI Transaction" and "--Obligations of FHGLP to Redeem Limited
Partnership Interests."
New Falcon is a California limited partnership that will operate under the
name "Falcon Communications, L.P.," and all of the systems owned and operated by
New Falcon will operate under the names "Falcon" or "Falcon Cable TV."
On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that
they have entered into an agreement under which AT&T Corp. would acquire
Tele-Communications, Inc. by merger. Although there can be no assurances as to
whether this merger will be consummated, the Company does
4
<PAGE>
not anticipate that this proposed merger will have any material adverse effect
upon the consummation of the TCI Transaction.
The following chart illustrates in summary form the structure of FHGLP, New
Falcon and certain affiliated entities upon consummation of the TCI Transaction
(including the assumption by New Falcon of all of the obligations of FHGLP under
the Debentures offered hereby).
[ORGANIZATIONAL CHART]
(1) FHGLP will retain its ownership interests (ranging from 0.5% to 1.0%) in
the Enstar Systems, as well as certain other non-operating assets. New
Falcon will provide management services to, and receive management fees
and reimbursement of expenses from, the Enstar Systems.
(2) Subject to possible adjustment pursuant to the Contribution Agreement.
(3) On May 19, 1998, FHGLP repurchased approximately $247.8 million
aggregate principal amount of the outstanding Notes and prior to October
15, 1998, FHGLP will redeem the approximately $34.4 million remaining
outstanding Notes.
(4) Includes the cable television systems acquired from Falcon Classic.
(5) These groups are for illustrative purposes only. The systems are, or
will be, owned by the Owned Subsidiaries.
5
<PAGE>
RISK FACTORS
Ownership of the Debentures involves certain risks, including that the
Company is, and will continue to be, highly leveraged, that the Company has a
history of net losses, that the Debentures will be effectively subordinated to
all future and existing indebtedness of the Issuers' subsidiaries and that FHGLP
may be required to repurchase certain limited partnership interests in the
future. These and other risks are described in detail under "Risk Factors," and
holders of the Old Debentures should consider carefully the risks described
therein, as well as the other information contained in this Prospectus, before
tendering the Old Debentures for the Exchange Debentures.
RECENT DEVELOPMENTS
FHGLP commenced the Notes Tender on April 20, 1998, and the Notes Tender
expired on May 18, 1998. FHGLP repurchased approximately $247.8 million
aggregate principal amount of the Notes on May 19, 1998 pursuant to the terms of
the Notes Tender with borrowings under the Company's prior senior bank credit
agreement (the "Bank Credit Agreement"). Under the indenture governing the
Notes, FHGLP has the right to redeem all or a portion of the Notes on or after
September 15, 1998 at 105.5% of the outstanding principal amount thereof, plus
accrued interest, to the redemption date. The Company will redeem the remaining
approximately $34.4 million aggregate principal amount of outstanding Notes
prior to October 15, 1998 in accordance with the redemption provisions of the
indenture governing the Notes (the "Notes Redemption"). The Company will use
borrowings under the New Credit Facility to effect the Notes Redemption. In
addition, in connection with the Notes Tender, FHGLP solicited and received
sufficient consents to amend the indenture governing the Notes to eliminate
certain covenants and events of default. See "Description of Certain
Indebtedness--11% Senior Subordinated Notes due 2003."
On June 30, 1998, the Company entered into the New Credit Facility. See
"Description of Certain Indebtedness--New Credit Facility." The Company borrowed
approximately $425.8 million under the New Credit Facility on June 30, 1998,
approximately $329 million of which was used to repay the remaining indebtedness
outstanding under the Bank Credit Agreement. The remaining proceeds resulted in
an excess cash balance of approximately $90 million (after payment of
approximately $4.5 million in fees and expenses related to the New Credit
Facility).
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Old Debentures: The Old Debentures were sold by the Issuers on April 3,
1998 to the Placement Agents pursuant to a Placement
Agreement, dated April 3, 1998 (the "Placement
Agreement"), among the Issuers and the Placement Agents.
The Placement Agents subsequently placed the Old
Debentures with (i) qualified institutional buyers
pursuant to Rule 144A under the Securities Act, (ii)
other institutional "accredited investors" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) and (iii) qualified buyers outside the United
States in reliance upon Regulation S under the
Securities Act.
Registration Rights Agreement: Pursuant to the Placement Agreement, the Issuers and the
Placement Agents entered into a Registration Rights
Agreement, dated as of April 3, 1998 (the "Registration
Rights Agreement"), which grants the holders of the Old
Debentures certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights, which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered: $375,000,000 aggregate original principal amount of
8.375% Series B Senior Debentures due 2010 (the "Senior
Exchange Debentures") and $435,250,000 aggregate
original principal amount at maturity of 9.285% Series B
Senior Discount Debentures due 2010 (the "Senior
Discount Exchange Debentures"); PROVIDED, HOWEVER, that
any time prior to April 15, 2003, the Issuers may elect
to commence accrual of cash interest on the Senior
Discount Exchange Debentures on any interest payment
date, in which case the outstanding principal amount at
maturity of a Senior Discount Debenture will be reduced
to the Accreted Value of such Debenture as of such
interest payment date and interest will be payable
semiannually in cash on each interest payment date
thereafter.
The Exchange Offer: $1,000 original principal amount of Senior Exchange
Debentures in exchange for each $1,000 original
principal amount of Old Senior Debentures, and $1,000
original principal amount at maturity of Senior Discount
Exchange Debentures in exchange for each $1,000 original
principal amount at maturity of Old Senior Discount
Debentures.The Issuers will issue the Exchange
Debentures on or promptly after the Expiration Date.
Based upon interpretations by the staff of the
Commission set forth in certain no-action letters issued
to third parties (including EXXON CAPITAL HOLDINGS
CORP., SEC No-Action Letter (April 13, 1989); MORGAN
STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991);
and SHEARMAN & STERLING, SEC No-Action Letter (July 2,
1993)), the Issuers believe that Exchange Debentures
issued pursuant to the Exchange Offer in exchange for
Old Debentures may be offered for resale, resold and
otherwise transferred by any holder thereof (other than
any such holder that is an "affiliate" of the Issuers
within the meaning of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery
requirements of the Securities Act, provided that such
Exchange Debentures are acquired in the ordinary course
of such holder's business and that at the time of the
consummation of the Exchange Offer such holder has no
arrangement or understanding with any person to partici-
pate in the distribution of such Exchange Debentures.
Any Participating Broker-Dealer that acquired Old
Debentures for its own account may be a statutory
underwriter. Each Participating Broker-Dealer that
receives Exchange Debentures for its own account
pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus,
a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used
by any person subject to the prospectus delivery
requirements of the Securities Act (other than an
Excluded Participating Broker Dealer). The Issuers have
agreed that, for a period of up to 180 days after the
consummation of the Exchange Offer (subject to extension
under certain circumstances), they will use their
reasonable best efforts to keep the Exchange Offer
Registration Statement effective and to amend and
supplement this Prospectus in order to permit this
Prospectus to be lawfully delivered by all persons
subject to the prospectus delivery requirements of the
Securities Act (provided that, as set forth in the
Letter of Transmittal, such persons shall have expressed
that they may be subject to such requirements and have
undertaken to use their reasonable best efforts to
notify Holdings when they are no longer subject to such
requirements). See "Plan of Distribution."
Any holder who is an "affiliate" of the Issuers (within
the meaning of Rule 405 under the Securities Act), who
does not acquire the Exchange Debentures in the ordinary
course of business or who tenders in the Exchange Offer
for the purpose of participating in a distribution of
the Exchange Debentures could not rely on the position
of the staff of the Commission enunciated in the
above-mentioned no-action letters and, in the absence of
an exemption therefrom, must comply with the regis-
tration and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such requirements in
such instance may result in such holder incurring
liability under the Securities Act for which the holder
is not indemnified by the Issuers.
Expiration Date: 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Principal Amount of and Accreted
Value on the Exchange Debentures
and the Old Debentures: Each Senior Exchange Debenture will have a principal
amount equal to that of the Old Senior Debenture for
which it is exchanged, and each Senior Discount Exchange
Debenture will have an Accreted Value equal to that of
the Old Senior Discount Debenture for which it is
exchanged.
Conditions to the Exchange Offer: The Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuers. See "The
Exchange Offer-- Conditions."
Procedures for Tendering Old
Debentures: Each holder of Old Debentures wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, or transmit an Agent's Message (as defined) in
connection with a book-entry transfer, in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Letter of Transmittal, or
such facsimile, or such Agent's Message, together with
the Old Debentures and any other required documentation
to the Exchange Agent (as defined) at the address set
forth herein. By executing the Letter of Transmittal or
Agent's Message, each holder will be deemed to represent
to the Issuers that, among other things, the Exchange
Debentures acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the
person receiving such Exchange Debentures, whether or
not such person is the holder, that neither the holder
nor any such other person has any arrangement or
understanding with any person to participate in the
distribution of such Exchange Debentures and that
neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities
Act, of the Issuers. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and "--Procedures for
Tendering."
Untendered Old Debentures: Following the consummation of the Exchange Offer,
holders of Old Debentures eligible to participate but
who do not tender their Old Debentures will not have any
further exchange rights and such Old Debentures will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for
such Old Debentures could be adversely affected.
Consequences of Failure to
Exchange: The Old Debentures that are not exchanged pursuant to
the Exchange Offer will remain restricted securities.
Accordingly, such Old Debentures may be resold only (i)
to the Issuers, (ii) pursuant to Rule 144A or Rule 144
under the Securities Act or pursuant to some other
exemption under the Securities Act, (iii) outside the
United States to a foreign person pursuant to the
requirements of Rule 904 under the Securities Act, or
(iv) pursuant to an effective registration statement
under the Securities Act. See "The Exchange
Offer--Consequences of Failure to Exchange."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Shelf Registration Statement: If (i) the Issuers determine that the Exchange Offer
would violate applicable law or the applicable
interpretations of the Commission, (ii) the Exchange
Offer is not for any other reason consummated by
September 30, 1998 or (iii) the Exchange Offer has been
completed and, in the opinion of counsel for the
Placement Agents, a registration statement must be filed
and a prospectus must be delivered by the Placement
Agents in connection with any offer or sale of the
Exchange Debentures, the Issuers shall file a shelf
registration statement (the "Shelf Registration
Statement") covering the Old Debentures. The Issuers
have agreed to use their best efforts to maintain the
effectiveness of the Shelf Registration Statement until
the date which is two years from the date of issuance of
the Old Debentures.
Special Procedures for Beneficial
Owners: Any beneficial owner whose Old Debentures are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering its Old Debentures, either
make appropriate arrangements to register ownership of
the Old Debentures in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time.
Guaranteed Delivery Procedures: Holders of Old Debentures who wish to tender their Old
Debentures and whose Old Debentures are not immediately
available or who cannot deliver their Old Debentures,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date must tender their
Old Debentures according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights: Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
Acceptance of Old Debentures and
Delivery of Exchange Debentures: The Issuers will accept for exchange any and all Old
Debentures which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Debentures issued pursuant
to the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Federal Income Tax Considerations: The exchange pursuant to the Exchange Offer will not be
a taxable event for federal income tax purposes. See
"Federal Income Tax Considerations."
Use of Proceeds: There will be no cash proceeds to the Issuers from the
exchange pursuant to the Exchange Offer.
Exchange Agent: U.S. Trust Company of New York
</TABLE>
10
<PAGE>
THE EXCHANGE DEBENTURES
<TABLE>
<S> <C>
General: The form and terms of the Exchange Debentures are the
same as the form and terms of the Old Debentures (which
they replace) except that (i) the Exchange Debentures
have been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (ii) the holders of Exchange
Debentures will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for an increase in the interest
rate on the Old Debentures in certain circumstances
relating to the timing of the Exchange Offer, which
rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and Effect
of the Exchange Offer." The Exchange Debentures will
evidence the same debt as the Old Debentures and will be
entitled to the benefits of the Indenture. See
"Description of the Debentures."
Issuers: The Exchange Debentures will be the joint and several
obligations of FHGLP and FFC. Upon the consummation of
the TCI Transaction, FHGLP's obligations under the
Exchange Debentures will be assumed by New Falcon, which
will be substituted for FHGLP as an obligor under the
Exchange Debentures.
Senior Exchange Debentures:
Maturity Date: April 15, 2010.
Interest Payment Dates: Cash interest on the Senior Debentures will accrue at a
rate of 8.375% per annum and will be payable
semi-annually in arrears on April 15 and October 15 of
each year until maturity, commencing October 15, 1998.
TCI Contribution: If the TCI Contribution is not consummated on or before
June 30, 1999, the interest rate on the Senior
Debentures will thereafter increase by 0.75% per annum;
PROVIDED that such additional interest will no longer be
payable if the TCI Contribution is consummated on or
before December 31, 1999.
Senior Discount Debentures:
Maturity Date: April 15, 2010.
Accreted Value and Interest: The initial Accreted Value of the Senior Discount
Debentures will be $633.29 per $1,000 principal amount
at maturity. The Senior Discount Debentures will accrete
at an annual rate of 9.285% (computed on a semiannual
bond equivalent basis) based on the initial Accreted
Value, calculated from the Issue Date. Cash interest
will not accrue on the Senior Discount Debentures prior
to April 15, 2003; PROVIDED, HOWEVER, that at any time
prior to April 15, 2003, the Issuers may elect to
commence the accrual of cash interest on any Semiannual
Accrual Date (as defined), in which case the outstanding
principal amount at maturity of each Senior Discount
Debenture will be reduced to the Accreted Value of such
Senior Discount
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Debenture as of such Semiannual Accrual Date and cash
interest will be payable on such Senior Discount
Debenture on each interest payment date thereafter.
Commencing on April 15, 2003, cash interest on the
Senior Discount Debentures will accrue at a rate of
9.285% per annum and will be payable semiannually in
arrears on April 15 and October 15 of each year until
maturity, commencing October 15, 2003.
Original Issue Discount: Each Senior Discount Debenture is being offered at an
original issue discount for federal income tax purposes.
Thus, although cash interest is not expected to accrue
on the Senior Discount Debentures prior to April 15,
2003, original issue discount (I.E., the difference
between the stated redemption price at maturity and the
issue price of the Senior Discount Debentures) will
accrete from the issue date of the Senior Discount
Debentures until April 15, 2003 and will be includable
as interest income periodically in a holder's gross
income for federal income tax purposes in advance of
receipt of the cash payments to which the income is
attributable. See "Federal Income Tax Considera-
tions--Original Issue Discount."
TCI Contribution: If the TCI Contribution is not consummated on or before
June 30, 1999, (i) from July 1, 1999 until April 15,
2003, the Company will pay cash interest on the Senior
Discount Debentures (in addition to accretion of
principal) equal to 0.75% per annum of the then
outstanding Accreted Value of Senior Discount Debentures
and (ii) from April 15, 2003 until the maturity of the
Senior Discount Debentures, the interest rate on the
Senior Discount Debentures will increase by 0.75% per
annum; PROVIDED that such additional interest will no
longer be payable if the TCI Contribution is consummated
on or before December 31, 1999.
Additional Terms of the
Debentures:
Ranking: The Debentures will be joint and several senior
unsecured obligations of the Issuers ranking PARI PASSU
in right of payment with all other existing and future
senior unsecured obligations of the Issuers. FHGLP is a
holding company that has no material operations and
conducts substantially all of its business through
subsidiaries. As a result, FHGLP's ability to make
interest and principal payments when due to holders of
the Debentures is dependent upon receipt of sufficient
funds from FHGLP's subsidiaries. The Debentures will be
the obligations of the Issuers only, and the Issuers'
subsidiaries will not have any obligation to pay any
amounts due under the Debentures. Therefore, the
Debentures will be effectively subordinated to all
existing and future liabilities of the Issuers'
subsidiaries. As of March 31, 1998, after giving pro
forma effect to the Offering, the refinancing of the
Bank Credit Agreement with proceeds from the New Credit
Facility, the repurchase of all of the Debentures
pursuant to the Debentures Tender and the consummation
of the TCI Transaction, (i) the Issuers (excluding
indebtedness of their
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
subsidiaries) would not have had any indebtedness
outstanding other than the Debentures and (ii) the
Issuers' subsidiaries would have had $936.5 million of
indebtedness outstanding, all of which would have been
effectively senior to the Debentures. In addition,
subject to certain limitations, the Indenture permits
the Company to incur additional indebtedness that would
be effectively senior to the Debentures.
Optional Redemption: The Debentures will be redeemable, at the Issuers'
option, in whole or in part, on or after April 15, 2003,
at the redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of redemption.
In addition, at any time prior to April 15, 2001, the
Issuers may redeem up to 35% of the aggregate principal
amount or Accreted Value, as applicable, of the
Debentures with the net cash proceeds of one or more
sales by the Company of its Capital Stock (as defined)
(other than Redeemable Capital Stock (as defined)) at a
redemption price, in the case of Senior Debentures,
equal to 108.375% of the principal amount thereof and,
in the case of Senior Discount Debentures, equal to
109.285% of the Accreted Value thereof, in each case
plus accrued and unpaid interest, if any, to the date of
redemption.
Change of Control: In the event of a Change of Control, the Issuers must
commence an offer to purchase all of the Debentures then
outstanding at a purchase price equal to 101% of the
principal amount thereof in the case of Senior
Debentures, and 101% of the Accreted Value thereof in
the case of Senior Discount Debentures, in each case
plus accrued interest, if any, to the payment date.
There can be no assurance, however, that the Company
will have sufficient funds to pay the purchase price for
all of the Debentures that might be delivered by holders
in connection with a Change of Control.
Certain Covenants: The Indenture will contain certain covenants that will
restrict the ability of the Issuers and certain of their
subsidiaries to, among other things, (i) incur certain
indebtedness, (ii) make certain restricted payments,
(iii) create liens, (iv) pay dividends and make other
distributions, (v) enter into certain transactions with
affiliates or (vi) consummate certain mergers,
consolidations or transfers.
</TABLE>
For additional information concerning the Debentures, see "Description of the
Debentures."
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Set forth below is summary consolidated financial data of the Company for
each of the years in the three-year period ended December 31, 1997 and for the
three-month periods ended March 31, 1997 and 1998. This data should be read in
conjunction with the Company's historical consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The summary consolidated financial data for the three-month periods
ended March 31, 1997 and 1998 have been derived from unaudited consolidated
financial statements of the Company, which in the opinion of management include
all adjustments (consisting of normal recurring adjustments) which are necessary
to present fairly the results of operations and financial position for the
periods and at the date presented. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year. The unaudited FHGLP pro forma data give effect to
(i) the Offering, (ii) the refinancing of the Bank Credit Agreement with
proceeds from the New Credit Facility, (iii) the repurchase of all of the Notes
pursuant to both the Notes Tender and the Notes Redemption, and (iv) the
acquisition (the "Falcon Classic Acquisition") of certain cable television
systems from Falcon Classic Cable Income Properties, L.P. ("Falcon Classic"), as
if such transactions had been consummated on January 1, 1997 in the case of the
operations statement data and other operating data and on March 31, 1998 in the
case of the balance sheet data. The unaudited New Falcon pro forma data give
effect to all of the transactions described in the preceding sentence and to the
TCI Transaction, including the consolidation of systems currently owned by
Falcon Video Communications, L.P. ("Falcon Video"), as if such transactions had
been consummated on January 1, 1997 in the case of the operations statement data
and other operating data and on March 31, 1998 in the case of the balance sheet
data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
FHGLP NEW FALCON
PRO FORMA PRO FORMA
1995(1) 1996(1) 1997 1997(2) 1997(2)
----------- ------------ ---------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT
DATA
Revenues.............. $ 151,208 $ 217,320 $ 255,886 $ 274,894 $ 424,994
Costs and expenses.... (71,652) (97,180) (122,080) (132,194) (215,719)
Depreciation and
amortization........ (54,386) (100,415) (118,856) (135,054) (224,617)
----------- ------------ ---------- ------------ ------------
Operating income
(loss).............. 25,170 19,725 14,950 7,646 (15,342)
Interest expense,
net(3).............. (57,777) (71,602) (79,137) (85,894) (119,925)
Equity in net income
(loss) of investee
partnerships........ (5,705) (44) 443 447 447
Other income, net..... 13,077(4) 814 885 674 1,950
Income tax benefit.... -- 1,122 2,021 2,021 2,021
----------- ------------ ---------- ------------ ------------
Loss before
extraordinary
item................ $ (25,235) $ (49,985) $ (60,838) $ (75,106)(5) $(130,849)(5)
----------- ------------ ---------- ------------ ------------
----------- ------------ ---------- ------------ ------------
OTHER OPERATING DATA
EBITDA(6)............. $ 79,556 $ 120,140 $ 133,806 $ 142,700 $ 209,275
EBITDA margin......... 52.6% 55.3% 52.3% 51.9% 49.2%
Total debt to
EBITDA.............. 7.01x(7) 6.62x(7) 6.81x 7.22x 7.50x
Net cash provided by
operating
activities.......... $ 43,162 $ 90,631 $ 79,537 $ 84,273 $ 140,126
Net cash used in
investing
activities.......... (22,674) (284,247) (76,287) (81,307) (99,512)
Net cash provided by
(used in) financing
activities.......... (15,906) 192,199 (2,966) (2,966) (40,614)
Capital
expenditures(8)..... 37,149 57,668 76,323 81,155 99,488
Deficiency of earnings
to fixed
charges(9).......... (25,254) (51,252) (63,302) (77,574) (133,317)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
NEW
FHGLP FALCON
PRO FORMA PRO FORMA
1997 1998(11) 1998(2) 1998(2)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT
DATA
Revenues.............. $ 63,984 $ 64,557 $ 68,136 $105,547
Costs and expenses.... (29,474) (31,243) (33,146) (55,412)
Depreciation and
amortization........ (29,793) (31,079) (33,900) (56,291)
--------- --------- --------- ---------
Operating income
(loss).............. 4,717 2,235 1,117 (6,156)
Interest expense,
net(3).............. (20,384) (20,487) (21,408) (30,433)
Equity in net income
(loss) of investee
partnerships........ (71) (248) (226) (226)
Other income, net..... (163) (774) (1,110) (1,051)
Income tax benefit.... 566 365 365 365
--------- --------- --------- ---------
Loss before
extraordinary
item................ $ (15,335) $(18,909) $(21,262) $(37,501)
--------- --------- --------- ---------
--------- --------- --------- ---------
OTHER OPERATING DATA
EBITDA(6)............. $ 34,510 $ 33,314 $ 35,017 $ 50,135
EBITDA margin......... 53.9% 51.6% 51.4% 47.5%
Total debt to
EBITDA.............. 6.25x 7.51x 7.48x 7.91x
Net cash provided by
operating
activities.......... $ 15,322 $ 2,729 $ 3,453 $ 14,479
Net cash used in
investing
activities.......... (10,941) (95,318) (20,029) (24,724)
Net cash provided by
(used in) financing
activities.......... (7,155) 89,834 16,576 10,245
Capital
expenditures(8)..... 10,624 18,021 19,508 24,111
Deficiency of earnings
to fixed
charges(9).......... (15,940) (19,319) (21,672) (37,911)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
AS OF DECEMBER 31, 1997 -----------------------------------------
------------------------------- FHGLP NEW FALCON
1995(1) 1996(1) 1997 ACTUAL PRO FORMA(2) PRO FORMA(2)
--------- --------- --------- ----------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............ $ 15,050 $ 13,633 $ 13,917 $ 11,162 $ 5,000 $ 5,000
Total assets......................... 585,258 774,323 740,358 800,326 819,772 1,457,972
Total debt........................... 669,019 885,786 911,221 1,001,054 1,047,715 1,587,157
Redeemable partners' equity(10)...... 271,902 271,902 171,373 171,373 171,373 75,000
Partners' deficit.................... (411,681) (456,499) (416,755) (435,664) (466,778) (281,358)
</TABLE>
- ------------------------------
(1) The December 31, 1995 consolidated balance sheet data include the assets
and liabilities of Falcon First, Inc. ("Falcon First"), which were acquired
on December 28, 1995. The consolidated statement of operations data for the
year ended December 31, 1995 exclude 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, FHGLP acquired
the assets of Falcon Cable Systems Company ("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 FHGLP 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 FHGLP from FCSC in 1995 were $2.6 million and $2.0
million, respectively.
(2) The unaudited pro forma financial statements and operating data may not be
indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the
periods indicated or the results that may be obtained in the future. The
unaudited pro forma financial and operating data presented should be read
in conjunction with the audited historical financial statements and related
notes thereto of FHGLP and the TCI Systems and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. See "Pro Forma Condensed Combined Financial
Data."
(3) Interest expense, net includes payment-in-kind interest expense amounting
to $27.1 million, $26.6 million and $20.4 million for the years ended
December 31, 1995, 1996 and 1997, respectively, and $7.0 million for the
three months ended March 31, 1997. There was no payment-in-kind interest
expense for the three months ended March 31, 1998. See Note 7 to FHGLP's
consolidated financial statements.
(4) Other income (expense), net in 1995 includes a gain on sale of marketable
securities ($13.3 million).
(5) The pro forma operations statement data do not reflect the impact of
certain non-recurring expenses associated with the transactions. The FHGLP
pro forma operations statement data do not include the write-off, as an
extraordinary charge, of deferred loan costs of $11.7 and $11.3 million,
respectively, at December 31, 1997 and March 31, 1998, related to the
extinguishment of the Bank Credit Agreement and the repurchase of the
Notes, as well as an approximate $19.8 million in premiums and costs
related to the repurchase and redemption of the Notes. Additionally, the
New Falcon pro forma operations statement data do not include a one-time
charge of approximately $6.6 million in compensation expense related to the
payment to certain FHGLP employees of amounts due under the Incentive Plan
(as defined), as required by the Contribution Agreement. The pro forma
balance sheet data reflect the pro forma effect of these adjustments.
(6) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry,
FHGLP 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 FHGLP use EBITDA-derived calculations as a measure of
financial performance. EBITDA is not a measurement determined under
generally accepted accounting principles ("GAAP") and does not represent
cash generated from operating activities in accordance with GAAP. EBITDA
should not be considered by the reader as an alternative to net income as
an indicator of FHGLP's financial performance or as an alternative to cash
flows as a measure of liquidity. In addition, the Company's definition of
EBITDA may not be identical to similarly titled measures used by other
companies.
(7) 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 resulting in
a debt to EBITDA historical ratio of 8.41x compared to a pro forma ratio of
7.01x, 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
resulting in a total debt to EBITDA historical ratio of 7.37x compared to a
pro forma ratio of 6.62x.
(8) Excluding acquisitions of cable television systems.
(9) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges, as adjusted for earnings and
distributions of less than 50% owned companies accounted for under the
equity method. Fixed charges are defined as the sum of (i) total interest
costs (including an estimated interest component of rental expenses) and
(ii) amortization of debt discount and expense.
(10) FHGLP's Third Amended and Restated Partnership Agreement, dated December
28, 1995 (the "Existing FHGLP Partnership Agreement"), provides that
certain limited partners of FHGLP have various liquidity rights, which
will be deferred, modified and reduced upon consummation of the TCI
Transaction. See "Risk Factors--Obligations of FHGLP to Redeem Limited
Partnership Interests," "Description of the Partnership Agreements" and
Note 2 to FHGLP's consolidated financial statements.
(11) In March, 1998, FHGLP acquired substantially all of the assets of Falcon
Classic and, accordingly, the results of these acquired systems have been
included from the date of their acquisition. Management fees and
reimbursed expenses received during the three months ended March 31, 1998
by FHGLP from Falcon Classic amounted to $190,000 and $114,000,
respectively, and are included in the unaudited statement of operations
data. The amounts attributable to management fees and reimbursed expenses
received by FHGLP from Falcon Classic in 1997 were $1.3 million and $1.0
million, respectively.
15
<PAGE>
SUMMARY SUBSCRIBER DATA
The following table sets forth certain operating statistics for (i) the
Owned Systems on a historical basis, (ii) the Owned Systems held by FHGLP after
giving pro forma effect to the Falcon Classic Acquisition and (iii) the Owned
Systems to be held by New Falcon after giving pro forma effect to the Falcon
Classic Acquisition and the TCI Transaction, including the consolidation of
systems currently owned by Falcon Video. Except as described in the preceding
sentence with respect to giving pro forma effect to the Falcon Classic
Acquisition and the consolidation of the Falcon Video systems, the statistics in
the following table do not include the Affiliated Systems and the Enstar
Systems. Please refer to "Business--Overview of the Falcon Systems" for the
historical operating statistics of the Affiliated Systems and the Enstar
Systems.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------- FHGLP NEW FALCON
FHGLP NEW FALCON PRO FORMA PRO FORMA
PRO FORMA PRO FORMA MARCH 31, MARCH 31, MARCH 31,
1995(1) 1996(2) 1997 1997(8) 1997 1998(9) 1998(8) 1998
----------- ----------- --------- ----------- ----------- ----------- ----------- -----------
(AT END OF PERIOD, EXCEPT AVERAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Homes passed(3)........ 691,941 924,030 937,786 1,013,593 1,567,651 1,007,614 1,012,733 1,557,685
Basic subscribers(4)... 442,166 570,708 562,984 611,968 974,772 606,937 611,127 975,000
Basic penetration(5)... 63.9% 61.8% 60.0% 60.4% 62.2% 60.2% 60.3% 62.6%
Premium service
units(6)............. 186,477 203,679 165,960 181,569 308,485 183,234 183,990 305,363
Premium
penetration(7)....... 42.2% 35.7% 29.5% 29.7% 31.6% 30.2% 30.1% 31.3%
Average monthly revenue
per basic
subscriber........... $ 32.77 $ 34.22 $ 36.67 $ 36.52 $ 35.78 $ 36.56 $ 36.51 $ 35.82
</TABLE>
- ------------------------------
(1) On December 28, 1995, the Company acquired all of 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. On July 1, 1996,
the Company 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, respectively. At December 31, 1994, the corresponding totals for
Falcon First were 113,403, 75,688 and 38,756, respectively. At July 1, 1996,
the Falcon First systems that were sold had approximately 18,957 homes
passed, 9,547 basic subscribers and 3,932 premium service units.
(2) On July 12, 1996, the Company acquired the assets of FCSC, and, as a result,
the systems of FCSC became Owned 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.
(3) Homes passed refers to estimates by the Company 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.
(4) 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.
(5) Calculated as basic subscribers as a percentage of homes passed.
(6) 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 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.
(7) Calculated as 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.
(8) Does not include the Falcon Video systems, which had approximately 69,845
basic subscribers as of December 31, 1997 and approximately 70,607 basic
subscribers as of March 31, 1998. The Falcon Video systems are currently
managed by FHGLP as part of the Affiliated Systems, and Falcon Video will
become an Owned Subsidiary of New Falcon following consummation of the TCI
Transaction.
(9) In March 1998, FHGLP acquired substantially all of the assets of Falcon
Classic. The number of homes passed, basic subscribers and premium service
units acquired, which are included in the March 31, 1998 totals, were
70,771, 45,816, and 14,206, respectively.
16
<PAGE>
RISK FACTORS
OWNERSHIP OF THE DEBENTURES INVOLVES A HIGH DEGREE OF RISK. HOLDERS OF THE
OLD DEBENTURES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE TENDERING THE
OLD DEBENTURES IN EXCHANGE FOR EXCHANGE DEBENTURES.
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES
The Company is, and will continue to be, highly leveraged. As of March 31,
1998, after giving pro forma effect to the Offering, the refinancing of the Bank
Credit Agreement with proceeds from the New Credit Facility, the repurchase of
all of the Notes pursuant to both the Notes Tender and the Notes Redemption and
the Falcon Classic Acquisition, the Company would have had approximately $1
billion of debt outstanding and a partners' deficit of $466.8 million. After
giving additional pro forma effect to the TCI Transaction, New Falcon would have
had approximately $1.6 billion of debt and a partners' deficit of $275.4
million. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, the Indenture will
allow the Company to incur additional indebtedness under certain circumstances.
See "Description of the Debentures--Covenants." The degree to which the Company
is leveraged could have important consequences to the holders of the Debentures,
including, but not limited to, the following: (i) increasing the Company's
vulnerability to adverse general economic and industry conditions; (ii)
affecting the proportion of the Company's operating cash flow required to pay
interest, principal and other amounts on indebtedness, thereby reducing the
funds available for operations; (iii) impairing the Company's ability to obtain
additional financing for future capital expenditures, acquisitions or other
general corporate purposes; and (iv) because certain of the Company's
indebtedness bears interest at variable rates, increasing the Company's
vulnerability to fluctuations in interest rates.
The Company reported net losses of $25.2 million, $50 million and $60.8
million for the years ended December 31, 1995, 1996 and 1997, respectively, and
$18.9 million for the three-month period ended March 31, 1998. Substantial
amounts of depreciation and amortization expense and interest expense totaling
$112.2 million, $172 million, and $198 million for the years ended December 31,
1995, 1996 and 1997, respectively, and $51.6 million for the three-month period
ended March 31, 1998 have contributed and will continue to contribute to the net
losses experienced by the Company.
Historically, cash generated from operating activities and borrowings has
been sufficient to fund FHGLP's debt service, working capital obligations and
capital expenditure requirements. The Company believes that it will continue to
generate cash and obtain financing sufficient to meet such requirements.
However, if the Company were unable to meet such requirements, the Company would
have to consider refinancing its indebtedness or obtaining new financing.
Although in the past the Company has been able both to refinance its
indebtedness and to obtain new financing, there can be no assurance that the
Company will be able to do so in the future or that, if the Company is able to
do so, the terms available will be acceptable to the Company. In the event that
the Company were unable to refinance its indebtedness or obtain new financing
under these circumstances, the Company would likely have to consider various
options, including the sale of certain assets to meet its required debt service,
reduction of planned capital expenditures or negotiation with lenders to
restructure applicable indebtedness. See "Selected Consolidated Financial Data,"
"Pro Forma Condensed Combined Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON RECEIPT OF FUNDS FROM OPERATING SUBSIDIARIES TO SERVICE
DEBENTURES; STRUCTURAL SUBORDINATION
As a holding company, FHGLP does not hold substantial assets other than its
direct or indirect investments in and advances to its operating subsidiaries
(the "Owned Subsidiaries"). As a result, FHGLP's ability to make interest and
principal payments when due to holders of the Debentures is dependent upon the
receipt of sufficient funds from the Owned Subsidiaries.
17
<PAGE>
Immediately following the consummation of the TCI Transaction, New Falcon
will contribute substantially all of its assets to New Falcon II (excluding the
capital stock of FFC), subject to certain liabilities and indebtedness
(estimated to be approximately $970.9 million in the aggregate as of March 31,
1998) to be assumed by New Falcon II, including the approximately $34.4 million
aggregate principal amount Notes that remain outstanding after the Notes Tender
and any indebtedness outstanding under the New Credit Facility, but excluding
the Debentures. Thus, New Falcon II will be substituted as an obligor under the
Notes (which the Company has agreed to redeem prior to October 15, 1998) and
will become the sole borrower under the New Credit Facility. New Falcon will be
substituted as an obligor under the Debentures and FFC will continue to be an
obligor under the Debentures as a wholly owned subsidiary of New Falcon. In
addition, the TCI Systems contributed to New Falcon in the TCI Transaction will
be contributed by New Falcon II to the Owned Subsidiaries. As a result, New
Falcon's ability to make interest and principal payments when due on the
Debentures will be dependent on the receipt of sufficient funds from New Falcon
II, which in turn will be dependent upon distributions from the Owned
Subsidiaries.
RESTRICTIONS IMPOSED BY NEW CREDIT FACILITY ON ABILITY OF SUBSIDIARIES TO MAKE
DISTRIBUTIONS
The New Credit Facility imposes substantial restrictions, including the
satisfaction of certain financial conditions and the absence of an event of
default, on the ability of the Owned Subsidiaries to make distributions to
FHGLP. In addition, the New Credit Facility contains similar restrictions with
respect to the ability of New Falcon II to make distributions to New Falcon. The
ability of the Company or New Falcon II, as the case may be, to comply with such
conditions may be affected by events that are beyond their control. Expected
increases in the funding requirements of FHGLP combined with limitations on its
sources of cash may create liquidity issues for FHGLP in the future. If the
maturity of loans under the New Credit Facility were to be accelerated, all
indebtedness outstanding thereunder would be required to be paid in full before
the Owned Subsidiaries would be permitted to distribute any assets or cash to
FHGLP or before New Falcon II would be permitted to make such distributions to
New Falcon. Additionally, the Debentures will not be guaranteed by any of the
subsidiaries of the Company or New Falcon II and will therefore be effectively
subordinated to all indebtedness and other liabilities of such subsidiaries.
Furthermore, any right of FHGLP or New Falcon, as the case may be, to receive
assets of any of its subsidiaries upon such subsidiary's liquidation or
reorganization will be effectively subordinated to the claims of that
subsidiary's creditors, except to the extent, if any, that FHGLP or New Falcon,
as the case may be, is recognized as a creditor of such subsidiary, in which
case the claims of FHGLP or New Falcon, as the case may be, would still be
subordinate to the claims of such creditors who hold security in the assets of
such subsidiary to the extent of such assets and to the claims of such creditors
who hold indebtedness of such subsidiary senior to that held by FHGLP or New
Falcon, as the case may be. See "Description of Certain Indebtedness."
CONDITIONS OF CLOSING THE TCI TRANSACTION
The consummation of the TCI Transaction is 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. In addition, if the stay of the cable multiple ownership rules
adopted by the Federal Communications Commission (the "FCC") is lifted, and the
court decision finding such rules unconstitutional is reversed, and if, as a
result of the foregoing, TCI or New Falcon would be in violation of the cable
multiple ownership rules, the TCI Transaction may require certain changes in the
relationship between FHGLP and TCI or the closing of the TCI Transaction may be
delayed or otherwise materially adversely affected. See "Legislation and
Regulation--Ownership." Each of TCI and FHGLP also has certain rights to
terminate the Contribution Agreement if the closing of the TCI Transaction has
not occurred by September 30, 1998, unless the reason for not closing is due to
failure to obtain certain franchise consents, in which case the right to
terminate does not arise until December 31, 1998. There can be no assurances
that such closing conditions will be satisfied or that the TCI Transaction will
be completed. This Exchange Offer is not conditioned on the consummation of the
TCI Transaction, nor will
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either Issuer be under any obligation to repurchase any Debentures if the TCI
Transaction is not completed. If the TCI Transaction is not consummated, FHGLP
would remain an obligor under the Debentures, and the existing liquidity rights
of certain non-management limited partners of FHGLP would remain in full effect
in accordance with the terms of the Existing FHGLP Partnership Agreement. 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 funds to meet such obligations on
terms acceptable to FHGLP, or at all. See "--Obligations of FHGLP to Redeem
Limited Partnership Interests."
OBLIGATIONS OF FHGLP TO REDEEM LIMITED PARTNERSHIP INTERESTS
The Existing FHGLP Partnership Agreement contains provisions that may
require FHGLP to purchase substantially all of the limited partnership interests
held by certain non-management limited partners. Redemption of such limited
partner interests is at the option of the holders, subject to certain timing
requirements set forth in the Existing FHGLP Partnership Agreement. In
contemplation of the TCI Transaction, by agreement of the non-management limited
partners, the dates on which FHGLP may be obligated to purchase their interests
pursuant to the liquidity rights were tolled in accordance with the Contribution
Agreement. The new dates are determined by adding to the original dates 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 is not consummated and that the Contribution Agreement is
not terminated prior to December 31, 1998, FHGLP may be required to purchase
limited partnership interests constituting approximately 60% of the common
equity of FHGLP during the period of January 2000 to October 2000. 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 redemption values of all partnership interests (other than FHGLP's Class C
preferred partnership interests, which had a liquidation value of $51.4 million
at December 31, 1997) 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 estimated
redemption value of such non-preferred partnership interests at March 31, 1998
was approximately $120 million, based upon preliminary estimates by management
which are subject to change. For more details regarding rights and value of
interests held by various groups of FHGLP's limited partners, please refer to
Note 2 of FHGLP's consolidated financial statements for the year ended December
31, 1997. The actual redemption amount will be determined as provided in the
Existing FHGLP Partnership Agreement and may be greater than or less than
management's estimate, and such variations could be significant. Factors which
could cause significant variations in the redemption amount include without
limitation, material changes in the business or operations of FHGLP and
unforseen changes in the economic or regulatory environment.
Upon consummation of the TCI Transaction, the Existing FHGLP Partnership
Agreement will be terminated, and the existing liquidity rights of the
non-management partners will expire and be replaced by certain new put rights
provided to the non-management limited partners in the New FHGLP Partnership
Agreement. Under the New FHGLP Partnership Agreement (to which New Falcon will
be a party), New Falcon may be required to purchase limited partnership
interests of the non-management partners in FHGLP constituting approximately 48%
of the partnership interests of FHGLP, and these put rights become exercisable
eight years after the consummation of the TCI Transaction. In addition to these
liquidity rights, the non-management limited partners have certain rights to
require incorporation of FHGLP for the purpose of effecting an initial public
offering.
Certain of the Company's debt agreements (including the New Credit Facility)
restrict the Company's ability to (i) make distributions to fund the purchase of
the limited partnership interests pursuant to the liquidity provisions of the
Existing FHGLP Partnership Agreement, (ii) incur indebtedness or issue debt
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securities in connection with such purchase, and (iii) sell a substantial
portion of its assets. The Indenture for the Debentures does not restrict the
Company's ability to make distributions to fund the purchase of such limited
partnership interests of the non-management partners of FHGLP so long as the
Company is otherwise in compliance with the covenant in the Indenture relating
to the incurrence of indebtedness. See "Description of the Debentures." 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 funds to meet such obligations on
terms acceptable to FHGLP, or at all. If FHGLP fails to purchase certain
partnership interests within a specified period after FHGLP's purchase
obligations arise, absent an alternative arrangement with the partners, FHGLP
may be required to liquidate. With respect to the liquidity rights under the New
FHGLP Partnership Agreement, certain of the Company's loan agreements may
restrict the ability of FHGLP or New Falcon to obtain funds to satisfy such
liquidity rights, and if FHGLP or New Falcon, as the case may be, fails to
satisfy such rights within a specified period, absent an alternative arrangement
with the partners, FHGLP or New Falcon, as the case may be, may, among other
things, be subject to damages or be required to liquidate. See "Description of
the Partnership Agreements--Existing FHGLP Partnership Agreement," "--New FHGLP
Partnership Agreement," "Description of Certain Indebtedness--11% Senior
Subordinated Notes Due 2003" and "Description of the Debentures."
In addition to the foregoing liquidity rights relating to FHGLP, the New
Falcon Partnership Agreement provides that, at any time after the seventh
anniversary of the closing of the TCI Transaction (other than at certain times
specified in such partnership agreement), either TCI or FHGLP has the right to
offer to sell to the other the offering partner's partnership interest in New
Falcon. Under certain circumstances in connection with such offer, New Falcon
can be required to purchase partnership interests of TCI or FHGLP. See
"Description of the Partnership Agreements--New Falcon Partnership
Agreement--Partner Liquidity--Buy/Sell Rights."
SIGNIFICANT COMPETITION IN THE CABLE TELEVISION INDUSTRY
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment, such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, online computer services and
home video products, including videotape cassette recorders. Because the
Company's franchises are generally non-exclusive, there is the potential for
competition with the Company's systems from other operators of cable television
systems, including systems operated by local governmental authorities, and from
other distribution systems capable of delivering programming to homes or
businesses, including direct broadcast satellite ("DBS") systems and
multichannel, multipoint distribution service ("wireless cable") systems. In
recent years, there has been significant national growth in the number of
subscribers to DBS services, and such growth would be assisted if one or more
DBS providers is successful in delivering local broadcast signals. Legislation
has recently been introduced in Congress to amend the Copyright Act to authorize
carriage of local broadcast signals by DBS providers. Subscribership to wireless
cable can be expected to grow due to the allocation of additional spectrum in
the 28 GHz range for a new multichannel wireless video service. Additionally,
recent changes in federal law and recent administrative and judicial decisions
have removed many of the restrictions that historically have limited entry into
the cable television business by potential competitors such as telephone
companies, registered utility holding companies and their subsidiaries. Such
developments will enable local telephone companies to provide a wide variety of
video services in the telephone company's own service area which will be
directly competitive with services provided by cable television systems. Other
new technologies, including Internet-based services, may also become competitive
with services that cable operators can offer.
Many of the Company's potential competitors have substantially greater
resources than the Company, and the Company cannot predict the extent to which
competition will materialize in its franchise areas from other cable television
operators, other distribution systems for delivering video programming and other
broadband telecommunications services to the home, or from other potential
competitors, or, if such
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competition materializes, the extent of its effect on the Company. See
"Business--Competition" and "Legislation and Regulation."
NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
The Company's business is dependent upon the retention and renewal of its local
franchises. A franchise is generally granted for a fixed term ranging from five
to 15 years, but in many cases is terminable if the franchisee fails to comply
with the material provisions thereof. The Company's franchises typically impose
conditions relating to the use and operation of the cable television system,
including requirements relating to the payment of fees, system bandwidth
capacity, customer service requirements, franchise renewal and termination. The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") prohibits franchising authorities from granting exclusive cable
television franchises and from unreasonably refusing to award additional
competitive franchises; it also permits municipal authorities to operate cable
television systems in their communities without franchises. The Cable
Communications Policy Act of 1984 (the "1984 Cable Act" and collectively with
the 1992 Cable Act, the "Cable Acts") 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. Although the Company believes that it generally has good relationships
with its franchise authorities, no assurances can be given that the Company will
be able to retain or renew such franchises or that the terms of any such
renewals will be on terms as favorable to the Company as the Company's existing
franchises. The non-renewal or termination of franchises relating to a
significant portion of the Company's subscribers could have a material adverse
effect on the Company's results of operations. See "Business--Franchises."
LACK OF AVAILABLE CHANNEL CAPACITY FOR NEW CHANNELS OR EXPANDED SERVICES
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. The
Company 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 Company'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 Company's systems are
significantly less technically advanced than had been expected prior to the
implementation of re-regulation. The Company believes that the delays in
upgrading many of its systems will, under present market conditions, most likely
have an adverse effect on the value of the systems compared to systems that have
been rebuilt to a higher technical standard.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable Acts, both
of which amended the Communications Act of 1934 (as amended, the "Communications
Act"), established a national policy to guide the development and regulation of
cable television systems. The Communications Act was recently substantially
amended by the Telecommunications Act of 1996 (the "1996 Telecom Act").
Principal responsibility for implementing the policies of the Cable Acts and the
1996 Telecom Act has been allocated between the FCC and state or local
regulatory authorities. 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
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effect that ongoing or future developments might have on the cable
communications industry or on the operations of the Company.
FEDERAL LAW AND REGULATION
The 1992 Cable Act and the FCC's rules implementing that Act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established, among other things, (i) rate regulations, (ii)
mandatory carriage and retransmission consent requirements that require a cable
system under certain circumstances to carry a local broadcast station or to
obtain consent to carry a local or distant broadcast station, (iii) rules for
franchise renewals and transfers and (iv) other requirements covering a variety
of operational areas such as equal employment opportunity and technical
standards and customer service requirements. In addition, the 1996 Telecom Act
eliminated certain barriers to entry in the telecommunications and cable
industries, declaring that state or local laws or regulations may not prohibit
or have the effect of prohibiting the ability of an entity, such as a cable
operator, to provide interstate or intrastate telecommunications services. The
1996 Telecom Act also allows telephone companies to compete directly with cable
operators by repealing the previous telephone company-cable cross-ownership ban
and replacing the FCC's previous video dialtone regulations with an "open video
system" ("OVS") plan by which local exchange carriers can provide cable service
in their telephone service areas.
The 1996 Telecom Act deregulates rates for certain cable programming
services tiers ("CPSTs") in 1999 and, for certain small cable operators,
immediately eliminates rate regulation of CPSTs, and, in certain circumstances,
basic services and equipment. The FCC has developed regulations to implement
these provisions of the 1996 Telecom Act. Because cable service rate increases
have continued to outpace inflation under the FCC's existing regulations, the
Company expects Congress and the FCC to explore additional methods of regulating
cable services rate increases, including deferral or repeal of the March 31,
1999 sunset of CPST rate regulation. The Company is currently unable to predict
the ultimate effect of the 1992 Cable Act, the 1996 Telecom Act or the FCC's
implementing regulations, future Congressional action, or the litigation
challenging various aspects of this federal legislation and the FCC's
regulations implementing the legislation. However, any further limitation on the
ability of the Company to raise service rates could have an adverse effect on
revenues and cash flow.
STATE AND LOCAL REGULATION
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
systems to the jurisdiction of centralized state governmental agencies. To date,
Nevada and New York are the only states in which the Company currently operates
that have enacted some form of regulation at the state level. Management cannot
predict whether any of the states in which it currently operates will engage in
such regulation in the future. See "Legislation and Regulation."
RELIANCE ON KEY PERSONNEL; MANAGEMENT CONFLICTS
Falcon's success is partially dependent upon the continued availability of
the services of certain key individuals, including Marc B. Nathanson, Chairman
of the Board of Directors and Chief Executive Officer of Falcon Holding Group,
Inc., the general partner of FHGLP ("FHGI" and, together with its predecessors,
"Falcon"), and Frank J. Intiso, President and Chief Operating Officer of FHGI.
The Company does not have an employment contract with any of its executive
officers. In addition, Mr. Nathanson serves as Chief Executive Officer of Falcon
International Communications LLC ("FIC"), which position could occupy up to
approximately 20% of his time.
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SIGNIFICANT CAPITAL EXPENDITURES
The Company intends to upgrade a significant portion of its cable television
systems over the next several years. Management's current plan calls for the
expenditure of approximately $101 million in 1998, including approximately $68
million to rebuild and upgrade certain of the Owned Systems (exclusive of any
capital expenditures related to the TCI Systems). The Company's level of capital
expenditures is presently expected to remain at or above the 1998 level for the
foreseeable future. The Company's inability to upgrade its cable television
systems could adversely affect its operations and competitive position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business."
ABILITY TO PURCHASE DEBENTURES UPON A CHANGE OF CONTROL
If a Change of Control Offer (as defined) is made, there can be no assurance
that the Company will have sufficient funds to pay the purchase price for all of
the Debentures that might be delivered by holders seeking to accept the Change
of Control Offer. In the event that a Change of Control Offer occurs at a time
when the Company does not have sufficient funds available to repurchase the
Debentures or at a time when the Company is prohibited from repurchasing the
Debentures under the terms of other indebtedness of the Company (and the Company
is unable either to obtain the consent of holders of such other indebtedness or
to repay such other indebtedness), an Event of Default would occur under the
Indenture. This provision may not, however, afford holders of the Debentures
protection in the event of certain highly leveraged transactions. Furthermore,
the New Credit Facility includes "change of control" provisions that permit the
lenders thereunder to accelerate the repayment of indebtedness thereunder. Any
acceleration of the obligations of the Company under the New Credit Facility
could materially and adversely affect the ability of the Company to effect a
purchase of the Debentures upon a Change of Control. In addition, the existence
of a holder's right to require the Company to repurchase its Debentures upon the
occurrence of a Change of Control may deter a third party from acquiring the
Company in a transaction which would constitute a Change of Control. See
"Description of Certain Indebtedness" and "Description of the Debentures."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of the
holders of Debentures to require the Company to repurchase such Debentures as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of the Company and its subsidiaries to another party may be
uncertain. See "Description of the Debentures--Certain Definitions."
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The Senior Discount Debentures will be issued at a substantial original
issue discount from their principal amount at maturity. Consequently, holders of
the Senior Discount Debentures will be required to include amounts in their
gross income for federal income tax purposes in advance of receipt of the cash
payments to which the income is attributable. See "Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the holders of the Senior Discount Debentures resulting from the
purchase, ownership or disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of the
Senior Discount Debentures upon the occurrence of an Event of Default, holders
of the Senior Discount Debentures may be entitled to recover only the amount
which may be declared due and payable pursuant to the Indenture, which could be
less than the principal amount at maturity of such Senior Discount Debentures.
See "Description of the Debentures--Events of Default."
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If a bankruptcy case is commenced by or against the Issuers under the United
States Bankruptcy Code (the "Bankruptcy Code"), the claim of a holder of Senior
Discount Debentures with respect to the principal amount thereof may be limited
to an amount equal to the sum of (i) the issue price of the Senior Discount
Debentures and (ii) that portion of the original issue discount (as determined
on the basis of such issue price) which is not deemed to constitute "unmatured
interest" for purposes of the Bankruptcy Code. Accordingly, under such
circumstances, even if sufficient funds are available, holders of Senior
Discount Debentures may receive a lesser amount than they may otherwise be
entitled to under the express terms of the Indenture. In addition, the same
rules as those used for the calculation of original issue discount under federal
income tax law could apply in a bankruptcy to determine the claim of a holder of
Senior Discount Debenture. Furthermore, a holder of Senior Discount Debentures
might be required to recognize gain or loss in the event of a distribution
related to such a bankruptcy case. See "Federal Income Tax Considerations."
NOMINAL ASSETS OF CO-OBLIGOR
FFC is a newly created California corporation formed solely for the purpose
of serving as a co-obligor under the Debentures. FFC is wholly owned by FHGLP,
has nominal assets and has no operations. Holders of the Debentures should not
expect FFC to participate in servicing the principal, interest, premium, if any,
or any other payment obligations on the Debentures.
LACK OF PUBLIC MARKET FOR THE DEBENTURES
The Old Debentures have not been registered under the Securities Act or
under the securities laws of any state and may not be resold unless the
Debentures are subsequently registered or an exemption from the registration
requirements of the Securities Act and applicable state securities laws is
available. The Exchange Debentures will be registered under the Securities Act,
but will constitute a new issue of securities with no established trading
market, and there can be no assurance as to (i) the liquidity of any such market
that may develop, (ii) the ability of holders of Exchange Debentures to sell
their Debentures or (iii) the price at which the holders of Exchange Debentures
would be able to sell their Debentures. If such a market were to exist, the
Exchange Debentures could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar debentures and the financial
performance of the Company.
The Debentures are designated for trading among qualified institutional
buyers in the PORTAL market. The Company has been advised by the Placement
Agents that they presently intend to make a market in the Debentures. However,
the Placement Agents are not obligated to do so, and any market-making activity
with respect to the Debentures may be discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and may be limited during the Exchange Offer or the pendency of
an applicable shelf registration statement. There can be no assurance that an
active trading market will exist for the Debentures or that such trading market
will be liquid.
CONSEQUENCES OF EXCHANGING OR FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties (including EXXON CAPITAL
HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO.
INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC
No-Action Letter (July 2, 1993)), the Issuers believe that Exchange Debentures
issued pursuant to the Exchange Offer in exchange for Old Debentures may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Exchange Debentures are acquired in the ordinary course of
such holder's business and that at the time of the consummation of the Exchange
Offer such holder has no
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arrangement or understanding with any person to participate in the distribution
of such Exchange Debentures.
Any Participating Broker-Dealer that acquired Old Debentures for its own
account may be a statutory underwriter. Each Participating Broker-Dealer that
receives Exchange Debentures for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Debentures. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by any person subject to the prospectus delivery
requirements of the Securities Act (other than an Excluded Participating Broker
Dealer). See "Plan of Distribution."
Any holder who is an "affiliate" of the Issuers (within the meaning of Rule
405 under the Securities Act), who does not acquire the Exchange Debentures in
the ordinary course of business or who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Debentures could not
rely on the position of the staff of the Commission enunciated in the
above-mentioned no-action letters and, in the absence of an exemption therefrom,
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Failure to comply with
such requirements in such instance may result in such holder incurring liability
under the Securities Act for which the holder is not indemnified by the Issuers.
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the Exchange Debentures prior to
offering or selling such Exchange Debentures. Upon consummation of the Exchange
Offer, holders that were not prohibited from participating in the Exchange Offer
and did not tender their Old Debentures will not have any registration rights
under the Registration Rights Agreement with respect to such nontendered Old
Debentures, and accordingly, such Old Debentures will continue to be subject to
the restrictions on transfer contained in the legend thereon. In general, Old
Debentures may only be offered or sold pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other exemption under the Securities Act
and applicable state securities laws or pursuant to an effective registration
statement under the Securities Act. See "The Exchange Offer--Consequences of
Failure to Exchange."
Issuance of the Exchange Debentures in exchange for the Old Debentures
pursuant to the Exchange Offer will be made only after a timely receipt by the
Issuers of such Old Debentures, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Old
Debentures desiring to tender such Old Debentures in exchange for Exchange
Debentures should allow sufficient time to ensure timely delivery. The Issuers
are under no duty to give notification of defects or irregularities with respect
to the tenders of Old Debentures for exchange. Old Debentures that are not
tendered or are tendered but not accepted will, following the consummation of
the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof, and, upon consummation of the Exchange Offer, certain
registration rights with respect to the Debentures under the Registration Rights
Agreement will terminate. In addition, any holder of Old Debentures who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Debentures may be deemed to have received restricted securities, and if
so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Debentures for its own account in
exchange for Old Debentures, where such Old Debentures were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Debentures. See "Plan of Distribution." To the
extent that Old Debentures are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Debentures could
be adversely affected. See "The Exchange Offer."
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THE TCI TRANSACTION
Pursuant to the Contribution and Purchase Agreement, dated as of December
30, 1997, as amended (the "Contribution Agreement"), FHGLP, TCI, the existing
partners of FHGLP and the investors in Falcon Video have agreed to consolidate
under the ownership and control of New Falcon, a holding company owned by FHGLP
and TCI, substantially all of the Falcon Systems and all of the TCI Systems. As
a result of the TCI Transaction, New Falcon will own systems that served
approximately 975,000 basic subscribers in 25 states as of March 31, 1998. New
Falcon will also manage the Enstar Systems, which served approximately 95,000
basic subscribers as of March 31, 1998. As such, New Falcon will own or manage
systems that served approximately 1,070,000 basic subscribers in 26 states as of
March 31, 1998. The TCI Systems will be consolidated into the Owned
Subsidiaries. As used in this Prospectus, the "TCI Transaction" refers
individually and collectively, as the context may require, to the transactions
contemplated by the Contribution Agreement, as it may be amended, modified or
supplemented. See "Business-- Overview of the Falcon Systems" and "--Overview of
the TCI Systems."
FHGLP will own approximately 53% of the equity of New Falcon and will serve
as the managing general partner of New Falcon. TCI will own approximately 47% of
the equity of New Falcon. The respective ownership percentages of FHGLP and TCI
in New Falcon are subject to possible adjustment pursuant to the Contribution
Agreement. The actual ownership percentages of FHGLP and TCI will be based on
the relative net fair market value as of closing of the capital contributions to
be made by FHGLP and TCI to New Falcon. The values of the contributed Falcon
Systems and the TCI Systems have been agreed to and are specified in the
Contribution Agreement. To calculate the value of each partner's contribution,
the value of its systems will be adjusted to reflect additional current assets
to be contributed to New Falcon, the amount of certain capital expenditures made
by the partner prior to the contribution, and the amount of liabilities to be
assumed by New Falcon. A partner may also be required to contribute cash to New
Falcon to offset any diminution in the value of its contributed systems from
certain causes (such as casualty losses or certain undisclosed liabilities), but
these contributions will not result in an adjustment to the partners' percentage
interests.
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, Falcon and its senior management will continue to manage the business
and day-to-day operations of New Falcon. For additional information regarding
the governance and management of New Falcon following consummation of the TCI
Transaction, see "Description of the Partnership Agreements--New Falcon
Partnership Agreement."
The Company expects to benefit substantially from its partnership with TCI,
one of the leading cable television operators in the world. The Company expects
that it will derive numerous operational synergies from its partnership with
TCI, including increased concentration of cable systems, purchasing discounts
and other economies arising from more streamlined management of Company assets
and those assets contributed by TCI. The Company also expects that its
partnership with TCI may increase the Company's access to and recognition in the
capital markets. Furthermore, the Company expects to benefit from access to
TCI's substantial resources in the areas of technical and engineering research.
The Company believes that its partnership with TCI will result in increased
availability of certain technological innovations, including state-of-the-art
digital converters, cable modems, and HITS digitally compressed cable television
programming services. The Company will also benefit from the expertise and
valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R.
Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of
the TCI Transaction. See "Management" and "Certain Relationships and Related
Transactions."
The TCI Transaction will consist of the following principal steps (with
references to the "TCI Closing" referring to the closing of the TCI
Transaction):
(1) Immediately prior to the TCI Closing, it is anticipated that Falcon
Video will use borrowings under the New Credit Facility to satisfy in part
its obligations under certain outstanding notes. Falcon
26
<PAGE>
Video will satisfy its remaining obligations under such notes by issuing
limited partnership interests in Falcon Video to the holders of those notes,
which the holders will in turn contribute to FHGLP at the TCI Closing (Step
6).
(2) At the TCI Closing, concurrently with the initial asset
contributions by FHGLP to New Falcon (Step 3), TCI will contribute to New
Falcon substantially all of the assets relating to the TCI Systems, and New
Falcon will assume indebtedness in the approximate amount of $429.7 million
and certain other liabilities of TCI. Following the TCI Closing, the TCI
Systems will be contributed to the Owned Subsidiaries.
(3) At the TCI Closing, FHGLP will contribute to New Falcon
substantially all of its assets, including the capital stock of FFC, and New
Falcon will assume certain indebtedness in the amount of $936.5 million and
other liabilities of FHGLP, including the Debentures and (subject to
subsequent assumption by New Falcon II) any Notes that remain outstanding
and the indebtedness outstanding under the New Credit Facility. See
"Description of Certain Indebtedness" and "Description of the Debentures."
The contributed assets will consist principally of FHGLP's equity interests
in the Owned Subsidiaries and the Falcon Video systems, and equity interests
in the managing general partners of the Owned Subsidiaries and Video
Investors (as defined). FHGLP will make its asset contributions to New
Falcon in two separate steps: in the first step, concurrently with the asset
contributions by TCI to New Falcon (Step 2), FHGLP will contribute all of
its assets other than the Falcon Video-related interests contributed to
FHGLP in Step 6; in the second step, immediately after the contributions to
FHGLP in Step 6, FHGLP will contribute those Falcon Video-related interests
to New Falcon. As a result of FHGLP's contributions to New Falcon (and
subject to subsequent contributions by New Falcon to New Falcon II), New
Falcon will own, directly or indirectly, greater than 99% of the partnership
interests in the Owned Subsidiaries, each of which will, in turn, have as
its managing general partner a limited partnership which will be owned 99%
or greater by New Falcon.
The assets to be contributed by FHGLP to New Falcon exclude FHGLP's
equity interests in Enstar interest ranging from 0.5% to 1.0% and its
subsidiaries, certain passive minority investments held by FHGLP in
international cable television businesses and any cash on hand that FHGLP
elects not to contribute. See "Business--The Affiliated Systems";
"--International Activities"; and "--Other Investments."
(4) At the TCI Closing, the Debentures and the Notes (which the Company
has agreed to redeem prior to October 15, 1998) will be assumed by New
Falcon, which will be substituted for FHGLP as an obligor thereunder
(subject, in the case of the Notes, to a subsequent assumption by New Falcon
II). FFC will continue to be an obligor under the Debentures as a
wholly-owned subsidiary of New Falcon. As of May 25, 1998, the aggregate
principal amount of the Notes outstanding was approximately $34.4 million.
(5) At the TCI Closing, FHGLP will redeem a specified portion of the
partnership interests in FHGLP currently held by the Redeemed Partners in
exchange for the New Falcon Interests. Following the redemption, TCI will
purchase such New Falcon Interests from the Redeemed Partners for cash in
the approximate aggregate amount of $154.7 million.
(6) At the TCI Closing, after the redemption of the Redeemed Partners
and the purchase of their New Falcon Interests by TCI (Step 5), (a) the
limited partners of Falcon Video will contribute their interests in Falcon
Video (including the interests issued in respect of certain notes, as
described in Step 1) to FHGLP in exchange for limited partnership interests
in FHGLP, (b) the holders of certain equity participation units and warrants
previously issued by Falcon Video will contribute those securities to FHGLP
in exchange for limited partnership interests in FHGLP, and (c) the limited
partners of Falcon Video Communications Investors, L.P., the managing
general partner of Falcon Video ("Video Investors"), other than FHGLP, will
contribute their interests in Video Investors (other than a 1% interest that
will be retained by a trust established for the benefit of members of the
27
<PAGE>
family of Marc B. Nathanson) to FHGLP in exchange for limited partnership
interests in FHGLP. FHGLP will then contribute these interests and
securities to New Falcon in the second step of FHGLP's contributions (Step
3). As a result of these contributions, Falcon Video will become an Owned
Subsidiary and its systems, which served approximately 71,000 basic
subscribers as of March 31, 1998, will be consolidated under the ownership
and control of New Falcon following the TCI Closing.
(7) FHGLP will amend its Incentive Plan prior to the TCI Closing to
provide for payments by FHGLP at the TCI Closing 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 TCI Closing New Falcon will assume (subject to a
subsequent assumption by New Falcon II) the obligations of FHGLP under the
Incentive Plan, as so amended, other than the obligation to make the
payments at the TCI Closing. See "Management--1993 Incentive Performance
Plan."
(8) Immediately after the TCI Closing New Falcon II will borrow funds
under the New Credit Facility to refinance the TCI indebtedness assumed by
New Falcon II at the TCI Closing and to refinance the initial borrowings of
Falcon Video under the New Credit Facility and Falcon Video's existing
senior indebtedness.
(9) At the TCI Closing, the existing partners of FHGLP will amend and
restate the FHGLP Partnership Agreement, and two additional persons will be
admitted to FHGLP as limited partners by virtue of their contributions to
FHGLP of their interests in Falcon Video (Step 6). Among other things, the
New FHGLP Partnership Agreement will defer and reduce the liquidity rights
of the non-management partners under the Existing FHGLP Partnership
Agreement, which rights will become an obligation of New Falcon. For
additional information regarding the new partnership agreement and a
description of certain new liquidity and other rights, see "Description of
the Partnership Agreements--New FHGLP Partnership Agreement."
(10) Concurrently with or immediately following the TCI Closing, the
partnership agreements of the Owned Subsidiaries, including Falcon Video,
and the partnership agreements of the managing general partners of the Owned
Subsidiaries, including Video Investors, will be amended as appropriate to
substitute New Falcon (or New Falcon II as described below) for FHGLP as a
partner effective as of the TCI Closing, to provide for distributions to the
partners, to reflect the contribution of assets to the Owned Subsidiaries
and to make certain other related changes.
The Company will redeem the remaining approximately $34.4 million aggregate
principal amount of 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 have been 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 "Capitalization" and
"Description of Certain Indebtedness--11% Senior Subordinated Notes Due 2003."
On June 30, 1998, the Company entered into the New Credit Facility, which
provides for three committed credit facilities (one revolving credit facility
and two term loans) and one uncommitted $350 million supplemental credit
facility (the terms of which will be negotiated at the time the Company makes a
request to draw on such facility). See "Description of Certain Indebtedness--New
Credit Facility." The Owned Subsidiaries, other than Falcon Video, are the
initial borrowers under the New Credit Facility. The Company borrowed
approximately $425.8 million under the New Credit Facility on June 30, 1998,
approximately $329 million of which was used to repay the remaining indebtedness
outstanding under the Bank Credit Agreement. The remaining proceeds resulted in
an excess cash balance of approximately $90 million (after payment of
approximately $4.5 million in fees and expenses related to
28
<PAGE>
the New Credit Facility). Immediately prior to the TCI Closing, Falcon Video
will use proceeds from borrowings under the New Credit Facility to satisfy in
part its obligations under certain financing notes (See Step 1). Upon the TCI
Closing, the Company will use proceeds from additional borrowings under the New
Credit Facility to refinance any other senior indebtedness of the Company,
including without limitation certain existing senior indebtedness of Falcon
Video, the initial borrowings of Falcon Video under the New Credit Facility, and
the indebtedness of TCI to be assumed by New Falcon at the TCI Closing. The
Company also intends to fund the Notes Redemption with proceeds from borrowings
under the New Credit Facility.
Immediately following the consummation of the TCI Transaction, New Falcon
will contribute substantially all of its assets to New Falcon II (excluding the
capital stock of FFC), and New Falcon II will assume certain indebtedness of New
Falcon, including any Notes that remain outstanding after the Notes Tender and
any indebtedness outstanding under the New Credit Facility, but excluding the
Debentures. Thus, New Falcon II will be substituted for New Falcon as an obligor
under the Notes and will become the sole borrower under the New Credit Facility,
and FFC will continue to be an obligor under the Debentures as a wholly-owned
subsidiary of New Falcon. In addition, New Falcon II will assume the obligations
of the Owned Subsidiaries under the New Credit Facility. New Falcon II will then
contribute the TCI Systems to the Owned Subsidiaries. See "Risk
Factors--Dependence on Receipt of Funds From Operating Subsidiaries to Service
Debentures; Structural Subordination."
The consummation of the TCI Transaction is 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 or that the TCI Transaction will be consummated, management
presently anticipates that the TCI Transaction will be completed in the third
quarter of 1998.
On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that
they have entered into an agreement under which AT&T Corp. would acquire
Tele-Communications, Inc. by merger. Although there can be no assurances as to
whether this merger will be consummated, the Company does not anticipate that
this proposed merger will have any material adverse effect upon the consummation
of the TCI Transaction.
29
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Issuers'
obligations under the Registration Rights Agreement. The Issuers will not
receive any cash proceeds from the issuance of the Exchange Debentures offered
hereby. In consideration for issuing the Exchange Debentures contemplated in
this Prospectus, the Issuers will receive Old Debentures in like original
principal amount at maturity, the form and terms of which are the same as the
form and terms of the Exchange Debentures (which replace the Old Debentures),
except as otherwise described herein.
The net proceeds received by the Company from the Offering were
approximately $631 million after giving effect to discounts, commissions and
other expenses payable by the Issuers. The Company used the net proceeds from
the Offering to repay indebtedness outstanding under the Bank Credit Agreement.
At March 31, 1998, outstanding indebtedness under the Bank Credit Agreement was
approximately $695.6 million. The weighted average interest rate on borrowings
outstanding under the Bank Credit Agreement as of December 31, 1997 was 7.69%.
30
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of FHGLP at
March 31, 1998; (ii) FHGLP's capitalization at March 31, 1998, after giving pro
forma effect to the Offering, the refinancing of the Bank Credit Agreement with
proceeds from the New Credit Facility, the repurchase of all of the Notes
pursuant to both the Notes Tender and the Notes Redemption, and the Falcon
Classic Acquisition as if such transactions had been consummated as of March 31,
1998; and (iii) New Falcon's capitalization giving pro forma effect to all of
the transactions described in the preceding sentence and the TCI Transaction,
including the consolidation of systems currently owned by Falcon Video, as if
such transactions had been consummated as of March 31, 1998. See "The TCI
Transaction" and "Pro Forma Condensed Combined Financial Data."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------------------------
FHGLP NEW FALCON
ACTUAL PRO FORMA PRO FORMA
------------ -------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Long-term Debt
Bank Credit Agreement(1)....................... $ 695,600 -- --
New Credit Facility(2)......................... -- $ 373,815 $ 920,757
Senior Debentures.............................. -- 375,000 375,000
Senior Discount Debentures..................... -- 275,639 275,639
11% Senior Subordinated Notes.................. 282,193 -- --
Other.......................................... 23,261 23,261 15,761
------------ -------------- ------------
Total debt................................... 1,001,054 1,047,715 1,587,157
Redeemable partners' equity...................... 171,373 171,373 75,000
Partners' deficit.............................. (435,664) (466,778) (281,358)
------------ -------------- ------------
Total capitalization......................... $ 736,763 $ 752,310 $ 1,380,799
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
- ------------------------
(1) As of June 29, 1998, the amount outstanding under the Bank Credit Agreement
was approximately $329 million. Borrowings since April 3, 1998 were used
primarily to repurchase outstanding Notes pursuant to the Notes Tender. See
"Prospectus Summary--Recent Developments."
(2) On June 30, 1998, the Company repaid and discharged the Bank Credit
Agreement with proceeds from the New Credit Facility and as of June 30,
1998, the amount outstanding under the New Credit Facility was approximately
$425.8 million. See "Description of Certain Indebtedness--New Credit
Facility."
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company for
each of the years in the five-year period ended December 31, 1997 and for the
three-month periods ended March 31, 1997 and 1998. This data should be read in
conjunction with the Company's historical consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated financial data for the three month
periods ended March 31, 1997 and 1998 have been derived from unaudited
consolidated financial statements of the Company, which in the opinion of
management include all adjustments (consisting of normal recurring adjustments)
which are necessary to present fairly the results of operations and financial
position for the periods and at the date presented. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year. The unaudited FHGLP pro forma data
give effect to (i) the Offering, (ii) the refinancing of the Bank Credit
Agreement with proceeds from the New Credit Facility, (iii) the repurchase of
all of the Notes pursuant to both the Notes Tender and the Notes Redemption, and
(iv) the Falcon Classic Acquisition as if such transactions had been consummated
on January 1, 1997 in the case of the operations statement data and other
operating data and on March 31, 1998, in the case of the balance sheet data. The
unaudited New Falcon pro forma data give effect to all of the transactions
described in the preceding sentence and to the TCI Transaction, including the
consolidation of systems currently owned by Falcon Video, as if such
transactions had been consummated on January 1, 1997 in the case of the
operations statement data and other operating data and on March 31, 1998 in the
case of the balance sheet data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------------------------------- -------------------------
FHGLP NEW FALCON
PRO FORMA PRO FORMA
1993 1994 1995(1) 1996(1) 1997 1997(2) 1997(2) 1997 1998(11)
-------- -------- -------- --------- --------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues................. $146,469 $147,229 $151,208 $ 217,320 $ 255,886 $ 274,894 $ 424,994 $ 63,984 $ 64,557
Costs and expenses....... (67,025) (67,711) (71,652) (97,180) (122,080) (132,194) (215,719) (29,474) (31,243)
Depreciation and
amortization........... (57,771) (60,935) (54,386) (100,415) (118,856) (135,054) (224,617) (29,793) (31,079)
-------- -------- -------- --------- --------- ----------- ----------- ----------- -----------
Operating income
(loss)................. 21,673 18,583 25,170 19,725 14,950 7,646 (15,342) 4,717 2,235
Interest expense,
net(3)................. (49,122) (49,859) (57,777) (71,602) (79,137) (85,894) (119,925) (20,384) (20,487)
Equity in net income
(loss) of investee
partnerships........... (3,596) (1,782) (5,705) (44) 443 447 447 (71) (248)
Other income (expense),
net.................... (403) (455) 13,077(4) 814 885 674 1,950 (163) (774)
Income tax benefit....... -- -- -- 1,122 2,021 2,021 2,021 566 365
-------- -------- -------- --------- --------- ----------- ----------- ----------- -----------
Loss before extraordinary
item................... $(31,448) $(33,513) $(25,235) $ (49,985) $ (60,838) $ (75,106)(5) $(130,849)(5) $(15,335) $(18,909)
-------- -------- -------- --------- --------- ----------- ----------- ----------- -----------
-------- -------- -------- --------- --------- ----------- ----------- ----------- -----------
OTHER OPERATING DATA
EBITDA(6)................ $ 79,444 $ 79,518 $ 79,556 $ 120,140 $ 133,806 $ 142,700 $ 209,275 $ 34,510 $ 33,314
EBITDA margin............ 54.2% 54.0% 52.6% 55.3% 52.3% 51.9% 49.2% 53.9% 51.6%
Total debt to EBITDA..... 6.71x 6.77x 7.01x(7) 6.62x(7) 6.81x 7.22x 7.50x 6.25x 7.51x
Net cash provided by
operating activities... $ 51,642 $ 49,076 $ 43,162 $ 90,631 $ 79,537 $ 84,273 $ 140,126 $ 15,322 $ 2,729
Net cash used in
investing activities... (27,562) (36,065) (22,674) (284,247) (76,287) (81,307) (99,512) (10,941) (95,318)
Net cash provided by
(used in) financing
activities............. (25,221) (18,169) (15,906) 192,199 (2,966) (2,966) (40,614) (7,155) 89,834
Capital
expenditures(8)........ 25,798 28,232 37,149 57,668 76,323 81,155 99,488 10,624 18,021
Deficiency of earnings to
fixed charges(9)....... (31,448) (33,513) (25,254) (51,252) (63,302) (77,574) (133,317) (15,940) (19,319)
<CAPTION>
FHGLP NEW FALCON
PRO FORMA PRO FORMA
1998 1998
----------- -----------
<S> <C> <C>
OPERATIONS STATEMENT DATA
Revenues................. $ 68,163 $105,547
Costs and expenses....... (33,146) 55,412
Depreciation and
amortization........... (33,900) (56,291)
----------- -----------
Operating income
(loss)................. 1,117 (6,156)
Interest expense,
net(3)................. (21,408) (30,433)
Equity in net income
(loss) of investee
partnerships........... (226) (226)
Other income (expense),
net.................... (1,110) (1,051)
Income tax benefit....... 365 365
----------- -----------
Loss before extraordinary
item................... $(21,262) $(37,501)
----------- -----------
----------- -----------
OTHER OPERATING DATA
EBITDA(6)................ $ 35,017 $ 50,135
EBITDA margin............ 51.4% 47.5%
Total debt to EBITDA..... 7.48x 7.91x
Net cash provided by
operating activities... $ 3,453 $ 14,479
Net cash used in
investing activities... (20,029) (24,724)
Net cash provided by
(used in) financing
activities............. 16,576 10,245
Capital
expenditures(8)........ 19,508 24,111
Deficiency of earnings to
fixed charges(9)....... (21,672) (37,911)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH
31, 1998
AS OF DECEMBER 31, ------------
-----------------------------------------------------
1993 1994 1995(1) 1996(1) 1997 ACTUAL
--------- --------- --------- --------- --------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents...................................... $ 15,626 $ 10,468 $ 15,050 $ 13,633 $ 13,917 $ 11,162
Total assets................................................... 432,668 425,402 585,258 774,323 740,358 800,326
Total debt..................................................... 532,938 538,626 669,019 885,786 911,221 1,001,054
Redeemable partners' equity(10)................................ 93,964 93,964 271,902 271,902 171,373 171,373
Partners' deficit.............................................. (236,096) (256,758) (411,681) (456,499) (416,755) (435,664)
<CAPTION>
FHGLP NEW FALCON PRO
PRO FORMA(2) FORMA(2)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents...................................... $ 5,000 $ 5,000
Total assets................................................... 819,772 1,457,972
Total debt..................................................... 1,047,715 1,587,157
Redeemable partners' equity(10)................................ 171,373 75,000
Partners' deficit.............................................. (466,778) (281,358)
</TABLE>
- ------------------------------
(1) The December 31, 1995 consolidated balance sheet data include 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 exclude 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, FHGLP 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 FHGLP
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 FHGLP from FCSC in 1995 were $2.6 million and $2.0
million, respectively.
(2) The unaudited pro forma financial and operating data may not be indicative
of the results that actually would have occurred if the transactions
described above had been completed and in effect for the periods indicated
or the results that may be obtained in the future. The unaudited pro forma
financial and operating data presented should be read in conjunction with
the audited historical financial statements and related notes thereto of
FHGLP and the TCI Systems and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. See "Pro Forma Condensed Combined Financial Data."
(3) 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 for the three years ended December 31, 1993, 1994, 1995, 1996 and
1997, respectively, and $7.0 million for the three months ended March 31,
1997. There was no payment-in-kind interest expense for the three months
ended March 31, 1998. See Note 7 to FHGLP's 1997 consolidated financial
statements.
(4) Other income (expense), net in 1995 includes a gain on sale of marketable
securities ($13.3 million).
(5) The pro forma operations statement data do not reflect the impact of
certain non-recurring expenses associated with the transactions. The FHGLP
pro forma operations statement data do not include the write-off, as an
extraordinary charge, of deferred loan costs of $11.7 and $11.3 million,
respectively, as of December 31, 1997 and March 31, 1998 related to the
extinguishment of the Bank Credit Agreement and the repurchase of the Notes
as well as an approximate $19.8 million in premiums and costs related to
the repurchase of the Debentures. Additionally, the New Falcon pro forma
operations statement data do not include a one-time charge of approximately
$6.6 million in compensation expense related to the payment to certain
FHGLP employees of amounts due under the Incentive Plan, as required by the
Contribution Agreement. The pro forma balance sheet data reflect the pro
forma effect of these adjustments.
(6) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry,
FHGLP 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 FHGLP use EBITDA-derived calculations as a measure of
financial performance. EBITDA is not a measurement determined under GAAP
and does not represent cash generated from operating activities in
accordance with GAAP. EBITDA should not be considered by the reader as an
alternative to net income as an indicator of FHGLP's financial performance
or as an alternative to cash flows as a measure of liquidity. In addition,
the Company's definition of EBITDA may not be identical to similarly titled
measures used by other companies.
(7) 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 EBITDA resulting in a
total debt to EBITDA historical ratio of 8.41x compared to a pro forma
ratio of 7.01x, 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 resulting in a total debt to EBITDA historical ratio of 7.37x compared
to a pro forma ratio of 6.62x.
(8) Excluding acquisitions of cable television systems.
(9) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges, as adjusted for earnings and
distributions of less than 50% owned companies accounted for under the
equity method. Fixed charges are defined as the sum of (i) total interest
costs (including an estimated interest component of rental expenses) and
(ii) amortization of debt discount and expense.
(10) The Existing Partnership Agreement provides that certain limited partners
of FHGLP have various redemption rights, which will be deferred and
reduced upon consummation of the TCI Transaction. See "Risk
Factors--Obligations of FHGLP to Redeem Limited Partnership Interests,"
"Description of the Partnership Agreements" and Note 2 to FHGLP's
Consolidated Financial Statements.
(11) In March 1998, FHGLP acquired substantially all of the assets of Falcon
Classic and, accordingly, the results of these acquired systems have been
included from the date of their acquisition. Management fees and
reimbursed expenses received during the three months ended March 31, 1998
by FHGLP from Falcon Classic amounted to $190,000 and $114,000,
respectively, and are included in the unaudited statement of operations
data. The amounts attributable to management fees and reimbursed expenses
received by FHGLP from Falcon Classic in 1997 were $1.3 million and $1.0
million, respectively.
33
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The unaudited pro forma condensed combined financial data presented below
are derived from the historical consolidated financial statements of the Company
and the TCI Systems and reflect management's present estimate of pro forma
adjustments, including a preliminary estimate of purchase price allocations.
These preliminary estimates represent management's best estimate based on
currently available information. Final purchase price allocation following the
closing of the TCI Transaction could be materially different from the
preliminary estimates, although management does not expect any material
variations at this time. Factors which could cause material changes in the
purchase price allocation include without limitation, material adverse changes
in the results of operations of the Falcon Systems or the TCI Systems and
unforseen changes in the economic or regulatory environment. The unaudited FHGLP
pro forma data for the year ended December 31, 1997 and for the three months
ended March 31, 1998 give effect to (i) the Offering, (ii) the refinancing of
the Bank Credit Agreement with proceeds from the New Credit Facility, (iii) both
the Notes Tender and the Notes Redemption, and (iv) the Falcon Classic
Acquisition as if such transactions had been consummated on January 1, 1997 in
the case of the statement of operations data and on March 31, 1998 in the case
of the balance sheet data. The unaudited New Falcon pro forma data give effect
to all of the transactions described in the preceding sentence and to the TCI
Transaction, including the consolidation of systems currently owned by Falcon
Video, as if such transactions had been consummated on January 1, 1997 in the
case of the statement of operations data and on March 31, 1998 in the case of
the balance sheet data.
The unaudited FHGLP pro forma data presented below do not give effect to the
TCI Transaction and assume that FHGLP is the primary obligor under the
Debentures. Upon the consummation of the TCI Transaction, all of FHGLP's
obligations under the Debentures will be assumed by New Falcon, which will be
substituted for FHGLP as an obligor under the Debentures. Thereafter, FHGLP will
have no further obligations under the Debentures. Accordingly, the unaudited New
Falcon pro forma data presented below give effect to the TCI Transaction and
present data for New Falcon but not for FHGLP since, upon the consummation of
the TCI Transaction, FHGLP will no longer be an obligor under the Debentures. In
addition, the effect of not presenting information for FHGLP after the
consummation of the TCI Transaction is immaterial because the only assets to be
retained by FHGLP besides its interest in New Falcon consist of FHGLP's equity
ownership interests (ranging from 0.5% to 1.0%) in the Enstar Systems and
certain other immaterial, passive minority investments. See
"Business--International Activities" and "--Other Investments."
The unaudited pro forma condensed combined financial statements may not be
indicative of the results that actually would have occurred if the transactions
described above had been completed and in effect for the periods indicated or
the results that may be obtained in the future. The unaudited pro forma
condensed combined financial data presented below should be read in conjunction
with the audited historical consolidated financial statements and related notes
thereto of the Company and the TCI Systems and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
The Falcon Classic Acquisition is being accounted for as the purchase by
FHGLP of the Falcon Classic systems. The TCI Transaction will be accounted for
as a contribution by FHGLP of the Falcon Systems to New Falcon at their
historical cost basis and the purchase by New Falcon of the Falcon Video systems
and the TCI Systems.
The pro forma condensed combined statements of operations do not reflect the
impact of certain non-recurring expenses associated with the transactions. The
FHGLP pro forma data do not include the write-off, as an extraordinary charge,
of deferred loan costs of $11.7 and $11.3 million, respectively, at December 31,
1997 and March 31, 1998 related to the extinguishment of the Bank Credit
Agreement and the repurchase of the Notes, as well as the approximate $19.8
million in premiums and costs related to the repurchase of the Notes.
Additionally, the New Falcon pro forma data do not include a one-time charge of
approximately $6.6 million in compensation expense related to the payment to
certain FHGLP employees of amounts due under the Incentive Plan, as required by
the Contribution Agreement. Such adjustments are reflected in the pro forma
condensed combined balance sheets.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
--------------------- --------------------
THE FALCON FHGLP FALCON TCI
COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS
---------- --------- ------------ ----------- --------- --------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 255,886 $ 20,299 $ (1,291)(1) $ 274,894 $ 32,145 $ 113,897 $ 4,058(7)
Expenses:
Costs and expenses................ (122,080) (11,248) 1,134(2) (132,194) (15,908) (64,113) (3,504)(8)
Depreciation and amortization..... (118,856) (8,080) (8,118)(3) (135,054) (16,086) (22,509) (50,968)(9)
---------- --------- ------------ ----------- --------- --------- ------------
Operating income (loss)......... 14,950 971 (8,275) 7,646 151 27,275 (50,414)
Other income (expense):
Interest expense, net............. (79,137) (1,490) (5,267)(4) (85,894) (10,985) (5,832) (17,214)(10)
Equity in net income of investee
partnerships.................... 443 4(5) 447
Other income (expense), net....... 885 (61) (150)(6) 674 (84) 1,360(11)
Income tax benefit (expense)........ 2,021 2,021 (8,808) 8,808(12)
---------- --------- ------------ ----------- --------- --------- ------------
Income (loss) before extraordinary
item.............................. $ (60,838) $ (580) $ (13,688) $ (75,106) $ (10,834) $ 12,551 $ (57,460)
---------- --------- ------------ ----------- --------- --------- ------------
---------- --------- ------------ ----------- --------- --------- ------------
<CAPTION>
NEW FALCON
PRO FORMA
-----------
<S> <C>
Revenues............................ $ 424,994
Expenses:
Costs and expenses................ (215,719)
Depreciation and amortization..... (224,617)
-----------
Operating income (loss)......... (15,342)
Other income (expense):
Interest expense, net............. (119,925)
Equity in net income of investee
partnerships.................... 447
Other income (expense), net....... 1,950
Income tax benefit (expense)........ 2,021
-----------
Income (loss) before extraordinary
item.............................. $(130,849)
-----------
-----------
</TABLE>
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
----------------- -----------------
THE FALCON FHGLP FALCON TCI
COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS
-------- ------- ----------- --------- ------- -------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $64,557 $ 3,796 $ (190)(1) $ 68,163 $ 7,694 $ 28,421 $ 1,269(7)
Expenses:
Costs and expenses.................... (31,243 ) (2,099) 196(2) (33,146) (4,094) (16,977) (1,195)(8)
Depreciation and amortization......... (31,079 ) (1,321) (1,500)(3) (33,900) (3,609) (5,791) (12,991)(9)
-------- ------- ----------- --------- ------- -------- -----------
Operating income (loss)............... 2,235 376 (1,494) 1,117 (9) 5,653 (12,917)
Other income (expense):
Interest expense, net................. (20,487 ) (86) (835)(4) (21,408) (2,786) (1,448) (4,791)(10)
Equity in net income of investee
partnerships........................ (248 ) 22(5) (226)
Other income (expense), net........... (774 ) 28,991 (29,327)(6) (1,110) 59
Income tax benefit (expense)............ 365 365 (1,793) 1,793(12)
-------- ------- ----------- --------- ------- -------- -----------
Income (loss) before extraordinary
item.................................. $(18,909) $29,281 $(31,634) $(21,262) $(2,795) $ 2,471 $(15,915)
-------- ------- ----------- --------- ------- -------- -----------
-------- ------- ----------- --------- ------- -------- -----------
<CAPTION>
NEW FALCON PRO
FORMA
---------------
<S> <C>
Revenues................................ $105,547
Expenses:
Costs and expenses.................... (55,412)
Depreciation and amortization......... (56,291)
---------------
Operating income (loss)............... (6,156)
Other income (expense):
Interest expense, net................. (30,433)
Equity in net income of investee
partnerships........................ (226)
Other income (expense), net........... (1,051)
Income tax benefit (expense)............ 365
---------------
Income (loss) before extraordinary
item.................................. $(37,501)
---------------
---------------
</TABLE>
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(1) To eliminate FHGLP management fee income from Falcon Classic.
(2) To eliminate Falcon Classic's management fee expense to FHGLP.
(3) To record additional depreciation and amortization expense attributable to
the allocation of the purchase price (cash of $83.4 million) to tangible
and intangible assets acquired and liabilities assumed from Falcon Classic,
based on preliminary estimates of their respective fair values as of the
acquisition date. These preliminary estimates represent management's best
estimate based on currently available information. Final purchase price
allocation following the closing of the TCI Transaction could be materially
different from the preliminary estimates, although management does not
expect any material variations at this time.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
12/31/97 3/31/98
----------- -----------
USEFUL LIFE
-------------
(IN YEARS) ($ IN 000'S)
<S> <C> <C> <C>
Record additional estimated depreciation expense........................................... 3-15 $ 3,312 $ 671
Record additional estimated amortization expense:
Franchise cost........................................................................... 12 (1,964) (357)
Goodwill................................................................................. 20 279 46
Customer lists and other intangible assets............................................... 5 6,491 1,140
----------- -----------
$ 8,118 $ 1,500
----------- -----------
----------- -----------
</TABLE>
(4) To increase interest expense to reflect the Falcon Classic Acquisition, the
Notes Tender and the terms of the Debentures as if the Falcon Classic
Acquisition, the Notes Tender and the Offering had been in effect during
the entire period; and to record the amortization on new debt discount and
issuance costs estimated at $28.8 million in connection with the New Credit
Facility and the Debentures. The average interest rates used to compute pro
forma interest expense on the New Credit Facility were 6.9% for the year
ended December 31, 1997 and 7.2% for the three months ended March 31, 1998.
The effect on pro forma income (loss) before extraordinary items of a 1/8%
change in interest rates would be approximately $470,000 per year (without
giving effect to the Company's interest rate hedging agreements).
<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
12/31/97 3/31/98
-------- --------
($ IN 000'S)
<S> <C> <C>
Eliminate historical interest expense related to borrowings
by Falcon Classic........................................ $ (1,490) $ (86)
Eliminate amortization expense on historical deferred loan
costs for the Bank Credit Agreement...................... (825) (214)
Eliminate amortization expense on historical deferred costs
for the Notes............................................ (874) (219)
Eliminate historical interest expense on the Notes......... (29,584) (7,760)
Eliminate historical interest expense on the Bank Credit
Agreement................................................ (44,493) (11,584)
Record estimated interest expense on the Debentures........ 57,593 14,399
Record estimated interest expense on borrowings under the
New Credit Facility...................................... 22,408 5,666
Record amortization expense on new debt discount........... 84 21
Record amortization expense on new debt issuance costs..... 2,448 612
-------- --------
$ 5,267 $ 835
-------- --------
-------- --------
</TABLE>
(5) To eliminate FHGLP's general partners' share of losses of Falcon Classic.
(6) To increase other expenses for anticipated legal fees related to the
settlement of litigation ($150,000 for the year ended December 31, 1997)
and to eliminate gain on the sale of Falcon Classic's Cable Systems ($29.3
million for the three months ended March 31, 1998).
37
<PAGE>
(7) To eliminate FHGLP management fee income from Falcon Video, to adjust TCI
Systems revenues to reflect revenue from additional assets acquired and to
eliminate certain revenues not being acquired pursuant to the Contribution
Agreement, and to conform to FHGLP's accounting treatment of franchise fees
charged to subscribers, as follows:
<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
12/31/97 3/31/98
-------- --------
($ IN 000'S)
<S> <C> <C>
Eliminate FHGLP management fee income from Falcon Video.... $(1,582 ) $ (381)
Adjust TCI Systems revenues (See detail of TCI Systems
adjustments)............................................. 5,640 1,650
-------- --------
$ 4,058 $ 1,269
-------- --------
-------- --------
</TABLE>
(8) To eliminate Falcon Video's management fee expense to FHGLP, to adjust TCI
Systems expenses to reflect additional assets acquired and to eliminate
certain expenses related to revenues not being acquired pursuant to the
Contribution Agreement and to conform to FHGLP's accounting treatment of
franchise fees charged to subscribers, as follows:
<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
12/31/97 3/31/98
-------- --------
($ IN 000'S)
<S> <C> <C>
Eliminate Falcon Video's management fee expense to FHGLP... $(1,582 ) $ (374)
Adjust TCI Systems expenses (See detail of TCI Systems
adjustments)............................................. 5,086 1,569
-------- --------
$ 3,504 $ 1,195
-------- --------
-------- --------
</TABLE>
(9) To record additional depreciation and amortization expense attributable to
the allocation of the fair value to tangible and intangible assets acquired
and liabilities assumed of Falcon Video ($143.2 million) and the TCI
Systems ($500.2 million), based on preliminary estimates of their
respective fair values as of the acquisition date. These preliminary
estimates represent management's best estimate based on currently available
information. Final allocation following the closing of the TCI Transaction
could be materially different from the preliminary estimates, although
management does not expect any material variations at this time.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
12/31/97 3/31/98
----------- -----------
USEFUL LIFE
-------------
(IN YEARS) ($ IN 000'S)
<S> <C> <C> <C>
Record additional estimated depreciation expense........................................... 3-15 $ (340) $ (31)
Record additional estimated amortization expense:
Franchise cost........................................................................... 12 (5,654) (1,448)
Goodwill................................................................................. 20 4,145 1,034
Customer lists and other intangible assets............................................... 5 52,816 13,436
----------- -----------
$ 50,968 $ 12,991
----------- -----------
----------- -----------
</TABLE>
(10) To increase interest expense to reflect the merger with Falcon Video and
the assumption of the TCI Systems' indebtedness. The average interest
rates used to compute the pro forma interest expense on the New Credit
Facility were 6.4% for the year ended December 31, 1997 and 6.7% for the
three months ended March 31, 1998. The effect on pro forma income (loss)
before
38
<PAGE>
extraordinary items of a 1/8% change in interest rates would be
approximately $1.2 million (without giving effect to the Company's
interest rate hedging agreements).
<TABLE>
<CAPTION>
THREE
YEAR MONTHS
ENDED ENDED
12/31/97 3/31/98
-------- --------
($ IN 000'S)
<S> <C> <C>
Eliminate historical interest expense of Falcon Video...... $(10,985) $(2,786)
Eliminate historical interest expense of the TCI Systems... (5,832) (1,448)
Record estimated interest expense on borrowings under the
New Credit Facility incurred to refinance the Falcon
Video and TCI Systems debt............................... 34,031 9,025
-------- --------
$ 17,214 $ 4,791
-------- --------
-------- --------
</TABLE>
(11) To eliminate the historical loss recorded in 1997 on the sale of an
international investment. The international investments of FHGLP are not
being contributed to New Falcon pursuant to the Contribution Agreement.
(12) To eliminate historical tax expense of the TCI Systems, which assets were
formerly held by a corporation.
DETAIL OF TCI SYSTEMS ADJUSTMENTS
The audited combined statement of operations of the TCI Systems for the year
ended December 31, 1997 has been adjusted to reflect additional assets acquired
(which acquisitions were not material individually or in the aggregate), to
eliminate certain revenues and expenses not being acquired pursuant to the
Contribution Agreement and to conform to FHGLP's accounting treatment of
franchise fees charged to subscribers, as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED 12/31/97 ENDED 3/31/98
-------------------- ----------------------
REVENUES EXPENSES REVENUES EXPENSES
--------- --------- ----------- ---------
($ IN 000'S) ($ IN 000'S)
<S> <C> <C> <C> <C>
Reclassify franchise fee pass-through............................................. $ 5,517 $ (5,517) $ 1,508 $ (1,508)
Eliminate revenues and expenses not being acquired................................ (2,122) 1,908 (4) 22
Add Ellensburg, WA................................................................ 1,850 (1,240) -- --
Add Pomeroy, WA................................................................... 179 (107) 55 (31)
Add Clatskanie, OR................................................................ 216 (130) 91 (52)
--------- --------- ----------- ---------
$ 5,640 $ (5,086) $ 1,650 $ (1,569)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
39
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
-------------------- ------------------
FALCON FHGLP FALCON TCI NEW FALCON
THE COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS PRO FORMA
----------- ------- ----------- ------------ -------- -------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents.............. $ 11,162 $2,508 $ (8,670)(1) $ 5,000 $ 5,880 -- $ (5,880)(11) $ 5,000
Receivables:
Trade.................... 12,291 1,132 -- 13,423 1,451 $ 2,557 -- 17,431
Affiliates............... 11,309 -- (35)(2) 11,274 -- -- (8,600)(12) 2,674
Other assets............... 15,647 494 -- 16,141 790 -- (3)(13) 16,928
Other investments.......... 1,555 -- -- 1,555 -- -- (1,519)(14) 36
Property, plant and
equipment, net........... 358,074 820 703(3) 359,597 38,528 88,309 91,658(15) 578,092
Franchise cost, net........ 218,844 -- 1,448(3) 220,292 47,710 333,195 (277,868)(15) 323,329
Goodwill, net.............. 71,487 -- 565(3) 72,052 1,513 -- 50,006(15) 123,571
Customer lists and other
intangible assets, net... 88,360 -- 2,932(3) 91,292 (43) 700 269,816(15) 361,765
Deferred loan costs, net... 11,597 -- 17,549(4) 29,146 -- -- -- 29,146
----------- ------- ----------- ------------ -------- -------- ------------- ------------
$ 800,326 $4,954 $ 14,492 $ 819,772 $ 95,829 $424,761 $ 117,610 $ 1,457,972
----------- ------- ----------- ------------ -------- -------- ------------- ------------
----------- ------- ----------- ------------ -------- -------- ------------- ------------
LIABILITIES:
Bank debt.................. $ 695,600 -- $(321,785)(5) $ 373,815 $ 74,700 -- $ 472,242(16) $ 920,757
Notes Payable
Debentures............... -- -- 650,639(6) 650,639 -- -- -- 650,639
11% Notes................ 282,193 -- (282,193)(7) -- -- -- -- --
Other...................... 23,261 -- -- 23,261 54,286 -- (61,786)(17) 15,761
----------- ------- ----------- ------------ -------- -------- ------------- ------------
1,001,054 -- 46,661 1,047,715 128,986 -- 410,456 1,587,157
Cash overdraft............. -- -- -- -- -- 1,841 -- 1,841
Accounts payable........... 6,476 $ 948 -- 7,424 1,035 600 -- 9,059
Accrued expenses and
other.................... 44,812 2,831 (35)(8) 47,608 5,905 3,458 -- 56,971
Customer deposits and
prepayments.............. 1,652 148 -- 1,800 130 -- -- 1,930
Deferred income taxes...... 7,026 -- -- 7,026 -- 121,362 (121,362)(18) 7,026
Minority interest.......... 346 -- -- 346 -- -- -- 346
Equity in losses of
affiliated partnerships
in excess of
investment............... 3,251 -- 7(9) 3,258 -- -- (3,258)(19) --
----------- ------- ----------- ------------ -------- -------- ------------- ------------
1,064,617 3,927 46,633 1,115,177 136,056 127,261 285,836 1,664,330
Redeemable partners'
equity..................... 171,373 -- -- 171,373 -- -- (96,373)(20) 75,000
Partners' equity (deficit)... (435,664) 1,027 (32,141)(10) (466,778) (40,227) 297,500 (71,853)(21) (281,358)
----------- ------- ----------- ------------ -------- -------- ------------- ------------
$ 800,326 $4,954 $ 14,492 $ 819,772 $ 95,829 $424,761 $ 117,610 $ 1,457,972
----------- ------- ----------- ------------ -------- -------- ------------- ------------
----------- ------- ----------- ------------ -------- -------- ------------- ------------
</TABLE>
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(1) To reduce the cash balance to reflect the use of cash to fund, in part, the
Notes Redemption and the retention of $5 million for ongoing business
needs. See also Note 5 below.
(2) To eliminate receivables of FHGLP management fees from Falcon Classic.
(3) To eliminate the historical book values of the tangible and intangible
assets of Falcon Classic and allocate the estimated fair values assigned to
those assets, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-------------
($ IN 000'S)
<S> <C>
Property, plant and equipment................................................................. $ 703
Franchise cost................................................................................ 1,448
Goodwill...................................................................................... 565
Customer lists and other intangibles.......................................................... 2,932
------
$ 5,648
------
------
</TABLE>
(4) To eliminate historical deferred loan costs and record new debt issuance
costs incurred in connection with the New Credit Facility and Debentures,
as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
Eliminate historical deferred loan costs--Bank Credit Agreement............................... $ (6,672)
Eliminate historical deferred loan costs--11% Notes........................................... (4,628)
Record new debt discount and issuance costs................................................... 28,849
-----------
$ 17,549
-----------
-----------
</TABLE>
(5) To record changes in bank debt, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
Record the issuance of the Debentures......................................................... $(650,639)
Record estimated debt discount and issuance costs............................................. 28,849
Record estimated increase in bank debt for the Notes Tender................................... 302,000
Record estimated decrease in cash balance as additional reduction of bank debt................ (8,670)
Record estimated increase in bank debt for the acquisition of Falcon Classic.................. 6,675
-----------
$(321,785)
-----------
-----------
</TABLE>
(6) To record the issuance of the Debentures.
(7) To record redemption of $282.2 million of the Notes pursuant to the Notes
Tender.
(8) To record the elimination of Falcon Classic's accrued management fees
payable to FHGLP.
(9) To eliminate FHGLP's investment, through affiliates, in Falcon Classic.
(10) To record changes in partners' deficit, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
Eliminate Falcon Classic's partners' equity................................................... $ (1,027)
Record estimated premium and costs paid in Notes Tender....................................... (19,807)
Record the write-off of historical deferred loan costs--Bank Credit Agreement................. (6,672)
Record the write-off of historical deferred loan costs--11% Notes............................. (4,628)
Eliminate FHGLP's investment, through affiliates, in Falcon Classic........................... (7)
-----------
$ (32,141)
-----------
-----------
</TABLE>
(11) To reduce the cash balance to maintain $5 million for ongoing business
needs.
(12) To eliminate receivables of FHGLP for intercompany notes from Enstar
Finance Company.
(13) To eliminate prepaid expenses of FHGLP for Enstar Finance Company.
41
<PAGE>
(14) To eliminate an investment that will be retained by FHGLP.
(15) To eliminate the historical book values of the tangible and intangible
assets of Falcon Video and the TCI Systems and allocate the estimated fair
values assigned to those assets, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-------------------------------
FALCON TCI
VIDEO SYSTEMS TOTAL
--------- --------- ---------
($ IN 000'S)
<S> <C> <C> <C>
Property, plant and equipment............................................ $ 9,884 $ 81,774 $ 91,658
Franchise cost........................................................... (24,712) (253,156) (277,868)
Goodwill................................................................. 9,986 40,020 50,006
Customer lists........................................................... 60,443 209,403 269,846
Deferred costs........................................................... (30) -- (30)
--------- --------- ---------
$ 55,571 $ 78,041 $ 133,612
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reduction in franchise costs is due to FHGLP's preliminary purchase
price allocation, which has the effect of allocating more purchase value to
customer lists than to franchise costs. FHGLP's allocation methodology was
based on management's best estimates of such costs, which in turn were
based on recent appraisals for other affiliated transactions. Additionally,
the magnitude of the adjustment is partly the result of different policies
employed by the TCI Falcon Systems (which allocate intangible costs to
franchise costs) as compared to FHGLP's policies relating to the allocation
of purchase price (which allocate intangible costs among customer lists,
franchise costs and goodwill).
(16) To record changes in bank debt, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
Refinance TCI Systems' indebtedness........................................................... $ 430,738
Partial redemption of the Falcon Video mezzanine Debentures................................... 40,588
Payment pursuant to the Incentive Plan........................................................ 6,555
Less historical cash balance of Falcon Video.................................................. (5,880)
Plus historical cash balance of Enstar Finance Company........................................ 241
-----------
$ 472,242
-----------
-----------
</TABLE>
(17) To eliminate the historical balance of Falcon Video's mezzanine notes upon
redemption and to eliminate intercompany notes payable of Enstar Finance
Company.
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
Eliminate historical balance of Falcon Video's mezzanine Debentures........................... $ (54,286)
Eliminate historical balance of intercompany notes............................................ (7,500)
-----------
$ (61,786)
-----------
-----------
</TABLE>
(18) To eliminate the historical balance of deferred income taxes for the TCI
Systems.
(19) To eliminate FHGLP's equity in losses of Falcon Video in excess of
investment, and to eliminate FHGLP's equity in losses of Enstar in excess
of investment, which will be retained by FHGLP.
(20) To adjust for put rights of certain FHGLP limited partners and to
reclassify the balance in part. See "Risk Factors--Partner Liquidity
Rights" and the "Description of the Partnership Agreements--New FHGLP
Partnership Agreement."
42
<PAGE>
(21) To record changes in partners' deficit, as follows:
<TABLE>
<CAPTION>
AT 3/31/98
-----------
($ IN
000'S)
<S> <C>
TCI assets contributed........................................................................ $ 496,903
Refinance TCI Systems' indebtedness........................................................... (429,738)
Eliminate TCI Systems' historical balance of partners' equity................................. (297,500)
Record Falcon Video partners' contribution in excess of their historical deficit.............. 71,080
Reclassify residual value of redeemable partners' equity...................................... 96,373
Less payment pursuant to the Incentive Plan................................................... (6,555)
Eliminate FHGLP's partners' equity for Enstar Finance Company................................. (1,246)
Eliminate an investment that will be retained by FHGLP........................................ (1,519)
Eliminate FHGLP's equity in losses of Enstar in excess of investment.......................... 349
-----------
$ (71,853)
-----------
-----------
</TABLE>
43
<PAGE>
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
Company's revenues and cash flow. The 1996 Telecom Act substantially changed the
competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will be terminated altogether in
1999. Because cable service rate increases have continued to outpace inflation
under the FCC's existing regulations, the Company expects Congress and the FCC
to explore additional methods of regulating cable service rate increases,
including deferral or repeal of the March 31, 1999 termination of CPST rate
regulation. 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 Company's business. Accordingly, the Company's historical
financial results as described herein are not necessarily indicative of future
performance. See "Legislation and Regulation."
This Prospectus 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 Company. 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
Company, as discussed more fully elsewhere in this Prospectus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
The Company's revenues increased from $64 million to $64.6 million, or by
0.9%, for the three months ended March 31, 1998 compared to the corresponding
period in 1997. Of the $573,000 net increase in revenues, $1.3 million was due
to the acquisition in March 1998 of the Falcon Classic assets. This increase was
partially offset by decreases of $424,000 in management fees and $289,000 in
cable service revenues. The $289,000 decrease in cable service revenues was
caused principally by decreases of $1.5 million due to reductions in the number
of regulated subscriptions for cable service and $975,000 due to reductions in
the number of premium subscriptions for cable service. These decreases were
partially offset by increases of $1.5 million related to increases in regulated
service rates implemented during 1997 and 1998 and by $741,000 related to
increases in unregulated service rates implemented during 1997. As of March 31,
1998, the Owned Systems had approximately 607,000 basic subscribers and 183,000
premium service units.
Management and consulting fees earned by the Company decreased from $1.5
million to $1.1 million for the three months ended March 31, 1998 compared to
the corresponding period in 1997 primarily due to a $349,000 reduction in the
amounts received from Falcon Classic. $73,000 of this reduction was due to the
March, 1998 sale of the Falcon Classic assets to the Partnership; the balance
was due to the one-time receipt by the Partnership during the three months ended
March 31, 1997 of previously deferred fees from Falcon Classic.
Service costs increased from $18.3 million to $19.6 million, or by 6.9%, for
the three months ended March 31, 1998 compared to the corresponding period in
1997. Service costs represent costs directly attributable to providing cable
services to customers. The $1.3 million increase was primarily caused by an
increase in programming fees paid to program suppliers (including primary
satellite fees), $411,000 of which was due to the acquisition of the Falcon
Classic assets.
44
<PAGE>
General and administrative expenses increased from $11.2 million to $11.7
million, or by 4.5%, for the three months ended March 31, 1998 compared to the
corresponding period in 1997. The $499,000 increase for the three months ended
March 31, 1998 compared to the corresponding period in 1997 related primarily to
increases in marketing expense and to $262,000 related to the acquisition of the
Falcon Classic assets.
Depreciation and amortization expense increased from $29.8 million to $31.1
million, or by 4.3%, for the three months ended March 31, 1998 compared to the
corresponding period in 1997. The $1.3 million increase in depreciation and
amortization expense was primarily due to the acquisition of the Falcon Classic
assets.
Operating income decreased from $4.7 million to $2.2 million, or by 52.6%,
for the three months ended March 31, 1998 compared to the corresponding period
in 1997. The $2.5 million decrease was principally due to increases in operating
expenses in excess of increases in revenues and to an increase in depreciation
and amortization expense as discussed above.
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $20.4 million to $20.5 million, or by 0.5%, for the
three months ended March 31, 1998 compared to the corresponding period in 1997.
The increase was primarily due to higher average debt balances outstanding. The
increase was partially offset by the effect of slightly lower average interest
rates (8.8% during the three months ended March 31, 1998 compared to 9.1% during
the corresponding period in 1997). Due to the Company electing to pay interest
expense on the 11% Notes in cash on March 15, 1998, there was no payment-in-kind
interest expense (in which interest payment requirements are met by an increase
in the principal amount of the notes) associated with the 11% Notes for the
three months ended March 31, 1998 compared to $7 million of payment-in-kind
interest expense for the corresponding period in 1997. Interest rate hedging
agreements resulted in additional interest expense of $53,000 during the three
months ended March 31, 1998 compared to additional interest expense of $250,000
during the corresponding period in 1997.
Other expense, net increased from $163,000 of expense for the three months
ended March 31, 1997 to $774,000 for the corresponding period in 1998, primarily
due to a $690,000 casualty loss recorded during 1998 as a result of property
damage caused by a storm.
Due to the factors described above, the Company's net loss increased from
$15.3 million to $18.9 million, or by 23.3%, for the three months ended March
31, 1998 compared to the corresponding period in 1997.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 6 to "Selected Consolidated Financial Data." EBITDA
as a percentage of revenues decreased from 53.9% to 51.6% for the three months
ended March 31, 1998 compared to the corresponding period in 1997. The decrease
was primarily caused by increases in programming costs and marketing expenses in
excess of revenue increases, as described above, and to the acquisition of
assets from Falcon Classic (which had an EBITDA as a percentage of revenues of
47.7%). EBITDA decreased from $34.5 million to $33.3 million, or by 3.5%, as a
result of these factors.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
FHGLP's revenues increased from $217.3 million to $255.9 million, or by
17.7%, during 1997 compared to 1996. Of the $38.6 million net increase in
revenues, $31 million was due to the acquisition of the FCSC assets in July
1996, as discussed in Note 3 to the consolidated financial statements and $8.7
million was due to increased cable service revenues. These increases were
partially offset by a decrease of $1.1 million in management fees. The $8.7
million increase in cable service revenues was caused principally by increases
of $14 million due to increases in regulated service rates implemented during
1996 and 1997, $4.5 million related to increases in unregulated service rates
implemented during 1996 and in May 1997
45
<PAGE>
and $1.6 million due to the July 1, 1996 restructuring of The Disney Channel
from a premium channel to a tier channel. These increases were partially offset
by decreases of $5 million due to reductions in the number of premium
subscriptions for cable service, $2.8 million related to decreases in other
revenues (primarily installation revenue), $1.9 million related to reductions in
the number of regulated subscriptions for cable service and $1.8 million related
to the Eastern Georgia cable systems sold on July 1, 1996. As of December 31,
1997, the Owned Systems had approximately 563,000 basic subscribers and 166,000
premium service units.
Management and consulting fees earned by FHGLP decreased from $6.3 million
during 1996 to $5.2 million during 1997. The decreased fees resulted primarily
from the absence in 1997 of management fees earned from FCSC, which was managed
by FHGLP prior to July 12, 1996, partially offset by increased fees related to
recording in 1997 the balance of previously deferred 1995 management fees from
Falcon Classic.
Service costs increased from $60.3 million to $75.6 million, or by 25.4%,
during 1997 compared to 1996. Service costs represent costs directly
attributable to providing cable services to customers. Of the $15.3 million
increase in service costs, $9.8 million related to the acquisition of FCSC
assets, $4.2 million related to increases in programming fees paid to program
suppliers (including primary satellite fees) and $1.2 million related to
increases in property taxes, franchise fees and personnel costs. The increase in
programming costs included $279,000 related to the July 1, 1996 restructuring of
The Disney Channel discussed above.
General and administrative expenses increased from $36.9 million to $46.4
million, or by 25.9%, during 1997 compared to 1996. Of the $9.5 million
increase, $6 million related to the acquisition of FCSC assets, $2.8 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 FHGLP prior to July
12, 1996 and $677,000 related to a reduction in reimbursement from Falcon
International Communications ("FIC"), an affiliated entity of expenses incurred
in connection with international investments. These increases were partially
offset by a decrease of $849,000 related primarily to reduced insurance premiums
as a result of self-insuring the Company's cable distribution plant and
subscriber connections during 1997 and a $345,000 decrease in costs associated
with reregulation by the FCC.
Depreciation and amortization expense increased from $100.4 million to
$118.8 million, or by 18.4%, during 1997 compared with 1996. The $18.4 million
increase in depreciation and amortization expense was primarily due to the
acquisition of the FCSC assets partially offset by accelerated 1996 depreciation
related to asset retirements and to intangible assets becoming fully amortized.
Operating income decreased from $19.7 million to $14.9 million, or by 24.2%,
during 1997 compared to 1996. The $4.8 million decrease was principally due to
increases in operating expenses in excess of revenues and to an increase in
depreciation and amortization expense as discussed above.
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $71.6 million to $79.1 million, or by 10.5%, during
1997 compared to 1996. The $7.5 increase in interest expense related primarily
to increased debt incurred to consummate the acquisition of the FCSC assets,
partially offset by lower average interest rates (7.7% during 1997 compared to
8% during 1996). 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
(the Company elected to pay interest expense in cash on March 15, 1998).
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 Company's net loss increased from
$50 million to $60.8 million, or by 21.7%, during 1997 compared to 1996.
EBITDA is calculated as operating income before depreciation and
amortization. See footnote 6 to "Selected Consolidated Financial Data." EBITDA
as a percentage of revenues decreased from 55.3%
46
<PAGE>
during 1996 to 52.3% in 1997. The decrease was primarily caused by increases in
programming costs and bad debt expense in excess of revenue increases as
described above, and to the acquisition of assets from FCSC (which had an EBITDA
as a percentage of revenues of 49%). EBITDA increased from $120.1 million to
$133.8 million, or by 11.4%, as a result of these factors.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's revenues increased from $151.2 million to $217.3 million, or
by 43.7%, during 1996 compared to 1995. Of the $66.1 million net increase in
revenues, $58.6 million was due to the acquisition in December 1995 of the
Falcon First assets and in July 1996 of the FCSC assets, as discussed in Note 3
to the consolidated financial statements and $9.8 million was due to increased
cable service revenues. These increases were partially offset by a decrease of
$2.3 million in management fees. The $9.8 million increase in cable service
revenues was caused principally by increases of $9.3 million due to increases in
regulated service rates implemented in April and October 1996, $2.2 million due
to increases related to other revenue producing items (primarily advertising
sales) and $1.1 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 $1.5 million due to reductions in the number of
regulated subscriptions for cable service, $1.1 million due to reductions in the
number of premium subscriptions for cable service and $241,000 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.
Management and consulting fees earned by the Company decreased from $8.6
million to $6.3 million during 1996 primarily due to the absence in 1996 of
management fees earned from Falcon First and FCSC, which were managed by FHGLP
prior to December 28, 1995 and July 12, 1996, respectively.
Service costs increased from $41.6 million to $60.3 million, or by 44.9%,
during 1996 compared to 1995. Service costs represent costs directly
attributable to providing cable services to customers. Of the $18.7 million
increase in service costs, $18.4 million was due to the acquisition of Falcon
First and FCSC assets and $1.9 million related to increases in programming fees
paid to program suppliers (including primary satellite fees). These increases
were partially offset by a net decrease of $1.7 million in other service costs
primarily related to increases in capitalized labor associated with increased
construction activity. The increase in programming costs included a $269,000
increase related to the restructuring of The Disney Channel discussed above.
General and administrative expenses increased from $30 million to $36.9
million, or by 22.8%, during 1996 compared to 1995. The $6.9 million increase
was caused principally by a $10.5 million increase related to the acquisition of
the Falcon First and FCSC assets partially offset by decreases of $928,000
related to the absence in 1996 of reimbursed expenses from FCSC, which was
managed by FHGLP prior to July 12, 1996, $900,000 related to certain one-time
charges occurring in 1995, $500,000 related to the recovery of previously
reserved bad debt expense and to $1.8 million related to other general and
administrative expenses.
Depreciation and amortization expense increased from $54.4 million to $100.4
million, or by 84.6%, during 1996 compared with 1995. Depreciation expense
increased by $37.1 million due to the acquisition of Falcon First and FCSC
assets during 1996, by $6.6 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 $2.1 million due to the
depreciation of property, plant and equipment additions. These increases were
partially 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 decreased from $25.2 million to $19.7 million during 1996
compared to 1995. The $5.5 million decrease was principally due to a $7.5
million decrease in operating income related to the
47
<PAGE>
acquisition of the Falcon First and FCSC assets partially offset by increases in
revenues in excess of increases in operating expenses as discussed above.
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $57.8 million to $71.6 million, or by 23.9%, during
1996 compared to 1995. Interest expense increased by $19.3 million primarily due
to the increased debt incurred to consummate the acquisitions of the Falcon
First and FCSC assets. These increases were partially offset by the absence in
1996 of $3.5 million of amortization of deferred loan costs and the effect of
lower average interest rates (8.0% during 1996 compared to 8.1% during 1995).
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 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 Company's net loss increased from
$25.2 million to $50 million, or by 98.1%, during 1996 compared to 1995.
EBTDA is calculated as operating income before depreciation and amortization
See footnote 6 to "Selected Consolidated Financial Data." EBITDA as a percentage
of revenues increased from 52.6% during 1995 to 55.3% in 1996. The increase was
primarily caused by revenue increases as described above. EBITDA increased from
$79.6 million to $120.1 million, or by 51%.
YEAR END RESULTS PRO FORMA FOR MATERIAL ACQUISITION
The historical results of operations of the Company for the period January
1, 1996 through July 11, 1996 did not include the results of FCSC. Results of
operations of the Company in 1996 were significantly affected by the acquisition
of FCSC on July 12, 1996. FCSC was managed by FHGLP prior to and subsequent to
its acquisition and has been affected by the same trends in operating costs and
revenues as all of the Company's cable systems. Accordingly, the Company
believes that it is more meaningful to compare 1997 historical operations to
1996 operations on a pro forma basis assuming that the acquisition of FCSC had
occurred on January 1, 1996. The pro forma results include the historical
results of FCSC.
Set forth in the table below are the pro forma revenues and service costs
for 1996 prepared on this basis and 1997 historical revenues and service costs.
The pro forma revenues and service costs are not necessarily indicative of
results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED ACTUAL YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------------- -----------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATIONS STATEMENT DATA
Revenues......................................... $ 244,905 $ 255,886
Service costs.................................... 68,945 75,643
</TABLE>
1997 HISTORICAL COMPARED TO 1996 (PRO FORMA FOR THE ACQUISITION OF FCSC)
FHGLP'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
48
<PAGE>
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, FHGLP's
revenues increased 5.3% during 1997 compared to 1996.
Management and consulting fees earned by FHGLP 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company'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 Company 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 subsequent July 1998 purchase of Falcon Classic's Somerset system for
approximately $6.6 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 Company's proposed spending plans (including its plans for 1998) are
frequently 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.
As noted in "Business--Overview of the Falcon 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 Company totaled approximately $171.2
million, with approximately $88 million of these capital expenditures being
attributable to upgrading and rebuilding existing distribution plant.
The Company 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 Company'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 Company's systems
are significantly less technically advanced than had been expected prior to the
implementation of re-regulation. The Company believes that the delays in
upgrading many of its systems will, under present market conditions, most likely
have an adverse effect on the value of the systems compared to systems that have
been rebuilt to a higher technical standard. The Company'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 Company is
49
<PAGE>
also evaluating the use of digital compression technology in its systems. See
"Business--Technological Developments" and "--Digital Compression."
The Company's future capital expenditure plans are, however, all subject to
the availability of adequate capital on terms satisfactory to the Company, as to
which there can be no assurances. The Company plans to finance capital
expenditures with cash flow from operations and borrowings under the New Credit
Facility. Subject to the Company's ability to remain in compliance with certain
covenants of the New Credit Facility and the Indenture for the Debentures, the
Company presently intends to spend approximately $101 million for capital
expenditures in 1998.
On July 12, 1996, the Company amended its principal credit facility with the
Bank Credit Agreement, which provided for aggregate borrowing capacity of $775
million, 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. As of March 31, 1998, the amount
outstanding under the Bank Credit Agreement was $695.6 million and borrowings
under the Bank Credit Agreement bore interest at an average rate of 7.9%
(including the effect of interest rate hedging agreements).
The Company has entered into fixed interest rate hedging agreements with an
aggregate notional amount at March 31, 1998 of $565 million. Agreements in
effect at March 31, 1998 totaled $540 million, with the remaining $25 million to
become effective as certain of the existing contracts mature during the balance
of 1998. The agreements serve as a hedge against interest rate fluctuations
associated with the Company's variable rate debt. These agreements expire at
various times through July 2001. In addition to these agreements, the Company
has an 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 Company pays variable LIBOR
rates subject to a cap of 5.49%.
On June 30, 1998, the Company entered into the New Credit Facility, which
provides for three committed credit facilities (one revolving credit facility
and two term loans) and one uncommitted $350 million supplemental credit
facility (the terms of which will be negotiated at the time the Company makes a
request to draw on such facility). See "Description of Certain Indebtedness--New
Credit Facility." The Owned Subsidiaries, other than Falcon Video, are the
initial borrowers under the New Credit Facility. The Company borrowed
approximately $425.8 million under the New Credit Facility on June 30, 1998
approximately $329 million of which was used to repay the remaining indebtedness
outstanding under the Bank Credit Agreement. The remaining proceeds resulted in
an excess cash balance of approximately $90 million (after payment of
approximately $4.5 million in fees and expenses related to the New Credit
Facility). At June 30, 1998, the weighted average interest rate under the New
Credit Facility was 9.4%, and the Company's aggregate remaining borrowing
capacity under the New Credit Facility (excluding the supplemental credit
facility) was $153 million. Management believes that borrowings under the New
Credit Facility together with cash flow from operations will be adequate to meet
the Company's liquidity needs for the forseeable future.
On March 29, 1993, FHGLP issued $175 million aggregate principal amount of
its 11% Senior Subordinated Notes due 2003 in connection with FHGLP's formation.
As a result of payment-in-kind interest payments under the Notes, the aggregate
principal of the Notes outstanding as of March 31, 1998 had increased to $282.2
million. Future interest payments are permitted to be paid in kind until 2000,
when cash payment is required. However FHGLP, as permitted by the terms of the
Indenture for the Notes, elected to begin to pay interest payments in cash
beginning with the payment due March 15, 1998. This election required an
amendment to the Bank Credit Agreement, which had prohibited cash interest
payments on the Notes until September 30, 2000. FHGLP commenced the Notes Tender
on April 20, 1998, and the Notes Tender expired on May 18, 1998, and FHGLP
repurchased approximately $247.8 million aggregate principal amount of the Notes
on May 19, 1998 in accordance with the terms of the Notes Tender. The Company
will redeem the remaining approximately $34.4 million aggregate principal amount
of the outstanding Notes prior to October 15, 1998. In addition, in connection
with the Notes Tender,
50
<PAGE>
FHGLP solicited and received sufficient consents to amend the indenture
governing the Notes to eliminate certain covenants and events of default. See
"Description of Certain Indebtedness--11% Senior Subordinated Notes due 2003."
On April 3, 1998, the Company consummated the offering of the Debentures.
The net proceeds of approximately $631 million were used to repay certain
outstanding indebtedness under the Bank Credit Agreement. Semiannual interest
payments with respect to the Senior Debentures will be approximately $15.7
million in the aggregate, commencing on October 15, 1998. No interest on the
Senior Discount Debentures will be payable prior to April 15, 2003, unless the
Issuers elect to pay cash interest. After April 15, 2003, semiannual interest
payments will be approximately $35.9 million in the aggregate. The Company
anticipates that cash flow from operations and, if necessary, borrowings under
the New Credit Facility (or a successor credit facility) will be adequate to
meet its interest payment obligations under the Debentures.
If the closing of the TCI Transaction occurs prior to consummation of the
Notes Redemption, New Falcon will assume the rights and obligations of FHGLP
under the Indenture for the remaining outstanding Notes and will be substituted
for FHGLP as an obligor under such Notes. In addition, New Falcon will assume
certain other indebtedness of FHGLP and TCI, including the Debentures and
amounts outstanding under the New Credit Facility. Immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to New Falcon II (excluding the capital stock of FFC), subject
to certain indebtedness to be assumed by New Falcon II, including any Notes and
any indebtedness then outstanding under the New Credit Facility, but excluding
the Debentures. Thus, New Falcon II will be substituted for New Falcon as the
obligor under such Notes and become the sole borrower under the New Credit
Facility.
In connection with the decision to make interest payments on the Notes in
cash and the anticipated redemption of the Notes, the Company entered into
various interest rate swap agreements with three banks on February 10, 1998 in
order to reduce interest costs. The agreements call for the Company 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 Company 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.
On June 6, 1997, FHGLP 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 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. The EFC bank
facility is non-recourse to the Company and matures on August 31, 2001, at which
time all funds previously advanced will be due in full.
Beginning in August 1997, FHGI elected to self-insure the Company'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 Company's
asset base and due to significant increases in the cost of insurance coverage
and decreases in the amount of insurance coverage available. The Company
continues to purchase insurance coverage in amounts it views as appropriate for
all other property, liability, automobile, workers' compensation and other types
of insurable risks.
FHGLP is a holding company which employs all of the Company's management
personnel. Prior to October 1995, FHGLP conducted certain international
investment and development activities. In October 1995, FHGLP sold certain of
its international investments to FIC for approximately $6.3 million. FHGLP was
reimbursed $1.9 and $1.1 million in 1995 and 1996, respectively, for operating
costs related to these investments. The Company 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
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of certain of its employees has been significantly reduced for 1997 and
subsequent periods. All of the Owned Systems are owned by subsidiaries of FHGLP.
Accordingly, 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 FHGLP combined with limitations on its sources of cash may
create liquidity issues for FHGLP in the future. Specifically, the former bank
credit agreement permitted the Owned Subsidiaries to remit to FHGLP no more than
3.75% of their net cable revenues, as defined, in any year. The Bank 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), for 1997 the limit was approximately $10.4 million ($6.8
million was actually remitted), and for the three-month period ended March 31,
1998, the limit was $2.8 million ($2.6 million was actually remitted). As a
result of the 1998 acquisition of the Falcon Classic systems, FHGLP 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 March 31, 1998, which
amount includes $7.5 million of notes receivable from the Enstar Systems. If the
TCI Transaction is consummated as presently structured, as to which there can be
no assurance, the management personnel will become employees of New Falcon and
New Falcon will be the obligor on the Debentures, but New Falcon II will be the
obligor under any Notes that remain outstanding after the Notes Tender and will
be the sole borrower under the New Credit Facility. Consequently, New Falcon
will have the same liquidity issues as outlined above and will continue to be
dependent on distributions from New Falcon II, subject to restrictions in the
New Credit Facility. See "Risk Factors--Dependence on Receipt of Funds From
Operating Subsidiaries to Service Debentures; Structural Subordination."
The Company 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 Company 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 Company
cannot predict whether it will have access to adequate capital in the future to
make further acquisitions of cable systems. The Company frequently considers
opportunities to sell assets that it views as non-strategic.
Effective as of December 31, 1997, FHGLP and certain other parties entered
into a settlement agreement resolving and settling a putative class action
lawsuit relating to FHGLP'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. 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 a rate of 10% per annum on the projected net sales proceeds of $64 million
from January 1, 1998 through the closing of the sale of substantially all of the
Falcon Classic systems, which occurred in March 1998. Such interest increased
the aggregate sales price of these systems 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
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have a material adverse effect on the Company. In addition, the Company
understands that certain of the TCI Systems are involved with similar lawsuits.
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 of FHGLP
become redeemable 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 that the Contribution Agreement is
terminated in 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 preferred 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 all such
partnership interests (other than Class C preferred 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
estimated purchase price of such non-preferred partnership interests at March
31, 1998 was approximately $120 million, based on preliminary estimates by
management which are subject to change. 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. The Class C interests had an aggregate liquidation value
of $51.4 million as of December 31, 1997. Certain of the Company's debt
agreements (including the New Credit Facility) restrict the Company'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 funds
to meet such obligations on terms acceptable to FHGLP, or at all. FHGLP has not
identified a source for funding any material redemption obligation at this time.
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 and the
New Falcon Partnership Agreement. See "Risk Factors-- Obligations of FHGLP to
Redeem Limited Partnership Interests," "The TCI Transaction" and "Description of
the Partnership Agreements--Existing FHGLP Partnership Agreement" and "--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 Company's
computer systems, process transactions based on two digits for the year of the
transaction (for example, "98" for 1998). These computer systems may not operate
effectively when the last two digits become "00," as will occur on January 1,
2000. 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 the interface systems of its vendors and service providers. Based on a
preliminary study,
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the Company'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. 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 Company's management is
currently assessing its exposure to risks associated with its operating and
revenue generating equipment and has also initiated communications with
significant third party vendors and service suppliers to determine the extent to
which the Company's interface systems are vulnerable should those third parties
fail to solve their own Year 2000 problems on a timely basis. Management
currently expects that the cost to replace non-compliant equipment will be
determined during the third quarter of 1998. There can be no assurance that the
systems of other companies on which the Company's systems rely will be timely
converted and that the failure to do so would not have an adverse impact on the
Company's business. The Company continues to closely monitor developments with
its vendors and service suppliers.
The following table sets forth, on a historical basis, for the periods
indicated certain items from FHGLP's Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------- THREE MONTHS ENDED
1995 1996 1997 MARCH 31, 1998
---------- ----------- ---------- -------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities:
Net loss............................................. $ (25,235) $ (49,985) $ (60,838) $ (18,909)
Payment-in-kind interest expense..................... 27,127 26,580 20,444 --
Depreciation and amortization........................ 54,386 100,415 118,856 31,079
Gain on sale of securities........................... (13,267) (2,264) -- --
Other................................................ 151 15,885 1,075 (9,441)
---------- ----------- ---------- --------
$ 43,162 $ 90,631 $ 79,537 $ 2,729
---------- ----------- ---------- --------
---------- ----------- ---------- --------
Net cash used in investing activities:
Capital expenditures................................. $ (37,149) $ (57,668) $ (76,323) $ (18,021)
Sale of available-for-sale securities................ 13,487 9,502 -- --
Acquisitions of cable television systems, net of
cash............................................... 2,655 (247,397) -- (76,789)
Proceeds from sale of cable systems.................. -- 15,000 -- --
Other................................................ (1,667) (3,684) 36 (508)
---------- ----------- ---------- --------
$ (22,674) $ (284,247) $ (76,287) $ (95,318)
---------- ----------- ---------- --------
---------- ----------- ---------- --------
Net cash (used in) provided by financing activities:
Net borrowings, (repayments)......................... $ (9,866) $ 191,022 $ (3,222) $ 89,834
Capital contributions................................ -- 5,000 93 --
Deferred loan costs.................................. (6,320) (3,823) (29) --
Other................................................ 280 -- 192 --
---------- ----------- ---------- --------
$ (15,906) $ 192,199 $ (2,966) $ 89,834
---------- ----------- ---------- --------
---------- ----------- ---------- --------
</TABLE>
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THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Cash provided by operating activities (including interest expense and
management fee income) decreased from $15.3 million to $2.7 million, or by
82.2%, for the three months ended March 31, 1998 compared to the corresponding
period in 1997, a decrease of $12.6 million. The decrease resulted primarily
from a net decrease of $5.6 million in other operating items (receivables, other
assets, payables, accrued expenses and subscriber deposits and prepayments) and
from the fact that in 1997, unlike 1998, the Company incurred $7 million of
payment-in-kind interest expense related to the 11% Notes.
Cash used in investing activities increased from $10.9 million to $95.3
million, or by 771.2%, for the three months ended March 31, 1998 compared to the
corresponding period in 1997. The increase was primarily due to the 1998
acquisition of the Falcon Classic assets for $76.8 million and to an increase in
capital expenditures of $7.4 million.
Cash from financing activities changed from a $7.2 million use of cash to
cash provided of $89.8 million for the three months ended March 31, 1998
compared to the corresponding period in 1997. The change was due primarily to
additional borrowings of debt in 1998 related to the acquisition of the Falcon
Classic assets and to the increase in capital expenditures.
1997 COMPARED TO 1996
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 of cash provided or used by 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 Debentures.
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 upon the 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
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
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 and $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 net borrowings in 1996.
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INFLATION
Certain of the Company's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation. However, the Company 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."
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has considered the effects of recently issued accounting
pronouncements from the Financial Accounting Standards Board (including
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities") and the American Institute of
Certified Public Accountants (including Statement of Position ("SOP") No. 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use" and SOP No. 98-5, "Reporting on the Costs of Start-Up Activities"). The
Company's management currently believes that the impact of such standards will
not have a material impact on the Company's financial position and results of
operations.
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BUSINESS
INTRODUCTION
The Company owns or manages cable television systems in 26 states. On
December 30, 1997, FHGLP entered into a definitive agreement with TCI to
consolidate substantially all of the Company's cable television systems and
certain systems owned and operated by affiliates of TCI. Upon consummation of
the TCI Transaction, the Company will be the 13th largest cable television
operator in the United States, serving subscribers principally in California,
Oregon, Washington, Missouri and Alabama. After giving effect to the TCI
Transaction, the Company would have served approximately 1,070,000 basic
subscribers at March 31, 1998.
The Company's Owned Systems are located in 23 states, principally
California, Oregon, Missouri, Georgia, North Carolina, Texas and Kentucky. As of
March 31, 1998, the Owned Systems passed approximately 1,008,000 homes and
served approximately 607,000 basic subscribers. The Company also holds varying
equity interests in and manages certain other cable television systems. The
Affiliated Systems are located in 14 states, including South Carolina, Kentucky,
Illinois, Washington and Tennessee. As of March 31, 1998, the Affiliated Systems
passed approximately 262,000 homes and served approximately 170,000 basic
subscribers.
The Company is a leading operator of cable systems primarily located in
small to medium-sized communities and suburban areas surrounding large and
medium-sized cities proximate to many of the major DMAs. Management believes
that the Company's cable systems generally have higher operating cash flow
margins and more predictable operating cash flow and are subject to less risk of
increased competition than systems in large urban cities. In many of the
Company'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 urban cities.
Management believes that its cable television systems generally have a more
stable customer base and generally have lower labor, operating and system
construction costs than systems in urban markets.
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, premium
programming services and the lease of cable-related equipment. Such monthly
service fees constitute the primary source of revenues for the Falcon Systems.
In
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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 Company a share of revenues from
sales of products in the System's service areas, in addition to paying the
System a separate fee in return for carrying their shopping service. Certain
other new channels have also recently offered the Falcon Systems certain
inducements 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 benefits on the Company's business.
Led by the Chairman of the Board and Chief Executive Officer of FHGI, Marc
B. Nathanson, and the President and Chief Operating Officer of FHGI, Frank J.
Intiso, Falcon's senior management has on average over 19 years of experience in
the cable industry and has worked together for over a decade. Mr. Nathanson, a
30-year veteran of the cable business, is a director and a member of the
Executive Committee of the 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 a 19-year
veteran of the cable industry. He also serves as Immediate Past Chair of the
California Cable Television Association and is active in various industry boards
including the Board of the Community Antenna Television Association ("CATA").
BUSINESS STRATEGY
FOCUS ON SMALL AND MEDIUM-SIZED MARKETS. The Company 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 Company's business strategy
has focused on serving small to medium-sized communities and the suburbs of
certain cities, including Los Angeles, St. Louis, Eugene, Salem, Portland
(Oregon), Norfolk, Little Rock, San Luis Obispo, Seattle, San Jose, Corpus
Christi and Huntsville. The Company 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.
Because the Company operates in geographically and economically diverse markets
across the United States, the Falcon Systems, taken as a whole, are not
dependent on any single local economy, are resistant to regional economic
fluctuations, and provide the Company with stable revenue and operating cash
flow streams. However, it is the goal of the Company to consolidate its
operations in fewer states while continuing its geographic and economic market
diversity and maintaining or increasing its current revenue and cash flow.
CLUSTERING OF CABLE SYSTEM PROPERTIES. To date, the Company has sought to
acquire cable television systems in communities that are within the same DMAs as
other cable television systems owned or managed by Falcon in order to maximize
the economies of scale and operating efficiencies associated with "clusters" of
systems. Management plans to continue its acquisition strategy by pursuing
opportunities to purchase cable television systems in the Company's existing
DMAs as well as by entering new DMAs, 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 opportunities to acquire systems, management expects to pursue
opportunities to exchange certain of its systems for other cable television
properties with both TCI and other cable operators, to further facilitate the
Company's clustering strategy, and to concentrate in fewer states.
REBUILD AND UPGRADE CABLE SYSTEMS. Through the upgrade of its cable plant,
including the utilization of addressable technology, fiber optic cable and
digital compression, the Company seeks to benefit from providing additional
tiers of programming and from the further development of advertising,
pay-per-view and home shopping services, as well as possible future services
such as Internet access, video-on-demand and other interactive services. In
addition to these potential revenue growth opportunities, upgraded plant will
provide enhanced picture quality and system reliability, reduced operating costs
and improved overall customer satisfaction. Currently, the Owned Systems have an
average capacity of 48 channels and
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approximately 74% of their subscribers are served by systems that utilize
addressable technology. Through a significant capital expenditure program, the
Company plans to increase this channel capacity in most of its clusters by
deploying fiber optic cable, digital compression or both.
However, 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. See "Risk Factors--Lack of Available Channel Capacity for New Channels
or Expanded Service," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Legislation and Regulation."
MAXIMIZE REVENUES AND CASH FLOW MARGINS. The Company seeks to maximize
revenues by increasing subscriptions to basic, expanded basic, and other tiers
of satellite services and premium programming services through a combination of
innovative marketing programs, an emphasis on customer service and active
community relations. As a result of the Company's success in facilitating
revenue growth, combined with operating efficiencies generated by the Company's
clustering strategy, economies of scale, volume discounts for cable programming
and decentralized management structure, the Company believes its operating cash
flow margins have been and continue to be among the highest in the cable
television industry.
BENEFIT FROM PARTNERSHIP WITH TCI. The Company expects to benefit
substantially from its partnership with TCI, one of the leading cable television
operators in the world. The Company expects that it will derive numerous
operational synergies from its partnership with TCI, including increased
concentration of cable systems, purchasing discounts and other economies arising
from more streamlined management of Company assets and those assets contributed
by TCI. The Company also expects that its partnership with TCI may increase the
Company's access to and recognition in the capital markets. Furthermore, the
Company expects to benefit from access to TCI's substantial resources in the
areas of technical and engineering research. The Company believes that its
partnership with TCI will result in increased availability of certain
technological innovations, including state-of-the-art digital converters, cable
modems and HITS digitally compressed programming services. The Company will also
benefit from the expertise and valuable industry knowledge of TCI's Leo J.
Hindery, Jr. and William R. Fitzgerald, who will join New Falcon's Advisory
Committee upon consummation of the TCI Transaction.
USE DECENTRALIZED MANAGEMENT TO KEEP "CLOSE TO THE CUSTOMER." The Company
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 Company believes that its decentralized management structure,
by enhancing management presence at the system and state 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.
MARKET AND PACKAGE PROGRAMMING TIERS. The Company 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 Company 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 Company 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
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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 Company 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 Company have received this desirable treatment. These amendments
to the FCC's rules have allowed the Company 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 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 TCI Systems to be owned and operated by New Falcon upon consummation of
the TCI Transaction did not implement the type of programming tier marketing
strategy that Falcon utilized in the wake of cable rate regulation. As a result,
those TCI Systems do not generally have, as the Falcon Systems do, multiple
levels of unregulated programming tiers and programming packages. Under current
FCC regulations, New Falcon generally does not expect to be able to implement in
the TCI Systems the same type of unregulated programming tier structures that
exist in the Falcon Systems.
The Company has employed a variety of targeted marketing techniques to
attract new customers by focusing on delivering value, choice, convenience and
quality. The Company employs direct mail, radio and local newspaper advertising,
telemarketing and door-to-door selling utilizing demographic "cluster codes" to
target specific messages to target audiences. In many systems, the Company
offers discounts to customers who purchase premium services on a limited trial
basis in order to encourage a higher level of service subscription. The Company
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.
ENHANCE QUANTITY AND QUALITY OF PRODUCTS AND SERVICES WITH SYSTEM
UPGRADES. The Company believes that the increase in channel capacity resulting
from the rebuild of its systems and the introduction of digital compression
technology create attractive opportunities to enhance value and to market
additional services to its existing and prospective customers. A typical rebuild
involves state-of-the-art fiber to the feeder technology, with a typical
bandwidth of 750 MHz and nodes of 500 homes. This platform delivers significant
improvements in service reliability and picture quality. In addition, a 750 MHz
system generally provides up to 95 channels of analog capacity. This additional
capacity is used to add channels to existing service tiers, to create new
service tiers, to introduce multiplexing of premium services and to increase the
number of pay-per-view channels. Finally, when marketing the new and expanded
service to its customers, the Company generally upgrades its addressable
technology by deploying advanced analog converters with a digital music service
and/or an interactive program guide.
Digital compression can be used to deliver even more channels over an
already rebuilt system and, in some cases, is used to add additional channels in
lieu of or in advance of a rebuild. TCI has led the cable industry in developing
digital technology and is technologically capable of delivering digital video
services in approximately 70% of the systems that it is contributing to New
Falcon. The Company continues to evaluate digital compression as both a
complement and/or a substitute for analog rebuilds.
EMPHASIZE CUSTOMER SERVICE AND COMMUNITY RELATIONS. The Company places a
strong emphasis on customer service and community relations and believes that
success in these areas is critical to its business. The Company has developed
and implemented a wide range of monthly internal training programs for its
employees, including its regional managers, that focus on the Company's
operations and employee
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<PAGE>
interaction with customers. The effectiveness of the Company'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 Company conducts an extensive customer
survey on a periodic basis and uses the information in its efforts to enhance
service and better address the needs of its customers. In addition, the Company
is participating in the industry's Customer Service Initiative which emphasizes
an on-time guarantee program for service and installation appointments. The
Company's corporate executives and regional managers lead the Company's
involvement in a number of programs benefiting the communities the Company
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.
THE TCI TRANSACTION
Pursuant to the Contribution Agreement, FHGLP, TCI, the existing partners of
FHGLP and the investors in Falcon Video 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 a
result of the TCI Transaction, New Falcon will own systems that served
approximately 975,000 basic subscribers in 25 states as of March 31, 1998. New
Falcon will also manage the Enstar Systems, which served approximately 95,000
basic subscribers as of March 31, 1998. As such, New Falcon will own or manage
systems that served approximately 1,070,000 basic subscribers in 26 states as of
March 31, 1998. The TCI Systems will be consolidated into and operated by the
Owned Subsidiaries. As used in this Prospectus, the "TCI Transaction" refers
individually and collectively, as the context may require, to the transactions
contemplated by the Contribution Agreement, as it may be amended, modified or
supplemented. See "--Overview of the TCI Systems" and "--Overview of the Falcon
Systems."
FHGLP will own approximately 53% of the equity of New Falcon and will serve
as the managing general partner of New Falcon. TCI will own approximately 47% of
the equity of New Falcon. The respective ownership percentages of FHGLP and TCI
in New Falcon are subject to possible adjustment pursuant to the Contribution
Agreement. The actual ownership percentages of FHGLP and TCI will be based on
the relative net fair market value of the capital contributions to be made by
FHGLP and TCI to New Falcon. The values of the contributed Falcon Systems and
the TCI Systems have been agreed to and are specified in the Contribution
Agreement. To calculate the value of each partner's contribution, the value of
its systems will be adjusted to reflect additional current assets to be
contributed to New Falcon, the amount of certain capital expenditures made by
the partner prior to the contribution, and the amount of liabilities to be
assumed by New Falcon. A partner may also be required to contribute cash to New
Falcon to offset any diminution in the value of its contributed systems from
certain causes (such as casualty losses or certain undisclosed liabilities), but
these contributions will not result in an adjustment to the partners' percentage
interests. For a description of the principal steps involved in the TCI
Transaction, see "The TCI Transaction."
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, Falcon and its senior management will continue to manage the business
and day-to-day operations of New Falcon. For additional information regarding
the governance and management of New Falcon following consummation of the TCI
Transaction, see "Description of the Partnership Agreements--New Falcon
Partnership Agreement."
The Company expects to benefit substantially from its partnership with TCI,
one of the leading cable television operators in the world. The Company expects
that it will derive numerous operational synergies from its partnership with
TCI, including increased concentration of cable systems, purchasing discounts
and other economies arising from more streamlined management of Company assets
and those assets
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<PAGE>
contributed by TCI. The Company also expects that its partnership with TCI may
increase the Company's access to and recognition in the capital markets.
Furthermore, the Company expects to benefit from access to TCI's substantial
resources in the areas of technical and engineering research. The Company
believes that its partnership with TCI will result in increased availability of
certain technological innovations, including state-of-the art digital
converters, cable modems, and HITS digitally compressed cable television
programming services. The Company will also benefit from the expertise and
valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R.
Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of
the TCI Transaction. See "Management" and "Certain Relationships and Related
Transactions."
The Company will redeem the approximately $34.4 million aggregate principal
amount of 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 have been 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 "Capitalization" and
"Description of Certain Indebtedness--11% Senior Subordinated Notes Due 2003."
Management anticipates that, immediately following the consummation of the
TCI Transaction, New Falcon will contribute substantially all of its assets,
excluding the capital stock of FFC, to New Falcon II, subject to certain
indebtedness to be assumed by New Falcon II, including any Notes that remain
outstanding and indebtedness outstanding under the New Credit Facility, but
excluding the Debentures. Thus, New Falcon II will be substituted for New Falcon
as the obligor under the Notes and became the sole borrower under the New Credit
Facility, and FFC will continue to be an obligor under the Debentures as a
wholly-owned subsidiary of New Falcon. See "Risk Factors--Dependence Upon
Receipt of Funds From Operating Subsidiaries to Service Debentures; Structural
Subordination."
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 or that the TCI Transaction will be consummated,
management presently anticipates that the TCI Transaction will be completed in
the third quarter of 1998. See "Risk Factors--Conditions of Closing the TCI
Transaction."
On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that
they have entered into an agreement under which AT&T Corp. would acquire
Tele-Communications, Inc. by merger. Although there can be no assurances as to
whether this merger will be consummated, the Company does not anticipate that
this proposed merger will have any material adverse effect upon the consummation
of the TCI Transaction.
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<PAGE>
OVERVIEW OF THE FALCON SYSTEMS
The following table sets forth certain operating statistics for the Falcon
Systems as of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------- AS OF
1993(1) 1994 1995(2) 1996(3) 1997 MARCH 31, 1998
---------- ---------- ---------- ---------- ---------- --------------
(AT END OF PERIOD, EXCEPT AVERAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
HOMES PASSED(4)
Owned Systems.................... 546,702 562,616 691,941 924,030 937,786 1,007,614
Affiliated Systems*.............. 501,872 513,954 407,754 178,294 180,823 111,121
Enstar Systems................... 138,926 140,154 141,922 148,907 150,319 150,672
---------- ---------- ---------- ---------- ---------- --------------
Total............................ 1,187,500 1,216,724 1,241,617 1,251,231 1,268,928 1,269,407
BASIC SUBSCRIBERS(5)
Owned Systems.................... 342,406 360,835 442,166 570,708 562,984 606,937
Affiliated Systems*.............. 322,369 330,179 260,005 118,603 118,829 74,797
Enstar Systems................... 92,015 95,311 96,972 96,384 94,898 95,086
---------- ---------- ---------- ---------- ---------- --------------
Total............................ 756,790 786,325 799,143 785,695 776,711 776,820
BASIC PENETRATION(6)
Owned Systems.................... 62.6% 64.1% 63.9% 61.8% 60.0% 60.2%
Affiliated Systems*.............. 64.2 64.2 63.8 66.5 65.7 67.3
Enstar Systems................... 66.2 68.0 68.3 64.7 63.1 63.1
Combined......................... 63.7% 64.6% 64.4% 62.8% 61.2% 61.2%
PREMIUM SERVICE UNITS(7)
Owned Systems.................... 154,846 165,137 186,477 203,679 165,960 183,234
Affiliated Systems*.............. 151,965 158,326 108,225 45,909 40,548 25,376
Enstar Systems................... 32,881 36,632 35,585 31,750 26,504 25,798
---------- ---------- ---------- ---------- ---------- --------------
Total............................ 339,692 360,095 330,287 281,338 233,012 234,408
PREMIUM PENETRATION(8)
Owned Systems.................... 45.2% 45.8% 42.2% 35.7% 29.5% 30.2%
Affiliated Systems*.............. 47.1 48.0 41.6 38.7 34.1 33.9
Enstar Systems................... 35.7 38.4 36.7 32.9 27.9 27.1
Combined......................... 44.9% 45.8% 41.3% 35.8% 30.0% 30.2%
AVERAGE MONTHLY REVENUE PER BASIC
SUBSCRIBER(9)
Owned Systems.................... $ 32.71 $ 32.43 $ 32.77 $ 34.22 $ 36.67 $ 36.56
Affiliated Systems*.............. 30.28 32.50 31.75 34.50 36.81 36.13
Enstar Systems................... 30.01 29.69 30.41 32.71 35.00 35.39
Combined......................... $ 31.36 $ 32.13 $ 32.15 $ 34.08 $ 36.49 $ 36.51
</TABLE>
- ------------------------
* As of December 31, 1997, Affiliated Systems consisted of the cable systems
owned by Falcon Classic and Falcon Video. Substantially all of the Falcon
Classic systems became Owned Systems in March 1998, and, therefore, at March
31, 1998 the Affiliated Systems consisted of the Falcon Classic Somerset
system and Falcon Video. The Falcon Somerset System became an Owned System
in July 1998. Following the consummation of the TCI Transaction, the Falcon
Video systems will become Owned Systems.
(1) The December 31, 1993 data for the Affiliated Systems do not include the
statistics for the systems owned by Vista Communications Limited Partnership
III ("Vista"). Vista sold those systems on
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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 Company acquired all of 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 1, 1996, the Company 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, respectively. At
December 31, 1994, the corresponding totals for Falcon First were 113,403,
75,688 and 38,756, respectively. At July 1, 1996, the Falcon 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 Company 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 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 Company 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.
(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 and for the three months ended March 31, 1998.
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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legislation and
Regulation."
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<PAGE>
THE OWNED SYSTEMS
The Owned Systems are divided into 37 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.
CALIFORNIA. As of March 31, 1998, the Company's six operating regions in
California had 137,640 basic subscribers, which comprised approximately 23% of
the basic subscribers of the Owned Systems. The systems in the California
regions have an average channel capacity of 51, 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 March 31, 1998, the Company's eight Oregon operating regions
had 98,490 basic subscribers, which comprised approximately 16% 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. Approximately 92% of the customers in these operating regions are
served by systems that utilize addressable technology.
MISSOURI. As of March 31, 1998, the Company's four operating regions in
Missouri had 73,778 basic subscribers, which comprised approximately 12% 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 March 31, 1998, the Company's Georgia systems had 44,362
basic subscribers, which comprised approximately 7% 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.
NORTH CAROLINA. As of March 31, 1998, the Company's two North Carolina
operating regions had 37,073 basic subscribers, which comprised approximately 6%
of the basic subscribers of the Owned Systems. These systems have an average
channel capacity of 39, approximately 99% of which are utilized. Addressable
technology is currently being introduced in one of the North Carolina operating
regions, and approximately 30% of the customers in the state had the technology
available to them at March 31, 1998.
TEXAS. As of March 31, 1998, the Company's three Texas operating regions
had 31,857 basic subscribers, which comprised approximately 5% of the basic
subscribers of the Owned Systems. These systems currently have an average
channel capacity of 53, approximately 88% of which are currently utilized.
Approximately 67% of the customers in the Texas regions are served by systems
that utilize addressable technology.
KENTUCKY. As of March 31, 1998, the Company's Kentucky systems had 29,902
basic subscribers which comprised 5% of the basic subscribers of the Owned
Systems. The Kentucky systems have an average channel capacity of 38,
approximately 96% of which are currently utilized. Approximately 62% of the
customers are served by systems that utilize addressable technology.
OTHER OPERATING REGIONS. The Company also owns and operates systems through
eleven additional regional centers in Athens, Alabama; Benton, Arkansas;
Plattsburgh, New York; Centreville, Maryland; Suffolk, Virginia; 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.
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<PAGE>
The following is a summary of certain operating data, as of March 31, 1998,
for the Owned Systems:
<TABLE>
<CAPTION>
PREMIUM AVERAGE MONTHLY
HOMES BASIC BASIC SERVICE PREMIUM REVENUE PER
STATE PASSED SUBSCRIBERS PENETRATION UNITS PENETRATION BASIC SUBSCRIBER(1)
- --------------------------- ---------- ----------- ------------- ------------ ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Alabama.................... 39,528 25,658 64.9% 10,119 39.4% $ 36.09
Arkansas................... 45,926 21,203 46.2% 5,043 23.8% 37.68
California................. 241,256 137,639 57.1% 45,283 32.9% 37.33
Florida.................... 14,719 9,691 65.8% 1,979 20.4% 36.42
Georgia.................... 54,396 44,362 81.6% 11,675 26.3% 40.50
Illinois................... 3,424 1,842 53.8% 669 36.3% 35.03
Indiana.................... 7,180 4,785 66.6% 1,066 22.3% 36.86
Kansas..................... 3,512 2,455 69.9% 622 25.3% 35.69
Kentucky................... 33,898 29,902 88.2% 6,358 21.3% 34.18
Louisiana.................. 5,494 2,753 50.1% 1,546 56.2% 39.65
Maryland................... 27,103 15,123 55.8% 7,456 49.3% 38.67
Michigan................... 7,324 3,749 51.2% 892 23.8% 32.56
Missouri................... 116,348 73,778 63.4% 17,390 23.6% 35.70
Mississippi................ 1,911 1,142 59.8% 224 19.6% 36.63
No. Carolina............... 63,871 37,073 58.0% 10,964 29.6% 37.57
Nevada..................... 6,320 1,720 27.2% 1,340 77.9% 32.99
New York................... 26,092 15,887 60.9% 4,662 29.3% 32.08
Oklahoma................... 17,938 11,044 61.6% 4,717 42.7% 40.10
Oregon..................... 159,365 98,490 61.8% 24,430 24.8% 35.02
Texas...................... 50,611 31,857 62.9% 10,677 33.5% 36.02
Utah....................... 31,262 9,434 30.2% 4,869 51.6% 29.36
Virginia................... 35,097 16,700 47.6% 8,832 52.9% 41.84
Washington................. 15,039 10,650 70.8% 2,421 22.7% 34.35
---------- ----------- ------------
1,007,614 606,937 60.2% 183,234 30.2% $ 36.56
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
- ------------------------
(1) Average monthly revenue per basic subscriber has been computed based on
revenue for the three months ended March 31, 1998.
THE AFFILIATED SYSTEMS
The Company 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 is an indirect,
wholly owned subsidiary of FHGLP, is the corporate general partner
(collectively, the "Affiliated Partnerships"). On December 28, 1995, FHGLP
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,
FHGLP 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 Company's 1995 results of
operations. As a result, the management fees received by the Company from Falcon
First similarly have not been eliminated in consolidation of the Company's 1995
results of operations and are treated as having been received from the
Affiliated Systems. The operating results of the FCSC systems have been included
from July 12, 1996. The management fees and reimbursed expenses received by the
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<PAGE>
Company 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 Prospectus, FHGLP 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 Company manages cable television systems
which at March 31, 1998 served approximately 170,000 basic subscribers in 14
states, including South Carolina, Kentucky, Illinois, Washington and Tennessee.
In 1995, 1996 and 1997, the Company 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 Company expects that the systems of
these entities will become Owned Systems in 1998 and that the management
agreements with these entities will be terminated. Additionally, as noted above,
the Company 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 Company 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 Company 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 Company. In addition, the Company may
provide additional financing to certain of the Affiliated Partnerships in the
form of deferral of amounts owed to the Company. Marc B. Nathanson, certain
members of management and FHGLP hold varying equity interests in the Affiliated
Partnerships. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions."
OVERVIEW OF THE TCI SYSTEMS
The following table sets forth certain operating statistics for the TCI
Systems as of the dates indicated.
<TABLE>
<CAPTION>
AS OF MARCH
AS OF DECEMBER 31, 31, 1998
-------------------- --------------
1996 1997 1998
--------- --------- --------------
<S> <C> <C> <C>
Homes passed(1)......................................... 436,343 449,042 438,950
Basic subscribers(2).................................... 299,083 292,959 293,266
Basic penetration(3).................................... 68.5% 65.2% 66.8%
Premium service units(4)................................ 130,004 101,977 96,753
Premium penetration(5).................................. 43.5% 34.8% 33.0%
Average monthly revenue per basic subscriber(6)......... $ 29.18 $ 33.65 $ 34.20
</TABLE>
- ------------------------
(1) Homes passed refers to estimates by TCI 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.
(2) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on a "basic
customer equivalent" basis in which the total monthly bill for the account
is divided by the basic monthly charge for a single outlet in the area.
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<PAGE>
(3) Basic subscribers as a percentage of homes passed.
(4) Premium service units include single channel services offered for a monthly
fee per channel and include tiers of channels offered as a package for a
single monthly fee.
(5) Premium service units as a percentage of basic subscribers. A customer may
purchase more than one premium service, each of which is counted as a
separate premium service unit. This ratio may be greater than 100% if the
average customer subscribes for more than one premium service.
(6) Average monthly revenue per basic subscriber for the one-year period ending
on December 31, and for the three months ended March 31, 1998.
The TCI Systems are divided into 16 separate operating regions located in
five states. Subsequent to the TCI Transaction, four of the 16 TCI regions will
be consolidated into and operated from existing Falcon operating regions. The
following is a brief description of the operating regions.
WASHINGTON. As of March 31, 1998 (and including the subscribers served by
the Ellensburg systems), the five operating regions in Washington had 114,357
basic subscribers, which comprised approximately 39% of the basic subscribers of
the TCI Systems. The systems in the Washington regions have an average analog
channel capacity of 45, approximately 98% of which are currently utilized.
Approximately 88% of the customers in Washington are served by systems that
utilize addressable technology and approximately 82% of the customers are served
by systems that offer digital video service.
OREGON. As of March 31, 1998, the six operating regions in Oregon had
97,327 basic subscribers, which comprised approximately 33% of the basic
subscribers of the TCI Systems. The systems in the Oregon regions have an
average analog channel capacity of 42, approximately 91% of which are currently
utilized. Approximately 96% of the customers in Oregon are served by systems
that utilize addressable technology and approximately 63% of the customers are
served by systems that offer digital video services.
CALIFORNIA. As of March 31, 1998, the one operating region in California
had 36,082 basic subscribers, which comprised approximately 12% of the basic
subscribers of the TCI Systems. The systems in the California regions have an
average analog channel capacity of 43, approximately 98% of which are currently
utilized. All of the customers in California are served by systems that utilize
addressable technology and approximately 96% of the customers are served by
systems that offer digital video services.
MISSOURI. As of March 31, 1998, the two operating regions in Missouri had
24,441 basic subscribers, which comprised approximately 8% of the basic
subscribers of the TCI Systems. The systems in the Missouri regions have an
average analog channel capacity of 39, all of which are currently utilized. All
of the customers in Missouri are served by systems that utilize addressable
technology and approximately 60% of the customers are served by systems that
offer digital video services.
ALABAMA. As of March 31, 1998, the two operating regions in Alabama had
21,059 basic subscribers, which comprised approximately 7% of the basic
subscribers of the TCI Systems. The systems in the Alabama regions have an
average analog channel capacity of 48, approximately 94% of which are currently
utilized. Approximately 82% of the customers in Alabama are served by systems
that utilize addressable technology.
See "The TCI Transaction."
INTERNATIONAL ACTIVITIES
The international investments described below will not be contributed to New
Falcon as part of the TCI Transaction and will continue to be held by FHGLP. In
order to focus its limited capital resources on the upgrade and rebuild needs of
the Owned Systems, FHGLP does not expect to pursue any further
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international investments. See "Certain Relationships and Related Transactions."
As of March 31, 1998, FHGLP held the following international investments:
NYNEX CABLE COMMS. FHGLP holds a 1.1% carried interest in the results of
certain systems operated under franchises that FHGLP 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. FHGLP believes that NYNEX is now obligated to make
the carried interest payment to FHGLP, and FHGLP is evaluating its rights and
remedies in that regard. NYNEX has not provided FHGLP 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. FHGLP also provided
consulting services to NYNEX for an annual fee of $356,700. This consulting
agreement expired on September 12, 1997.
TELECAB. FHGLP 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 FHGLP), Mexican Duhamel Cable, Limited Partnership and
Duhamel Cable Partners, Limited Partnership to make an investment in 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. FHGLP 's investment is part of an
investment of approximately $41 million by DFC Mexico for an ownership interest
of 34% of Telecab. FHGLP 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 FHGLP's
wind-up of its international activities, this agreement was assigned to FIC, a
separately capitalized affiliated company whose members and management also
include certain limited partners and management of FHGLP. DFC Mexico concluded
an arbitration proceeding (which included FHGLP ) with the Mexican partners to
resolve certain disagreements regarding the management policies of Telecab. The
resolution of the arbitration proceeding resulted in DFC Mexico's shares being
purchased by the Mexican partners. As a result, on May 29, 1998, FHGLP received
approximately $1.7 million, which exceeded its current carrying value for the
investment in Telecab of approximately $1.5 million, resulting in a $200,000
gain.
OTHER INVESTMENTS
LAKE LAS VEGAS PROJECT. FHGLP 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. FHGLP'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 Company 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 Subsidiaries 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. FHGLP does not manage these systems and has not included the basic
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, which resulted in a decrease in the
percentage of equity of Falcon/Capital Cable owned by the Company.
ENSTAR COMMUNICATIONS CORPORATION. Enstar, an indirect subsidiary of FHGLP,
controls and holds varying equity interests in 15 limited partnerships.
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ENSTAR FINANCE COMPANY, LLC. On June 6, 1997, FHGLP and Enstar formed EFC,
an unrestricted subsidiary. On September 30, 1997, EFC obtained a secured bank
facility of $35 million 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. The EFC loan is non-recourse to FHGLP and matures on
August 31, 2001, at which time all funds previously advanced will be due in
full.
The Company's interests in the Enstar entities described above will not be
contributed to New Falcon as part of the TCI Transaction and will be held
directly by FHGLP following the TCI Transaction.
CUSTOMER RATES AND SERVICES
The Company'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 Company also offers other cable
television services to its customers, including pay-per-view programming. For
additional charges, in most of the Falcon Systems, the Company 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 Company 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 Company's systems not deemed to be subject to effective
competition under the FCC's definition. See "Legislation and Regulation."
At March 31, 1998, the Company'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 Company's marketing programs. A one-time installation fee,
which the Company 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, and for the three
months ended March 31, 1998 subscriber fees accounted for 84.9%, 86.9%, 87.4%
and 87.8%, respectively, of the Company's revenues. Management fees accounted
for 5.7%, 2.9%, 2.0% and 1.7%, respectively, of the Company'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%, 10.6% and 10.6%,, respectively.
EMPLOYEES
As of May 1, 1998, the Company had approximately 1,080 full-time employees
and 43 part-time employees. The Company considers its relations with its
employees to be good. As of March 31, 1998, the
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Affiliated Systems had approximately 136 full-time and 5 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 Company 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 Company 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 Company's capital expenditure plans is,
however, dependent in part on the availability of adequate capital on terms
satisfactory to the Company, of which there can be no assurance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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 Company'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 March 31, 1998, approximately 74% 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 Company 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 Company 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 Company to offer pay-per-view services.
DIGITAL COMPRESSION
The Company 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 Company 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 Company's management plans to introduce this technology in selected
markets in 1998. This issue is under frequent management review.
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PROGRAMMING
The Company 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 Company. Certain other new channels
have also recently offered the Falcon Systems certain inducements in return for
carrying their service. Due to a lack of channel capacity available for adding
new channels, the Company's management cannot predict the impact of such
potential benefits 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 Company's programming contracts are generally for a fixed
period of time and are subject to negotiated renewal. The Company 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 Company's
programming costs will not continue to increase substantially, or that other
materially adverse terms will not be added to the Company's programming
contracts. Management believes, however, that the Company's relations with its
programming suppliers generally are good.
The Company'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 Company 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 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act. See "Legislation and Regulation."
As of March 31, 1998, the Owned Systems held 482 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 which have become commercially impracticable.
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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 March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF BASIC PERCENTAGE OF BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES SUBSCRIBERS SUBSCRIBERS
- -------------------------------------------------- ------------- ----------- -------------------
<S> <C> <C> <C>
Prior to 1999..................................... 133 194,692 32.1%
1999-2003......................................... 147 152,410 25.1
2004 and after.................................... 202 224,294 37.0
--- ----------- ---
Total............................................. 482 571,396 94.2%
--- ----------- ---
--- ----------- ---
</TABLE>
The Company 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 35,541 basic subscribers, comprising approximately 5.8% of the
Owned Systems' basic subscribers, are served by such portions of such systems.
In general, the Company does not believe that the loss of any single franchise
would cause a substantial reduction in the economies of scale discussed above.
See "--Business Strategy." 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
Company's clustering strategy. The Company has never had a franchise revoked for
any of its systems and believes that it has satisfactory relationships with
substantially all of its franchising authorities.
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is 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
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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 DBS satellites 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 is 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. However,
DBS provider, EchoStar, has announced plans to deliver a limited number of local
broadcast signals in a limited number of markets and has initiated efforts to
have the practice legalized. If DBS providers are ultimately permitted to
deliver local broadcast signals, cable television systems would lose a
significant competitive advantage. DBS service can be received virtually
anywhere in the continental United States through the installation of a small
rooftop or side-mounted antenna, and it is more accessible than cable television
service where cable plant has not been constructed or where it is not cost
effective to construct cable television facilities. DBS service is being heavily
marketed on a nationwide basis by several service providers. In addition,
medium-power fixed-service satellites can be used to deliver direct-to-home
satellite services over small home satellite dishes, and one provider,
PrimeStar, currently provides service to subscribers using such a satellite.
Multichannel multipoint distribution systems ("wireless cable") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. Wireless cable systems are less capital
intensive, are not required to obtain local franchises or to pay franchise fees,
and are subject to fewer regulatory requirements than cable television systems.
To date, the ability of wireless cable services to compete with cable television
systems has been limited by channel capacity (35-channel maximum) and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few wireless cable systems in the United States are currently in operation or
under construction, virtually all markets have been licensed or tentatively
licensed. The use of digital compression technology may enable wireless cable
systems to deliver more channels.
Private cable television systems compete to service 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 telecommunications
services. The FCC recently completed 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.
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The 1996 Telecom Act eliminates the restriction against ownership (subject
to certain exceptions) 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, print media
and the 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."
PROPERTIES
The Company 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 Company owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices. The Company believes that its properties, both owned and leased, are in
good condition and are suitable and adequate for the Company's business
operations.
The Company 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 Company leases space for
the corporate financial center is owned by a partnership owned by Marc B.
Nathanson and his wife, Jane Nathanson. The Company 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
Company 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 Company in 1998 for a purchase price
determined by two independent appraisals. See "Certain Relationships and Related
Transactions."
LEGAL PROCEEDINGS
The Company is periodically a party to various legal proceedings. Such legal
proceedings are ordinary and routine litigation proceedings that are incidental
to the Company'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 Company.
FHGLP, 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. Plaintiffs in this action are
certain
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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 this 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 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 FCSC 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 FCSC
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 this action, and the action is currently in the pre-trial
discovery stage. The court has set a trial date for October 1998 for this
matter. FHGLP believes it has substantial and meritorious defenses to the
claims.
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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 Company 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 Company 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
Company.
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
regulations, the Company 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 regulations, 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
Company'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.
Numerous franchising authorities have become certified by the FCC to
regulate the rates charged by the Company for basic cable service and for
associated basic cable service equipment. In addition, a number of the Company's
customers and/or franchising authorities have filed complaints with the FCC
regarding the rates charged for nonbasic cable service.
The Company 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 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, an exemption from compliance with this requirement 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 Company 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 Company 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 Company 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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The FCC is currently conducting a rulemaking proceeding regarding the
carriage responsibilities of cable television systems during the transition of
broadcast television from analog to digital transmission. Specifically, the FCC
is exploring whether to amend the signal carriage rules to accommodate the
carriage of digital broadcast television signals.
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 certain
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 has recently been introduced 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.
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The 1992 Cable Act makes several changes to the process under which a cable
operator seeks to enforce his renewal rights which could make it easier in some
cases for a franchising authority to deny renewal. While a cable operator must
still submit its request to commence renewal proceedings within thirty to
thirty-six months prior to franchise expiration to invoke the formal renewal
process, the request must be in writing and the franchising authority must
commence renewal proceedings not later than six months after receipt of such
notice. The four-month period for the franchising authority to grant or deny the
renewal now runs from the submission of the renewal proposal, not the completion
of the public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether 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 "Business--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, and the
FCC recently initiated such a review. 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
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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 voting stock), officerships, directorships, general partnership
interests and limited partnership interests (unless the limited partners have no
material involvement in the limited partnership's business.) 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. See
"Risk Factors-- Conditions of Closing the TCI Transaction" and "Description of
the Partnership Agreements--New Falcon Partnership Agreement--Cross-Ownership
Provisions."
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 (the
"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 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.
Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure the
competitive availability to consumers of customers premises equipment, such as
converters, used to access the services offered by
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cable television systems and other multichannel video programming distributions
("MVPD"). Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their MVPD so long as the equipment
does not harm the network, does not interfere with the services purchased by
other customers, and is not used to receive unauthorized services. As of July 1,
2000, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using component
security modules obtained from the MVPD with set-top units purchased or leased
from retail outlets. As of January 1, 2005, MVPDs will be prohibited from
distributing new set-top equipment integrating both security and non-security
functions to their customers.
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 Company
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 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.
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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 the number and types of cable services provided. The 1996
Telecom Act prohibits a franchising authority from either requiring or limiting
a cable operator's provision of telecommunications services.
The 1984 Cable Act places certain limitations on a franchising authority's
ability to control the operation of a cable system operator, and the courts have
from time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially in
the area of customer service and rate regulation. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation of
cable television systems or decisions made on franchise grants, renewals,
transfers and amendments.
The foregoing describes all material regulations and legislation relevant to
the Issuers as part of the cable television industry, but it does not purport to
describe all present and proposed federal, state and local regulations and
legislation relating to the cable television industry. Other existing federal
regulations, copyright licensing and, in many jurisdictions, state and local
franchise requirements, currently are the subject of a variety of judicial
proceedings, legislative hearings and administrative and legislative proposals
which could change, in varying degrees, the manner in which cable television
systems operate. Neither the outcome of these proceedings nor their impact upon
the cable television industry can be predicted at this time.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF FHGI
FHGI serves as the sole general partner of FHGLP which, in turn, will serve
as the managing general partner of New Falcon. The directors and executive
officers of FHGI are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ------------------------------------------------
<S> <C> <C>
Marc B. Nathanson....... 53 Chairman of the Board, Chief Executive Officer
and a Director
Frank J. Intiso......... 51 President and Chief Operating Officer
Stanley S. Itskowitch... 59 Executive Vice President, General Counsel and a
Director
Michael K. Menerey...... 46 Executive Vice President, Chief Financial
Officer and Secretary
Joe A. Johnson.......... 53 Executive Vice President--Operations
Thomas J. Hatchell...... 49 Executive Vice President--Operations
Jon W. Lunsford......... 38 Executive Vice President--Finance
</TABLE>
Pursuant to certain management rights agreements with FHGLP, 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.
The following sets forth certain biographical information with respect to
the directors and executive officers of Falcon.
MARC B. NATHANSON, 53, 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 and a member of the Executive Committee 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 30-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 Falcon International Communications LLC. 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 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 and Cable Positive.
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FRANK J. INTISO, 51, was appointed President and Chief Operating Officer of
FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso 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 the management of Falcon. 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 currently serves as Immediate Past 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. He served as Senior Vice President and General Counsel of FHGI 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 its predecessors between 1984 and 1998. Mr. Menerey is
a Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants, and he was formerly associated with BDO Seidman. Mr. Menerey has
also served as Chief Financial Officer, Secretary and as a director of Enstar
since October 1988.
JOE A. JOHNSON, 53, has been Executive Vice President of Operations of FHGI
since September 1995, and was a Divisional Vice President of Falcon 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. Mr. Johnson is also a
member of the Cable Pioneers.
THOMAS J. HATCHELL, 49, 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
of 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 of Falcon between 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.
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OTHER OFFICERS OF FALCON
The following sets forth certain biographical information with respect to
certain additional members of FHGI management.
LYNNE A. BUENING, 44, has been Vice President of Programming of Falcon 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 Falcon since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California from 1985 to 1988. He was an Advertising Sales Account
Executive at Choice TV, an affiliate of Falcon.
ABEL C. CRESPO, 38, has been Controller of Falcon 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 Falcon
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 Falcon
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, 63, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. From 1987 to May 1988, she was self-employed as a
management consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles-based cable company from 1985
through 1987. Prior to that time, she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.
RAYMOND J. TYNDALL, 50, has been Vice President of Engineering of Falcon
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, Falcon 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.
BOARD OF REPRESENTATIVES OF FHGLP
The Existing FHGLP Partnership Agreement provides for the establishment of a
Board of Representatives of FHGLP, which has the authority to approve annual
budgets and whose approval is required in order for FHGLP to undertake certain
actions specified in the Existing FHGLP Partnership Agreement. The Board of
Representatives consists of eleven members, six of whom are appointed by Falcon
(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
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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. Upon consummation of the TCI Transaction, FHGLP
will be governed by the New FHGLP Partnership Agreement which does not provide
for a Board of Representatives. See "Description of the Partnership
Agreements--New FHGLP Partnership Agreement."
As of March 15, 1998, 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, Lawrence M. Unrein
III(1)(2)
Paul J. Finnegan
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
The following sets forth certain biographical information with respect to
the members of the Board of Representatives of FHGLP who are not members of
management. Each of such persons has been a member of the Board of
Representatives since the formation of FHGLP except for Messrs. Finnegan, Unrein
and Niehaus, who were first appointed in 1995, 1996 and 1997, respectively.
LEONARD J. BAXT, 50, has been a member of the Washington, D.C. office of the
law firm of Dow, Lohnes & Albertson, PLLC ("DL&A") since 1980. Mr. Baxt heads
the Corporate Department of DL&A 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, 50, 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 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 Deputy Chief Executive of Lazard Freres & Co. LLC,
which he joined in 1989 as a General Partner. Between 1986 and 1989, Mr. Rattner
was a Managing Director at Morgan Stanley & Co. Incorporated.
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<PAGE>
LAWRENCE M. UNREIN, 42, is a 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., 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. He serves on the Board of Directors at
Hamilton Services Corp. He is the Treasurer at Malcolm Baldridge, Quality Award
Foundation. He is also 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.
ADVISORY COMMITTEE OF NEW FALCON
The New Falcon Partnership Agreement provides for an Advisory Committee
consisting of six individual representatives of the partners, three of whom are
to be appointed by FHGLP, two of whom are to be appointed by TCI and one of whom
is to be appointed by joint designation of FHGLP and TCI. FHGLP must consult
with the Advisory Committee on certain partnership matters and must obtain the
Advisory Committee's approval before taking certain other actions on behalf of
New Falcon. For additional information regarding the governance and management
of New Falcon following consummation of the TCI Transaction, see "Description of
the Partnership Agreements--New Falcon Partnership Agreement."
FHGLP has appointed Marc B. Nathanson (Chairman), Frank J. Intiso and
Stanley S. Itskowitch as its initial representatives; TCI has appointed Leo J.
Hindery, Jr. and William R. Fitzgerald as its initial representatives; and FHGLP
and TCI have designated John S. Evans as their initial joint representative.
The following sets forth certain biographical information with respect to
the members of the Advisory Committee of New Falcon who are not members of
Falcon management.
LEO J. HINDERY, JR., 50, has served as the President and Chief Operating
Officer and a Director of Tele-Communications, Inc. ("TCI Parent") since March
1997 and has been a director of TCI Parent since May 1997. Mr. Hindery is also
President and Chief Executive Officer of TCI Communications, Inc. and is
Chairman of the Board of TCI Ventures Group. Mr. Hindery was previously founder,
Managing General Partner and Chief Executive Officer of InterMedia Partners, a
cable TV operator, and its affiliated entities since 1988. Mr. Hindery is
Chairman, a director and a member of the Executive Committee of the NCTA, and is
also a director of Cablevision Systems Corporation, Lenfest Group, TCI Music,
Inc., Telecommunications International, Inc., USA Networks, Inc. and the @ Home
Network. Mr. Hinderey is also Chairman and a director of C-SPAN.
WILLIAM R. FITZGERALD, 41, is Executive Vice President of Corporate
Development for TCI Communications, Inc. and has served as a Director of TCI
Communications, Inc. since January 30, 1998. Prior to joining TCI
Communications, Inc. in March 1996, he was a Senior Vice President and Partner
with Daniels & Associates, a leading brokerage and investment banking firm to
the communications industry. Before joining Daniels & Associates, Mr. Fitzgerald
was Vice President at The First National Bank of Chicago.
JOHN S. EVANS, 54, is Chairman and Chief Executive Officer of Evans
Telecommunications Company, an investment, consulting and operating company in
the cable television and telecommunications industries. From 1983 to 1994, he
was President and Chief Operating Officer of Hauser Communications and was co-
founder of C-SPAN. Mr. Evans serves as a trustee of the C-SPAN Educational
Foundation and is a director of C-SPAN, the NCTA, the Virginia Cable Television
Association, The Eisenhower World Affairs Institute and The Hollings Cancer
Center.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF FFC
The following persons are the sole directors and officers of FFC:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -------------------------------------------
<S> <C> <C>
Marc B. Nathanson.........................
53 Chief Executive Officer and a Director
Frank J. Intiso...........................
51 President and a Director
Stanley S. Itskowitch.....................
59 General Counsel and a Director
Michael K. Menerey........................
46 Chief Financial Officer, Secretary and a
Director
</TABLE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by FHGLP 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
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 FHGLP.
(2) Net of reimbursement for salary and bonus FHGLP 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.
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PROFIT SHARING PLAN
FHGLP 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, FHGLP 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 FHGLP 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, 1997 or for the three months ended March 31, 1998.
1993 INCENTIVE PERFORMANCE PLAN
On December 30, 1993, FHGLP 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 FHGLP, FHGI agreed to
fund any benefits payable under the Incentive Plan through additional capital
contributions to FHGLP, the waiver of its rights to receive all or part of
certain distributions from FHGLP and a contribution of a portion of its
Partnership Units to FHGLP. 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 FHGLP held by FHGI, 237.98 of
the Class A Units of FHGLP held by FHGI and a portion of FHGI's interest in
certain of the partnerships that are 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 FHGLP 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 FHGLP to fund such distributions.
The participants in the Incentive Plan are present and former employees of FHGLP
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. See "The TCI
Transaction." Following consummation of the TCI Transaction, the Company intends
to consider and adopt one or more new management incentive plans.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997 and for the three months
ended March 31, 1998, 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 Financial Officer and Secretary,
participated in deliberations with the Board of Representatives of FHGLP with
respect to executive officer compensation.
The Company 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 Company has negotiated a new lease
expiring September 30, 2005. The base rent is currently approximately $31,000
per month, and increased to approximately $35,000 per month in the first quarter
of 1998 due to additional space required in connection with the TCI Transaction.
The Company believes that the terms of the new Pasadena lease are consistent
with leases between unaffiliated parties involving similarly situated
properties. The Company 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 Company in 1998 for a purchase price
determined by the average of two independent appraisals.
In addition, the Company 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 Company pays the balance. The net
amount paid by the Company in 1995, 1996, 1997 and for the three months ended
March 31, 1998 was approximately $180,000, $118,300, $163,000 and $51,000,
respectively.
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 Company
receive no compensation for their service on the Board of Representatives other
than reimbursement of expenses. Following consummation of the TCI Transaction,
members of the Advisory Committee who are not affiliated with the Company will
receive $10,000 per year and will be reimbursed for expenses.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FHGLP and its affiliates, including Marc B. Nathanson and other members of
Falcon's senior management team, currently own varying interests in, and FHGLP
controls the general partners of, the Affiliated Partnerships and certain other
entities engaged in the cable television business. FHGLP 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, FHGLP acquired the assets
of FCSC. See "Business--The Affiliated Systems." 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 FHGLP, approximately $758,000. FCSC also paid FHGLP approximately
$5.2 million of previously deferred fees.
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. In March 1998, FHGLP acquired
substantially all of the assets of Falcon Classic. In connection with this sale,
Falcon Classic made a 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; 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
FHGLP, approximately $33,200. The remaining distribution relates to the July 16,
1998 sale of the City of Somerset system, which will result in proceeds of
approximately $65,400 to FCCIG, which proceeds will be distributed to the FCCIG
partners in essentially the same proportion as the payments enumerated above.
FALCON VIDEO COMMUNICATIONS, L.P. The partners of Falcon Video have agreed
to combine Falcon Video's assets with those of FHGLP concurrent with the closing
of the TCI Transaction. See "The TCI Transaction." If the TCI Transaction has
not occurred, then at any time subsequent to May 15, 1999, either FHGLP or
certain limited partners of Falcon Video may initiate the sale of the
partnership based on an appraised value. In such a circumstance, FHGLP 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 FHGLP at its bid, (ii) sell such assets
to an unaffiliated third party at a price equal to at least 105% of the price
which FHGLP agreed to pay or (iii) not effect a sale of the assets. If FHGLP
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 FHGLP 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, FHGLP 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 FHGLP's
management and certain of its limited partners. The sales 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, FHGLP received an
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additional $1.9 million, $1.1 million and $398,000 in cash as reimbursement for
1995, 1996 and 1997 operating costs, respectively, related to international
investments. There is also an insurance cost allocation agreement between FHGLP
and FIC. In order to focus its limited capital resources on the upgrade and
rebuild needs of the Owned Systems, FHGLP does not expect to pursue any further
international investments. See "Business--International Activities."
INDEMNIFICATION OF THE GENERAL PARTNER. The Existing FHGLP Partnership
Agreement provides that FHGI, as the general partner of FHGLP (the "General
Partner") will be indemnified by FHGLP for acts performed within the scope of
its authority under the Existing FHGLP 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 FHGLP 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 FHGLP 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, FHGLP 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 FHGLP would be entitled to
indemnify such person pursuant to the 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, it is the opinion of the Commission that such
indemnification is contrary to public policy and therefore unenforceable.
MANAGEMENT LOANS
In September 1994, FHGLP loaned Jon W. Lunsford, Executive Vice
President--Finance, 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.
OTHER
The Company 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, increased 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 arms' length basis. It is expected that any future
modifications to the leasing agreement will be approved by the members of the
Board of Representatives of FHGLP other than Marc B. Nathanson. The Company 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
FHGLP in 1998 for $282,500, a price determined by two independent appraisals.
As noted herein, certain executive officers of FHGLP have ownership
interests in the Affiliated Partnerships and in other domestic and international
cable operations in addition to their equity interests in FHGLP. 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,
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the Affiliated Partnerships each have Advisory Committees or similar bodies
which, among other things, act in the case of conflicts of interest.
Leonard J. Baxt is a member of the Board of Representatives and a limited
partner of FHGLP. Mr. Baxt is also a member of DL&A, which has served as counsel
to FHGLP in connection with the Exchange Offer, the Offering, the TCI
Transaction, the Notes Tender and the Notes Redemption. DL&A has provided other
legal services to FHGLP from time to time and received customary fees for such
services.
For a description of certain other transactions involving management, see
"Management--Compensation Committee Interlocks and Insider Participation."
TRANSACTIONS WITH TCI
Pursuant to the New Falcon Partnership Agreement, TCI Communications, Inc.,
an affiliate of TCI and the direct or indirect owner, of substantially all of
the cable television systems wholly-owned and operated in the continental United
States by TCI Parent, has agreed to use commercially reasonable efforts to (i)
cause to be offered to New Falcon and its subsidiaries equipment, billing
services, the At Home Internet access service, HITS and other goods and services
that are made available to TCI Communications, Inc. or the cable television
systems owned by TCI Communications, Inc., at a cost equal to the direct cost
incurred by TCI Communications, Inc. for such goods and services and (ii) make
available to New Falcon on a royalty-free basis any technological innovations
that TCI Communications, Inc. develops, or becomes aware of and has access to,
for other cable television systems owned by or otherwise affiliated with TCI
Communications, Inc.
As a result of its relationship with TCI, the Company has the ability to
purchase its programming at rates approximating those available to TCI. The
Company has a contract with Satellite Services, Inc. ("SSI"), a subsidiary of
TCI, to obtain basic and premium programming. SSI contracts with various
programmers to purchase programming. Following consummation of the TCI
Transaction, the Company has the option (but is not required) to purchase
programming for the Company's systems through its contract with SSI for which it
will pay SSI's cost plus an administrative fee.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and footnotes set forth, as of March 31, 1998, the
beneficial ownership of general partnership interests and Class A and Class B
limited partnership interests of FHGLP by (i) each person who is known to FHGLP
to own beneficially more than 5% of such partnership interests of FHGLP and (ii)
all executive officers of FHGLP and the members of the Board of Representatives
of FHGLP.
<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>
Marc B. Nathanson(1)(2).................. General Partner -- 100.0%
Limited Partner 36,107 36.1%
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 FHGLP 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
FHGLP. However, by virtue of Mr. Nathanson's ownership of a majority of the
voting securities of FHGI, the general partner of FHGLP, he has voting and
investment power as to the 11,195 limited partnership units of FHGLP held
of record by FHGI. Although FHGI has equity ownership, and therefore
investment power, over 11.2% of the partnership units of FHGLP, 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 FHGLP 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 FHGLP 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 FHGLP 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
FHGLP held by such trust. Mr. Nathanson also beneficially owns 0.46% 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
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entities are controlled by Hellman & Friedman. Hellman & Friedman has
equity ownership, and therefore investment power over 35.4% of the
partnership units of FHGLP 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 FHGLP. 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 IIA
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 LLC"). Madison Dearborn Partners VI, of which Mr.
Finnegan is a general partner, is the sole manager of FFC LLC. Excludes the
Class C partnership units held of record by FFC LLC, which generally do not
have voting rights and are entitled to participate in the profits of FHGLP
under limited circumstances after receipt of a preferred return as
described in the Existing FHGLP Partnership Agreement. Except for its
partnership interest in FHGLP, FFC LLC is otherwise unaffiliated with any
other Falcon entity. The address is c/o Madison Dearborn Partners, Inc.,
Three First National Plaza, Suite 3800, Chicago, Illinois 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 FHGLP
under limited circumstances after receipt of a preferred return as
described in the Existing FHGLP Partnership Agreement. All such Class C
partnership interests are held of record by FFC LLC.
(8) Frank J. Intiso beneficially owns 0.04% of Falcon Classic and 0.35% of
Falcon Video, each an Affiliated Partnership.
(9) Stanley S. Itskowitch beneficially owns 0.09% of Falcon Classic and 0.35%
of Falcon Video, each an Affiliated Partnership.
(10) Michael K. Menerey beneficially owns 0.04% of Falcon Classic and 0.15% of
Falcon Video, 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 of
FHGLP as the designee of an affiliated partner of FHGLP. 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 FHGLP.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENTS
The following is a summary of the material terms of the Existing FHGLP
Partnership Agreement, the Fourth Amended and Restated Agreement of Limited
Partnership of Falcon Holding Group, L.P. (the "New FHGLP Partnership
Agreement") and the Amended and Restated Agreement of Limited Partnership of
Falcon Communications, L.P. (the "New Falcon Partnership Agreement")
(collectively, the "Partnership Agreements"). Copies of the Partnership
Agreements have been filed with the Commission. The statements under this
caption are summaries, and investors are encouraged to read the full text of the
Partnership Agreements. All capitalized terms not otherwise defined herein shall
have the meanings ascribed to them in the respective Partnership Agreements.
EXISTING FHGLP PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. FHGLP was organized on February 11, 1993 as a
Delaware limited partnership to assume the cable management and operations of
FHGI. Unless sooner terminated in accordance with the terms of the Existing
FHGLP Partnership Agreement, FHGLP will continue until January 1, 2015.
GENERAL PARTNER. FHGI is the sole general partner of FHGLP and, except for
certain partnership matters specified in the Existing FHGLP Partnership
Agreement requiring the approval of the Board of Representatives or the limited
partners, FHGI has the exclusive authority to manage the business, operations
and affairs of FHGLP and the exclusive right to exercise all rights incident to
the ownership of all partnership and other interests held by FHGLP.
BOARD OF REPRESENTATIVES. The Existing FHGLP Partnership Agreement provides
for a Board of Representatives consisting of up to eleven individual
representatives of the partners, as follows:
(1) Four members are designated by FHGI in its sole discretion. FHGI's
current designees are Marc B. Nathanson, Frank J. Intiso, Stanley S.
Itskowitch and Michael Menerey.
(2) Two additional "independent" members are designated by FHGI with the
approval of a majority of the members of the Board of Representatives
(other than the four FHGI representatives). The current "independent"
designees are Leonard J. Baxt and Steven Rattner.
(3) So long as any of the Group II Partners continues to be a partner of
FHGLP, two members are designated by Hellman & Friedman Capital Partners
II, L.P. and one member is designated by Hellman & Friedman Capital
Partners, a California Limited Partnership, subject to approval by FHGI
in certain circumstances. The current Group II designees are John L.
Bunce, Jr., Lawrence M. Unrein and Joseph M. Niehaus.
(4) So long as any of the Group I Partners continues to be partner of FHGLP,
one member is designated by Boston Ventures Limited Partnership II,
subject to approval by FHGI in certain circumstances. The current Group I
designee is Roy F. Coppedge, III.
(5) So long as any of the Group III Partners continues to be a partner in
FHGLP and none of the Group I partners continues to be a partner in
FHGLP, one member of the Board of Representatives is designated by Leeway
& Co., subject to certain permitted FHGI approval rights. So long as any
of the Group III partners continues to be a partner in FHGLP and none of
the Group II partners continues to be a partner in FHGLP, two members of
the Board of Representatives are designated by Leeway & Co., subject to
certain permitted FHGI approval rights. There are currently no Group III
designees.
(6) So long as the Group IV Partner and the Original Group IV Members
continue to beneficially own a certain specified minimum ownership
percentage in FHGLP or its corporate successor,
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one member is designated by Madison Dearborn Partners VI, subject to
approval by FHGI in certain circumstances. The current Group IV designee
is Paul J. Finnegan.
See "Management" for additional biographical information regarding the members
of the Board of Representatives.
The Existing FHGLP Partnership Agreement prohibits FHGLP and its
subsidiaries from taking certain actions without the approval of at least a
majority of the members of the Board of Representatives, including:(1) making
any expenditures inconsistent with the annual operating budget or capital
expenditure budget, with certain permitted exceptions; (2) sale or other
disposition of assets in a single transaction having an aggregate value in
excess of $15 million; (3) purchase or other acquisition of assets in a single
transaction having an aggregate value in excess of $15 million or that are not
reasonably related to the business of FHGLP; (4) incurrence of any indebtedness,
with certain permitted exceptions; (5) issuance of any equity interest in FHGLP
or a subsidiary, with certain permitted exemptions; (6) making any voluntary or
optional prepayment on any indebtedness, except pursuant to any revolving credit
arrangements; (7) purchase or redemption of any partnership interest in FHGLP or
any subsidiary, with certain permitted exceptions; (8) making any distributions
of cash or property to the partners of FHGLP with respect to their partnership
interest in FHGLP, with certain permitted exceptions; (9) entering into any
transaction or agreement with the general partner or its affiliates, with
certain permitted exceptions; and (10) making certain amendments to any
agreement pursuant to which FHGLP manages cable television systems. In addition,
the Board of Representatives must approve, under procedures set forth in the
Existing FHGLP Partnership Agreement, an annual operating budget and an annual
capital expenditure budget for FHGLP and its subsidiaries and the aggregate
compensation of the Partnership's designated senior management.
LIMITED PARTNERS. The Existing FHGLP Partnership Agreement provides for
three different classes of limited partnership interests: Class A, Class B and
Class C. The Class C partnership interests are non-voting interests (with the
exception of certain permitted approval rights). Each non-management limited
partner is designated as a Group I Partner, a Group II Partner, a Group III
Partner or a Group IV Partner. See "--Partner Liquidity." The Group I Partners,
the Group II Partners and the Group III Partners principally hold Class B
partnership interests and the Group IV Partner holds Class B and Class C
partnership interests.
APPROVAL RIGHTS OF LIMITED PARTNERS. The Existing FHGLP Partnership
Agreement prohibits FHGLP and its subsidiaries from taking certain actions
without the approval of limited partners holding at least a two-thirds voting
interest, including: (1) effecting a merger or consolidation, with certain
permitted exceptions, (2) sale or other disposition of assets in a single
transaction having an aggregate value in excess of $15 million; (3) purchase or
other acquisition of assets in a single transaction having an aggregate value in
excess of $15 million or that are not reasonably related to the business of
FHGLP; (4) incurrence of any indebtedness, with certain permitted exceptions;
(5) issuance of any equity interest in FHGLP or any subsidiary, with certain
permitted exemptions; (6) making any voluntary or optional prepayment on any
indebtedness, except pursuant to any revolving credit arrangements; (7) purchase
or redemption of any partnership interest in FHGLP or any subsidiary, with
certain permitted exceptions; (8) making any distributions of cash or property
to the partners of FHGLP with respect to their partnership interest in FHGLP,
with certain permitted exceptions; (9) entering into any transaction or
agreement with the general partner or its affiliates, with certain permitted
exceptions; (10) making certain amendments to any agreement pursuant to which
FHGLP manages cable television systems; and (11) paying any compensation to any
member of the Board of Representatives, with certain permitted exceptions. The
Existing FHGLP Partnership Agreement also prohibits FHGLP and its subsidiaries
from incurring any indebtedness, which would restrict FHGLP's ability to satisfy
its obligations with respect to the partners' liquidity rights. This restriction
is materially more limiting than the corresponding provisions of the Company's
debt agreements in effect on December 28, 1995 (including the bank credit
agreement, as then in place, and the Debentures), and requires the consent of
the partner designee of the partners whose liquidity rights would be affected.
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CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. Other than the capital
contributions already made by the partners to FHGLP, the Existing FHGLP
Partnership Agreement does not require any additional capital contributions. The
Class C partnership interests have certain preferences over the Class A and
Class B partnership interests with respect to the allocation of income and
distributions by FHGLP. Otherwise, all distributions made by FHGLP are generally
made in proportion to the partners' percentage interests. Distributions prior to
liquidation of FHGLP are made at the discretion of FHGI, except that FHGLP is
required to make annual distributions of available cash (subject to contractual
restrictions on distributions by FHGLP) to the extent of the partners' aggregate
estimated tax liabilities as a result of the allocation to them of FHGLP's
income and gain. No such distributions have been made since the formation of
FHGLP.
PARTNER LIQUIDITY. 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 (either as a result of a
partner exercising a put right or pursuant to the existing mandatory redemption
provisions) 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 (the "tolling 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 of the date of the
Prospectus, the number of days in the tolling period cannot be finally
determined. Assuming that the Contribution Agreement is not terminated prior to
December 31, 1998, the tolling period will be approximately sixteen months. The
various dates included in the discussion below assume a tolling period equal to
approximately sixteen months. If the Contribution Agreement is terminated prior
to December 31, 1998, the tolling period would be less than sixteen months and
FHGLP may be required to redeem certain partnership interests earlier than the
dates set forth below. Subject to certain customary exceptions, the Contribution
Agreement may not be terminated without the consent of FHGLP prior to December
31, 1998.
The Group I Partners may require FHGLP to redeem all of their partnership
interests on or before January 2000 (subject to a shorter tolling period as
described above). Subject to certain conditions, FHGLP is required to redeem,
and the Group II Partners are required to sell, the partnership interests held
by the Group II Partners between November 1999 and October 2000 (subject to a
shorter tolling period as described above). If the Group I Partners exercise
their put right (the election is required to be made between December and March
prior to the above effective date), the partnership interests held by the Group
II Partners may not be redeemed until the partnership interests held by the
Group I Partners have been redeemed. The partnership interests held by the Group
III Partners must be redeemed concurrently with the redemption of the
partnership interests held by the Group II Partners unless the Group III
Partners exercise an option to not be so redeemed. If the Group III Partners
exercise their option not to be so redeemed, on the earlier of July 2001
(subject to a shorter tolling period as described above) or approximately nine
months after FHGLP redeems the partnership interests held by the Group II
Partners (and on each second anniversary thereafter), there will be a 90-day
period during which FHGLP may elect to redeem the partnership interests held by
the Group III Partners, on the one hand, and the Group III Partners may require
FHGLP to redeem their partnership interests, on the other hand (which redemption
shall be effective within 180 days after the election). The Class C partnership
interests held by the Group IV Partner may be repurchased by FHGLP at any time,
and from time to time, at a price equal to the redemption value thereof, and are
subject to mandatory redemption in July 2005 (subject to a shorter tolling
period as described above). The Group IV Partner has the option to require FHGLP
to redeem its Class B partnership interests at any time after July 2005 (subject
to a shorter tolling period as described above). Under certain circumstances,
the Group IV Partner may elect to participate in a redemption of the partnership
interests held by the Group II Partners. The redemption values of the Class B
partnership interests will generally be determined through negotiation or a
third party appraisal mechanism, as specified in the Existing FHGLP Partnership
Agreement, at the time the interests are redeemed. The redemption value of the
Class C partnership interests will be equal to its stated value, as determined
in accordance with the Existing FHGLP Partnership Agreement. The purchase price
for the
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redeemed interests must be paid in cash, or under certain circumstances, may be
paid through the issuance of debt or equity securities. If FHGLP fails to
purchase certain of the limited partnership interests within a specified period
after FHGLP's purchase obligations arise, absent an alternative arrangement with
the partners, FHGLP may be required to liquidate. See "Risk Factors--Obligations
of FHGLP to Redeem Limited Partnership Interests." The liquidity rights
described above will be terminated in connection with the consummation of the
TCI Transaction and be replaced by certain liquidity rights provided to the non-
management partners in the New FHGLP Partnership Agreement. See "New FHGLP
Partnership Agreement."
CONVERSION OF FHGLP INTO A CORPORATION. With the approval of limited
partners holding greater than a fifty percent voting interest, the limited
partners may elect at any time to require that FHGLP be converted into a
corporation (a "Corporate Conversion"), except that if the conversion into a
corporation is for the purpose of effecting an initial public offering (a
"Public Corporate Conversion"), only the consent of each of FHGI, a specified
Group I Partner, a specified Group II Partner and a specified Group III Partner
is required. The Existing FHGLP Partnership Agreement does not afford the Group
IV Partner a separate right to approve a Corporate Conversion but contains
provisions that preserve certain substantive rights and preferences of the
partners following a Corporate Conversion and generally require that the Group
IV Partner be treated no less favorably than the Group II Partners with respect
to certain aspects of a Corporate Conversion. In the event of a Public Corporate
Conversion, the Class C partnership interests will be converted into that number
of shares of common stock of the successor corporation that have a value equal
to the redemption value of the Class C interests immediately prior to the Public
Corporate Conversion, and the Class A and Class B partnership interests will be
converted pro rata into the remaining shares of common stock of the successor
corporation allocated for distribution to the partners of FHGLP, subject to a
Class A holder's election to receive super-voting stock. In the event of a
Corporate Conversion, the Class C partnership interests will be converted into
shares of preferred stock of the successor corporation with a redemption
preference equal to the redemption value of the Class C interests immediately
prior to the Corporate Conversion, and the Class A and Class B partnership
interests will be converted pro rata into all the shares of common stock
allocated for distribution to the partners of FHGLP. In addition, upon any
Corporate Conversion, the successor corporation shall enter into a Registration
Rights Agreement with the FHGLP partners pursuant to which the partners would
have certain rights to elect to register their stock in the successor
corporation under the Securities Act. Generally, the put and call rights
applicable to the limited partnership interests are tolled or terminated during
or following an effective registration of the successor interests following a
Corporate Conversion.
AMENDMENTS. In general, the Existing FHGLP Partnership Agreement may not be
amended without the approval of FHGI and limited partners holding at least a
two-thirds voting interest. Certain amendments require unanimous approval by the
limited partners or the approval of specified limited partners.
WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. With
certain permitted exceptions, without the approval of limited partners holding
at least a two-thirds voting interest, the Existing FHGLP Partnership Agreement
prohibits FHGI from withdrawing as general partner of FHGLP or assigning its
partnership interest. The Existing FHGLP Partnership Agreement also prohibits
any limited partner of FHGLP from assigning its partnership interest without the
consent of FHGI, subject to certain permitted exceptions.
DISSOLUTION AND LIQUIDATION. The principal events upon which FHGLP will
dissolve are: (1) the expiration of the term of FHGLP (January 1, 2015); (2) the
sale or other disposition of all or substantially all of the assets of FHGLP;
(3) subject to contractual restrictions, with the consent of FHGI and limited
partners holding at least a two-thirds voting interest; (4) an election to
dissolve FHGLP made by limited partners holding greater than a fifty percent
voting interest if Marc B. Nathanson voluntarily ceases to be active in the
business of FHGLP (subject to certain permitted exceptions) or Marc B. Nathanson
involuntarily ceases to be active in the business of FHGLP and a successor has
not been designated by
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FHGI and approved by limited partners holding greater than a fifty percent
voting interest within one year; (5) the withdrawal of FHGI as the general
partner unless the partners of FHGLP vote to continue FHGLP; and (6) the
happening of any event that, under applicable law, causes the dissolution of a
limited partnership. In the event of liquidation, the Class C partnership
interests have priority in liquidation over the other partnership interests in
the amount of its then stated value.
NEW FHGLP PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. The New FHGLP Partnership Agreement will become
effective concurrently with the Closing of the TCI Transaction. Unless sooner
terminated in accordance with the terms of the New FHGLP Partnership Agreement,
FHGLP will continue until January 1, 2025.
GENERAL PARTNER. FHGI will remain the sole general partner of FHGLP and,
except for certain partnership matters specified in the New FHGLP Partnership
Agreement requiring the approval of the limited partners, FHGI will have the
exclusive authority to manage the business, operations and affairs of FHGLP and
the exclusive right to exercise all rights incident to the ownership of all
partnership or corporate interests held by FHGLP. Under the New FHGLP
Partnership Agreement, FHGLP will be prohibited from entering into certain
transactions with Marc B. Nathanson or any Nathanson Controlled Entity without
the consent of (1) limited partners (excluding Nathanson Controlled Entities)
which hold more than 50% of the outstanding limited partnership interests
(excluding these held by Nathanson Controlled Entities) and (2) so long as the
Hellman Partners have not disposed of any of the partnership interests in FHGLP
held by the Hellman Partners, the Hellman Partners.
CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. Other than the capital
contributions already made by the partners to FHGLP and the contributions to be
made pursuant to the Contribution Agreement, the New FHGLP Partnership Agreement
will not require any additional capital contributions. Distributions prior to
liquidation of FHGLP will be made at the discretion of FHGI, except that FHGLP
will be required to make annual distributions of available cash (subject to
contractual restrictions on distributions by FHGLP) to the extent of
distributions from New Falcon with respect to the partners' aggregate estimated
tax liabilities as a result of the allocation to them of New Falcon's income and
gain. Profits and losses will be allocated, and distributions will be made, in
proportion to the partners' percentage interests, except that following a
dissolution of FHGLP, distributions will be made first to the two holders of
certain 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; and
thereafter, to all partners (including the holders of the Preferred Interests)
in proportion to their percentage interests. The Preferred Return equals $6
million plus a 10% return from the date of the closing of the TCI Transaction.
PUT/CALL RIGHTS. For purposes of the following put/call provisions, (1) New
Falcon is the "Purchaser" if FHGLP has not purchased TCI's entire interest in
New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership
Agreement, and (2) FHGLP is the "Purchaser" if FHGLP has purchased TCI's entire
interest in New Falcon pursuant to the buy/sell provisions of the New Falcon
Partnership Agreement. See "--New Falcon Partnership Agreement."
LIMITED PARTNERS' PUT RIGHTS. If the non-management limited partners of
FHGLP have made an election (which election may not be made earlier than 7 1/2
years after consummation of the TCI Transaction) to require FHGLP to effect an
Incorporation (as defined herein) of FHGLP or an election to require FHGLP to
make an election to require New Falcon to effect an Incorporation of New Falcon,
then (regardless of whether TCI approves such election), at any time after the
date that is six months after the non-management limited partners' election and
prior to the date on which the successor corporation has consummated a Qualified
Public Offering, the non-management limited partners of FHGLP (other than
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Belo Ventures, Inc.) (by a vote of non-management limited partners holding an
aggregate partnership interest equal to at least 51% of the aggregate limited
partnership interest held by them, other than Belo Ventures, Inc., on the date
of the closing of the TCI Transaction) will have the right to elect to require
that the Purchaser purchase all of the non-management partners' partnership
interests in FHGLP (including the partnership interest held by Belo Ventures,
Inc.).
At any time prior to the date on which the successor corporation to FHGLP or
New Falcon, as applicable, consummates a Qualified Public Offering and after (A)
if the non-management limited partners of FHGLP have made an election to require
FHGLP to effect an Incorporation of FHGLP or an election to require FHGLP to
make an election to require New Falcon to effect an Incorporation of New Falcon,
the date that is six months after such election, or (B) if the non-management
limited partners of FHGLP have not made such an election, but FHGI has made an
election to require FHGLP to effect an Incorporation of FHGLP or FHGLP has made
an election to require New Falcon to effect an Incorporation of New Falcon, the
later of the date that is six months after such election or the date that is
eight years and nine months after the closing of the TCI Transaction, or (C) in
all other events, the date that is eight years and nine months after the closing
of the TCI Transaction, the non-management limited partners of FHGLP (other than
Belo Ventures, Inc.) (by a vote of non-management limited partners holding
partnership interests representing an aggregate percentage interest at least
equal to the aggregate percentage interest represented by the partnership
interests held by the Specified Investors on the date of the closing of the TCI
Transaction) will have the right to elect to require that the Purchaser purchase
all of the non-management partners' partnership interests in FHGLP (including
the partnership interest held by Belo Ventures, Inc.).
Any non-management limited partner of FHGLP that did not join in an election
by the non-management limited partners to require the Purchaser to purchase the
partnership interests of the non-management limited partners may elect to
exclude its partnership interest in FHGLP from the purchase and sale and, upon
such election, all put and call rights with respect to such partner's
partnership interest in FHGLP will automatically terminate. Under specified
circumstances, following an election by the non-management limited partners of
FHGLP to require the Purchaser to purchase all of their partnership interests in
FHGLP, the Purchaser will have the right to request that the purchase and sale
be deferred for sixty days to permit the consummation of a Qualified Public
Offering. See "Risk Factors--Obligations of FHGLP to Redeem Limited Partnership
Interests."
PURCHASER'S CALL RIGHT. At any time prior to the date on which the
successor corporation to FHGLP or New Falcon, as applicable, consummates a
Qualified Public Offering and after (A) if the non-management limited partners
of FHGLP have made an election to require FHGLP to effect an Incorporation of
FHGLP or an election to require FHGLP to make an election to require New Falcon
to effect an Incorporation of New Falcon, the date that is six months after such
election, or (B) if the non-management limited partners of FHGLP have not made
such an election, the date that is eight years and nine months after the closing
of the TCI Transaction, the Purchaser will have the right to elect to require
each of the non-management limited partners of FHGLP to sell its entire interest
in FHGLP to the Purchaser.
If the Incorporation of FHGLP occurs without the concurrent consummation of
a Qualified Public Offering, the corporate successor to FHGLP will succeed to
all rights and assume all obligations of FHGLP pursuant to the put/call
provisions of the New FHGLP Partnership Agreement, which rights and obligations
(and if FHGLP has not purchased TCI's entire interest in New Falcon pursuant to
the buy/sell provisions of the New Falcon Partnership Agreement, the rights and
obligations of New Falcon) will survive the Incorporation of FHGLP and the
dissolution and liquidation of FHGLP. If the Incorporation of FHGLP occurs
concurrently with the consummation of a Qualified Public Offering and the
liquidation of FHGLP, the put/call provisions of the New FHGLP Partnership
Agreement will terminate upon the Incorporation of FHGLP. If the Incorporation
of New Falcon occurs without the concurrent consummation of a Qualified Public
Offering, the corporate successor to New Falcon will succeed to all rights and
assume all obligations of New Falcon pursuant to the put/call provisions of the
New FHGLP Partnership
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Agreement, which rights and obligations will survive the Incorporation of New
Falcon and the dissolution and liquidation of FHGLP. If the Incorporation of New
Falcon occurs concurrently with the consummation of a Qualified Public Offering
and the liquidation of FHGLP, the put/call provisions of the New FHGLP
Partnership Agreement will terminate upon the Incorporation of New Falcon.
CONVERSION OF FHGLP INTO A CORPORATION. FHGI will have the right to elect
at any time, without the approval of FHGLP's limited partners, to convert FHGLP
to a corporation for the purpose of effecting an initial public offering (an
"Incorporation"). The non-management limited partners of FHGLP (by a vote of at
least 51% of the aggregate limited partnership interests held by them on the
date of the closing of the TCI Transaction) will have the right to elect to
require that FHGLP effect an Incorporation at any time after the purchase by
FHGLP of TCI's entire interest in New Falcon pursuant to the buy/sell provisions
of the New Falcon Partnership Agreement (see "--New Falcon Partnership
Agreement--Partner Liquidity-- Buy/Sell Rights"), but in no event earlier than
seven years and six months after the closing of the TCI Transaction.
Consummation of an Incorporation of FHGLP shall be conditioned on the concurrent
public offering and sale of equity securities in the successor corporation on
such terms and conditions as FHGI deems appropriate, and the successor
corporation shall offer to enter into a Registration Rights Agreement pursuant
to which the partners of FHGLP could elect to register their stock in the
successor corporation under the Securities Act. As part of an Incorporation of
FHGLP, FHGI will have the right to require, at its sole discretion, (1) that
FHGI retain control of the successor corporation and have exclusive authority to
manage the operations and affairs of the successor corporation, and/or (2) that
FHGLP and New Falcon be consolidated such that the owners of FHGLP immediately
prior to the Incorporation of FHGLP, on the one hand, and TCI (or one or more
direct or indirect owners of TCI), on the other hand, shall be the owners of the
successor corporation immediately after the Incorporation of FHGLP. The relative
ownership interests of the owners of the successor corporation immediately after
the Incorporation of FHGLP shall be the same as their relative ownership
interests immediately prior to the Incorporation of FHGLP.
CONVERSION OF NEW FALCON INTO A CORPORATION. At any time after the date
that is seven years and six months after the closing of the TCI Transaction, the
non-management limited partners of FHGLP (by a vote of non-management limited
partners holding at least 51% of the aggregate limited partnership interests
held by them on the date of the closing of the TCI Transaction) will have the
right to require that FHGLP make an election pursuant to the New Falcon
Partnership Agreement to require New Falcon to effect an Incorporation, which
election shall be subject to the approval of TCI as provided in the New Falcon
Partnership Agreement See "--New Falcon Partnership Agreement--Conversion of New
Falcon to Corporation." At any time after the date that is eight years and six
months after the closing of the TCI Transaction, the non-management limited
partners of FHGLP (by a vote of non-management limited partners holding
partnership interests representing an aggregate percentage interest at least
equal to the aggregate percentage interest represented by the partnership
interests held by the Specified Investors on the date of the closing of the TCI
Transaction), will have the right to require that FHGLP make an election
pursuant to the New Falcon Partnership Agreement to require New Falcon to effect
an Incorporation, which election shall be subject to the approval of TCI as
provided in the New Falcon Partnership Agreement. The non-management limited
partners will not be permitted to require FHGLP to make such election at any
time that FHGLP is prohibited from making such an election under the New Falcon
Partnership Agreement. Upon any Incorporation of New Falcon that involves the
receipt by FHGLP of shares of capital stock in a successor corporation to New
Falcon, FHGLP will dissolve in accordance with the liquidation provisions of the
New FHGLP Partnership Agreement and distribute such shares in kind to the
partners of FHGLP.
AMENDMENTS. With certain specified exceptions, the New FHGLP Partnership
Agreement may be amended by FHGI in its sole discretion. Among the specified
exceptions, if an amendment would treat any limited partner differently from
FHGI or any Nathanson Controlled Entity and would adversely affect such partner,
a majority in interest of the affected limited partners would have to approve
the amendment,
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and if such limited partners included any of the Hellman Partners (and the
Hellman Partners had not disposed of any of their partnership interests since
the date of the New FHGLP Partnership Agreement) each affected Hellman Partner
would have to approve such amendment.
WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. The New
FHGLP Partnership Agreement will prohibit FHGI from withdrawing as the general
partner of FHGLP, assigning its interest, or taking certain other actions, if
the withdrawal by FHGI, the assignment by FHGI of its interest or such other
action would violate the New Falcon Partnership Agreement. The withdrawal of
FHGI, the assignment by FHGI of its interest and other actions that would result
in FHGI no longer having management control over FHGLP would violate the New
Falcon Partnership Agreement unless TCI consented. Subject to certain permitted
exceptions, the New FHGLP Partnership Agreement will prohibit any limited
partner from assigning its partnership interest without the approval of FHGI.
DISSOLUTION AND LIQUIDATION. The principal events upon which FHGLP will
dissolve are: (1) the withdrawal of FHGI as general partner unless the partners
vote to continue the partnership; (2) the expiration of the term of FHGLP
(January 1, 2025); (3) the sale or other disposition of all or substantially all
of the assets of FHGLP, including a sale of all of FHGLP's partnership interest
in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership
Agreement (see "--New Falcon Partnership Agreement--Partner Liquidity--Buy/Sell
Rights"); (4) the consummation of an Incorporation of New Falcon; (5) the
dissolution and liquidation of New Falcon, other than upon a purchase by FHGLP
of all of TCI's interest in New Falcon pursuant to the buy/sell provisions of
the New Falcon Partnership Agreement (see "--New Falcon Partnership
Agreement--Partner Liquidity--Buy/Sell Rights"); (6) an election by FHGI to
dissolve the partnership and cause to be distributed to the partners in kind
interests in New Falcon; (7) an election to liquidate and dissolve the
partnership made by FHGI with the approval of (A) limited partners (excluding
Nathanson Controlled Entities) which hold more than 50% of the outstanding
limited partnership interests (excluding interests held by Nathanson Controlled
Entities) and (B) so long as the Hellman Partners have not disposed of any of
their partnership interests in FHGLP, the Hellman Partners.
NEW FALCON PARTNERSHIP AGREEMENT
ORGANIZATION AND DURATION. New Falcon was formed on October 23, 1997 as a
California limited partnership in connection with the TCI Transaction and will
conduct substantially all of the business currently conducted by FHGLP following
consummation of the TCI Transaction. See "The TCI Transaction." Unless sooner
terminated in accordance with the terms of the New Falcon Partnership Agreement,
New Falcon will continue until July 1, 2013. See "--Partner Liquidity--Buy/Sell
Rights."
GENERAL PARTNERS. FHGLP is the managing general partner and a limited
partner of New Falcon, and TCI is a general partner of New Falcon. Other than
with respect to certain partnership matters that require the approval of New
Falcon's Advisory Committee (see "--Advisory Committee") and certain additional
partnership matters that require the approval of TCI (see "--Approval Rights of
TCI"), FHGLP will have the exclusive authority to manage the business,
operations and affairs of New Falcon and the exclusive right to exercise all
rights incident to the ownership of all partnership or corporate interests held
by New Falcon. FHGI, in turn, is the sole general partner of FHGLP and will have
the exclusive authority to manage the business, operations and affairs of FHGLP,
subject to certain limitations. See "--New FHGLP Partnership Agreement."
ADVISORY COMMITTEE. The New Falcon Partnership Agreement provides for an
Advisory Committee consisting of six individual representatives of the partners,
three of whom are to be appointed by FHGLP, two of whom are to be appointed by
TCI and one of whom is to be appointed by joint designation of FHGLP and TCI.
FHGLP has appointed Marc B. Nathanson (Chairman), Frank J. Intiso and Stanley S.
Itskowitch as its initial representatives; TCI has appointed Leo J. Hindery, Jr.
and William R. Fitzgerald as its initial representatives; and FHGLP and TCI have
designated John S. Evans as their initial joint
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representative. See "Management" for additional biographical information
regarding the members of the Advisory Committee.
The New Falcon Partnership Agreement will prohibit Falcon and FHGLP from
causing New Falcon or its subsidiaries (including the Owned Subsidiaries) to
take certain actions without the affirmative vote of a majority of the members
of the Advisory Committee, including: (1) the acquisition or disposition of
assets in any one transaction having an aggregate value in excess of $15
million, with certain permitted exceptions; and (2) conducting or entering into
any line of business other than the ownership and operation of cable television
systems and related and ancillary businesses that involve the distribution of
video programming or data to subscribers (including businesses engaged in the
production of cable television programming and the provision of Internet access,
but excluding other related or ancillary businesses, such as personal
communications, alternative access, and other telephony-related investments or
businesses). In addition, FHGLP must consult with the Advisory Committee before
entering into any agreement pursuant to which New Falcon or any of its
subsidiaries (including the Owned Subsidiaries) would incur indebtedness in
excess of $1 million, although the approval of the Advisory Committee is not
required for such agreement.
APPROVAL RIGHTS OF TCI. The New Falcon Partnership Agreement will prohibit
FHGI and FHGLP from causing New Falcon or its subsidiaries (including the Owned
Subsidiaries) to take certain actions without the approval of TCI. The following
is a summary of certain material actions or events, in addition to those
described elsewhere in this Prospectus, that require TCI's approval: (1) any
merger, consolidation, recapitalization or other reorganization, with certain
permitted exceptions; (2) any sale or disposition of assets in any one
transaction having an aggregate value in excess of $30 million (or, in excess of
$500,000 if the cumulative aggregate value of all assets sold in dispositions of
over $500,000 exceeds $100 million (subject to certain adjustments); (3) any
sale or disposition of assets that would result in the allocation of income or
gain to TCI pursuant to Internal Revenue Code Section 704(c); (4) any purchase
or acquisition of assets in any one transaction having an aggregate value in
excess of $30 million (or, in excess of $500,000 if the cumulative aggregate
value of all assets purchased in acquisitions of over $500,000 exceeds $100
million); (5) the exercise of New Falcon's call right under the New FHGLP
Partnership Agreement or any other action that is within the discretion of New
Falcon pursuant to the put/call provisions of the New FHGLP Partnership
Agreement (see "--New FHGLP Partnership Agreement--Put/Call Rights"); (6) the
incurrence of Indebtedness if, after giving effect to such Indebtedness, New
Falcon's Operating Cash Flow Ratio would exceed 7.5:1; (7) the issuance or
redemption of any partnership interest or convertible interest, with certain
permitted exceptions; (8) any transaction with FHGLP or any affiliate of FHGLP,
with certain permitted exceptions; (9) the adoption or amendment of any
Management Incentive Plan; (10) the incurrence of Net Overhead Expenses in any
fiscal year beginning after the closing of the TCI Transaction that exceed 4.5%
of the Gross Revenues of New Falcon and its subsidiaries; or (11) the
liquidation or dissolution of New Falcon, except in accordance with the
provisions of the New Falcon Partnership Agreement. TCI has agreed to increase
the debt incurrence test in connection with the transactions described in the
Prospectus.
OTHER APPROVAL RIGHTS. On December 30, 1997, New Falcon entered into an
agreement with Belo, a partner of Falcon Video, prohibiting any sale or
disposition of assets by New Falcon or its Subsidiaries (including the Owned
Subsidiaries) without Belo's approval that would result in the allocation of
income or gain to Belo pursuant to Internal Revenue Code Section 704(c), with
specified exceptions.
CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. FHGLP and TCI will contribute to
New Falcon those assets described above under "The TCI Transaction." Under
certain circumstances, FHGLP and/or TCI may be required under the Contribution
Agreement to contribute cash to New Falcon after the closing of the TCI
Transaction in order to make the actual value of their respective asset
contributions as determined after the closing equal the value of their
respective asset contributions as estimated at closing. TCI may be required
under the Contribution Agreement to contribute certain assets to the partnership
that were not
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contributed at closing pending receipt of certain necessary approvals and
consents. FHGLP will be required to contribute to New Falcon cash in the amount
of any payments made by New Falcon after the closing of the TCI Transaction
under the Incentive Plan to be assumed by New Falcon at the closing. Other than
as described above, neither FHGLP nor TCI will be required to make any
additional capital contributions to New Falcon.
All distributions by New Falcon will be made in proportion to the partners'
percentage interests. Distributions prior to liquidation of New Falcon will be
made at the discretion of FHGLP, except that New Falcon will be required to make
annual distributions of cash (subject to contractual restrictions on
distributions by New Falcon) to the extent of the estimated tax liabilities of
the partners as a result of the allocation to them of New Falcon's income and
gain.
PARTNER LIQUIDITY-BUY/SELL RIGHTS. At any time after the seventh
anniversary of the closing of the TCI Transaction (other than at certain times
specified in the New Falcon Partnership Agreement), either TCI or FHGLP (the
"Offering Partner") will have the right to offer to sell (an "Offer") to the
other partner (the "Responding Partner") the Offering Partner's entire
partnership interest in New Falcon for a price per partnership unit equal to the
Offering Partner's good faith estimate of the amount per partnership unit that
would be distributed to the partners if New Falcon were liquidated in accordance
with the New Falcon Partnership Agreement, subject to certain special
assumptions (the "Offer Unit Price"). The Responding Partner will have the right
to accept or reject the Offering Partner's Offer.
If the Responding Partner accepts the Offering Partner's Offer, the
Responding Partner will have the right under certain circumstances to require
New Falcon (in lieu of the Responding Partner) to purchase the Offering
Partner's entire partnership interest in New Falcon. If the Responding Partner
accepts the Offering Partner's Offer but defaults in its obligation to purchase
the Offering Partner's entire partnership interest in New Falcon, the Offering
Partner will have the right to elect either (1) to purchase, or to require New
Falcon to purchase, the Responding Partner's entire partnership interest in New
Falcon at a price per partnership unit equal to 95% of the Offer Unit Price or
(2) to cause New Falcon to be liquidated and dissolved in accordance with the
liquidation provisions of the New Falcon Partnership Agreement.
If the Responding Partner rejects the Offering Partner's Offer, the Offering
Partner will have the right to elect to cause New Falcon to be liquidated and
dissolved in accordance with the liquidation provisions of the New Falcon
Partnership Agreement. If the price per partnership unit that the partners would
receive pursuant to the general liquidation provisions of the New Falcon
Partnership Agreement (the "Liquidation Unit Price") is less than the Offer Unit
Price, the Responding Partner will have the right to elect to purchase, or under
certain circumstances to require that New Falcon purchase, the Offering
Partner's entire partnership interest in New Falcon at a price per partnership
unit equal to the Liquidation Unit Price.
The partners may agree at any time to abandon the purchase and sale of a
partner's partnership interest in New Falcon or the liquidation and dissolution
of New Falcon pursuant to a subsequent election by the Offering Partner. Neither
partner will be permitted to make an Offer (1) during the pendency of a purchase
and sale of partnership interests pursuant to a previous Offer or any subsequent
election pursuant to the New Falcon Partnership Agreement's buy/sell provisions
or (2) during the pendency of an Incorporation of New Falcon pursuant to a
previous election by FHGLP. See "--Conversion of New Falcon to Corporation."
CONVERSION OF NEW FALCON TO CORPORATION. FHGLP will have the right to elect
at any time (other than certain times specified in the New Falcon Partnership
Agreement), with the approval of TCI, which shall not be unreasonably withheld,
to convert New Falcon to a corporation for the purpose of effecting an initial
public offering (an "Incorporation"). FHGLP and TCI have agreed that adverse,
uncompensated tax consequences to TCI would be a reasonable basis for TCI to
withhold its approval. Under current tax law, an Incorporation would likely
result in adverse tax consequences to TCI. Consummation of an Incorporation of
New Falcon shall be conditioned on the concurrent public offering and sale of
equity
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securities in the successor corporation on such terms and conditions as FHGLP
deems appropriate, with the approval of TCI, which shall not be unreasonably
withheld, and the successor corporation shall offer to enter into a Registration
Rights Agreement pursuant to which FHGLP, TCI and the partners of FHGLP, as
applicable, could elect to register their stock in the successor corporation
under the Securities Act. As part of an Incorporation of New Falcon, FHGLP will
have the right to require, at its sole discretion, (1) that FHGI retain control
of the successor corporation and have exclusive authority to manage the
operations and affairs of the successor corporation, and/or (2) that FHGLP and
New Falcon be consolidated such that the owners of FHGLP immediately prior to
the Incorporation of New Falcon, on the one hand, and TCI (or one or more direct
or indirect owners of TCI), on the other hand, shall be the owners of the
successor corporation immediately after the Incorporation of New Falcon. The
relative ownership interests of the owners of the successor corporation
immediately after the Incorporation of New Falcon shall be the same as their
relative ownership interests immediately prior to the Incorporation of New
Falcon. Upon any Incorporation of New Falcon that involves the receipt by FHGLP
of shares of capital stock in a successor corporation to New Falcon, FHGLP shall
dissolve in accordance with the liquidation provisions of the New FHGLP
Partnership Agreement and distribute such shares in kind to the partners of
FHGLP. FHGLP will not be permitted to make an election to effect an
Incorporation of New Falcon (1) within one year of making a previous election to
effect an Incorporation of New Falcon that was not approved by TCI, or (2)
during the pendency of a purchase and sale of partnership interests pursuant to
an Offer or any subsequent election pursuant to the New Falcon Partnership
Agreement's buy/sell provisions. See "--Partner Liquidity--Buy/Sell Rights."
LIMITATIONS ON THE ACTIVITIES OF NEW FALCON. Following the closing of the
TCI Transaction, the New Falcon Partnership Agreement will prohibit New Falcon
and its subsidiaries from: (1) immediately engaging in wireless communications
services that use radio spectrum for cellular, PCS, SMR, paging, mobile
telecommunications, or other voice data or wireless services, with certain
permitted exceptions; (2) prior to January 1, 1999, engaging in Restricted
Telephony Activities, with certain permitted exceptions; and (3) acquiring an
equity interest in Enstar or any of its subsidiaries.
CROSS-OWNERSHIP PROVISIONS. The New Falcon Partnership Agreement contains
provisions relating to cross-ownership restrictions under the Communications
Act, any rule, regulation or policy of the FCC under the Communications Act or
any subsequent law ("Ownership Restrictions"). If a partner's interest in New
Falcon causes a violation by New Falcon or its subsidiaries of any Ownership
Restriction, then such partner is to take steps to cure the violation subject to
certain exceptions. In addition, the New Falcon Partnership Agreement provides
that the managing general partner will not permit New Falcon or its subsidiaries
to enter into an agreement to acquire an interest in any business that it knows
would cause either of the partners to be in violation of an Ownership
Restriction.
ADMISSION OF ADDITIONAL PARTNERS AND AMENDMENTS. New Falcon will be able to
issue additional equity interests in New Falcon, and admit new persons as
additional partners of New Falcon, only with the approval of TCI and, if such
approval is required and received, only in accordance with the terms of such
approval. The New Falcon Partnership Agreement may be amended only by FHGLP with
the approval of TCI, except that certain specified ministerial amendments may be
made by FHGLP without the approval of TCI.
REMOVAL. Under certain very limited circumstances specified in the New
Falcon Partnership Agreement where FHGLP's conduct has resulted in material harm
to New Falcon or TCI, TCI may elect to purchase all of FHGLP's partnership
interest in New Falcon (at a price determined in accordance with the New Falcon
Partnership Agreement) and, upon consummation of such purchase, remove FHGLP as
a partner.
WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. Without
TCI's consent, the New Falcon Partnership Agreement will prohibit (1) FHGLP from
withdrawing as the managing general partner of New Falcon, (2) FHGI from
withdrawing as the general partner of FHGLP, and (3) FHGLP and FHGI
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from taking certain actions if, as a result of such actions, FHGLP would no
longer have management control over New Falcon or FHGI would no longer have
management control over FHGLP. Subject to certain permitted exceptions, the New
Falcon Partnership Agreement will prohibit FHGLP from assigning its partnership
interest without the approval of TCI and will prohibit TCI from assigning its
partnership interest without the approval of FHGLP.
DISSOLUTION AND LIQUIDATION. The principal events upon which New Falcon
will dissolve are: (1) the withdrawal of FHGLP as managing general partner
unless the partners vote to continue the partnership; (2) the expiration of the
term of New Falcon (July 1, 2013); (3) an election to liquidate and dissolve the
partnership made by the Offering Partner pursuant to the buy/sell provisions of
the New Falcon Partnership Agreement (see "--Partner Liquidity--Buy/Sell
Rights"); (4) the sale or other disposition of all or substantially all of the
assets of New Falcon; (5) subject to any contractual restrictions on the
dissolution of New Falcon, an election to liquidate and dissolve the partnership
made by FHGLP with the approval of TCI; (6) an election to liquidate and
dissolve the partnership made by TCI if Marc B. Nathanson ceases to be active in
the business of New Falcon on a regular and consistent basis and a successor
shall not have been designated by FHGLP and approved by TCI within nine months;
and (7) the termination of the Contribution Agreement in accordance with its
terms prior to the closing of the TCI Transaction.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain debt instruments to which FHGLP is a
party. The statements under this caption are summaries of the material terms of
such agreements. All capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the respective agreements governing the debt
instruments.
11% SENIOR SUBORDINATED NOTES DUE 2003
FHGLP issued $175 million aggregate principal amount of the Notes on March
29, 1993 in connection with its formation and capitalization. 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 (the "Notes Indenture"). In addition,
the Notes are effectively subordinated to the claims of creditors of FHGLP's
subsidiaries, including the Owned Subsidiaries.
FHGLP completed the Notes Tender on May 19, 1998 and will redeem the
approximately $34.4 million aggregate principal amount of remaining outstanding
Notes prior to October 15, 1998 in accordance with the redemption provisions of
the Notes Indenture. In connection with the Notes Tender, FHGLP solicited the
consent of holders of the Notes to certain amendments to the Notes Indenture
(the "Proposals") eliminating certain events of default under and substantially
all of the covenants in the Notes Indenture, except the covenant to pay interest
on and principal of the Notes when due. FHGLP received sufficient consents to
approve the Proposals, and FHGLP and the Trustee executed a Supplemental
Indenture, dated as of May 5, 1998, giving effect to the Proposals.
The Notes mature on September 15, 2003 and bear interest at 11% per annum
from the date of issuance or from the most recent interest payment date to which
interest has been paid or provided for. Interest payment dates are semi-annual,
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. Additional
Notes amounting to $8.9 million for 1993, $20.8 million for 1994, $23.1 million
for 1995, $25.7 million for 1996 and $28.7 million for 1997 were issued as
payment-in-kind for interest. As a result of the issuance of these additional
Notes, the aggregate principal amount of the Notes outstanding as of March 31,
1998 was $282.2 million. FHGLP elected to make the interest payment due March
15, 1998 in cash, and under the terms of the Debentures, is required to continue
to make cash payments. FHGLP obtained an amendment to the Bank Credit Agreement
on February 6, 1998 to permit FHGLP to pay interest on the Debentures in cash
prior to September 30, 2000.
The Notes are redeemable at the option of FHGLP, in whole or in part, (i) at
any time on or after September 15, 1998, at 105.5% of the outstanding principal
amount, plus accrued interest to the redemption date, (ii) at any time on or
after September 15, 1999, at 102.75% of outstanding principal amount, plus
accrued interest to the redemption date, and (iii) at any time on or after
September 15, 2000, at 100% of outstanding principal amount, plus accrued
interest to the redemption date.
NEW CREDIT FACILITY
On June 30, 1998, the Company entered into the New Credit Facility with
BankBoston, N.A. as Documentation Agent, The Chase Manhattan Bank as
Co-Syndication Agent, NationsBank, N.A. as Syndication Agent, Toronto Dominion
(Texas) Inc. as Administrative Agent, Bank of America, N.T. & S.A. as Agent, and
the other lenders signatory thereto. Until the TCI Closing, the Owned
Subsidiaries, other than Falcon Video, will be the co-borrowers under the New
Credit Facility and the Restricted Companies under the New Credit Facility will
be all of the subsidiaries of FHGLP (but not including FHGLP itself and also
excluding New Falcon, Falcon Video, Video Investors and subsidiaries of FHGLP
that are designated by the Company as Excluded Companies from time to time).
Immediately prior to the TCI Closing, Falcon Video will become a borrower for a
portion of Facility A (as defined) but will not become a Restricted
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Company until after the TCI Closing and the discharge of Falcon Video's existing
senior indebtedness. Immediately after the TCI Closing, New Falcon II will
assume all of the obligations of the Owned Subsidiaries, including Falcon Video,
under the New Credit Facility and become the sole borrower thereunder, and the
Restricted Companies will be New Falcon II and all of its subsidiaries
(excluding subsidiaries of FHGLP that are designated by the Company as Excluded
Companies from time to time and excluding, until Falcon Video's existing senior
indebtedness is discharged immediately after the TCI Closing, Falcon Video and
Falcon Video Communications Investors, L.P.).
The New Credit Facility provides for three committed credit facilities: a
$650 million reducing revolving credit facility maturing in December 2006
("Facility A"); a $200 million amortizing term loan maturing in June 2007
("Facility B"); and a $300 million amortizing term loan maturing in December
2007 ("Facility C"). The lenders under the New Credit Facility may also make
available in their discretion as requested by the Company up to $350 million in
additional revolving credit and/or term loans pursuant to one or more
supplemental credit facilities (the terms of which will be negotiated at the
time the Company makes a request to draw on such facility).
The New Credit Facility provides for prime-based and LIBOR-based interest
rate options. Facility A's base margin ranges from 0% to 0.375%, and its LIBOR
margin ranges from 0.5% to 1.375%. Facility B's base margin ranges from 0.5% to
1.0%, and its LIBOR margin ranges from 1.5% to 2.0%. Facility C's base margin
ranges from 0.75% to 1.25%, and its LIBOR margin ranges from 1.75% to 2.25%. The
actual margins are based on the ratio of the borrowers' total consolidated debt
to annualized consolidated cash flow (each as calculated in accordance with the
provisions of the New Credit Facility). Prior to the closing of the TCI
Transaction, Facility A's LIBOR margin is set at a minimum of 1.0%. Facility C's
base rate margin is set at a minimum of 1.0%, and its LIBOR margin is set at a
minimum of 2.0%. If the TCI Transaction does not close by December 31, 1998,
each of the stated margins is increased by 0.25% for all three facilities, but
will automatically revert to the stated margins upon closing of the TCI
Transaction. The Company must also pay a commitment fee, ranging from 0.25% to
0.375%, depending on the applicable leverage ratio, on the unused portion of the
available borrowings under Facility A and a commitment fee of 0.375% on the
unused portion of the available borrowings under Facility B.
At the closing of the New Credit Facility on June 30, 1998, the Company
borrowed approximately $126 million under Facility B and all $300 million
available under Facility C. Thus, as of June 30, 1998, the aggregate amount
outstanding under the New Credit Facility was approximately $425.8 million and,
subject to covenant compliance, approximately $153 million in additional funds
was available to the Company under the New Credit Facility for borrowing
(excluding the supplemental facilities). As of June 30, 1998, borrowings under
the New Credit Facility bore interest at an average rate of 9.4% (including the
effect of interest rate hedging agreements). The Company used approximately $329
million of the aggregate proceeds from the borrowings under Facility B and
Facility C to repay the remaining indebtedness outstanding under the Bank Credit
Agreement. The remaining proceeds resulted in an excess cash balance of
approximately $90 million (after payment of approximately $4.5 million in fees
and expenses related to the New Credit Facility). The Company is required to
borrow the remaining approximately $74 million available under Facility B no
later than September 30, 1998.
Immediately prior to the TCI Closing, the lenders will make a loan to Falcon
Video (and not to any other borrower and without recourse to any other borrower)
sufficient to permit Falcon Video to satisfy in part its obligations under
certain financing notes. See "The TCI Transaction." Prior to the TCI Closing,
Falcon Video will not be responsible for any other borrowings under the New
Credit Facility and the other borrowers will not be responsible for the Falcon
Video borrowings. Upon closing the TCI Transaction, the loan to Falcon Video
will be discharged and become part of Facility A. Upon the TCI Closing, the
Company will use proceeds from additional borrowings under the New Credit
Facility to refinance any other senior indebtedness of the Company, including
without limitation certain existing senior indebtedness of Falcon Video, the
initial borrowings of Falcon Video under the New Credit Facility, and the
indebtedness of TCI to be assumed by New Falcon at the TCI Closing. The Company
also intends to fund
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the redemption of the remaining outstanding Notes with proceeds from borrowings
under the New Credit Facility. See "Prospectus Summary--Recent Developments."
The aggregate borrowing availability under Facility A is subject to
quarterly principal reductions, commencing on the last day of the quarter
beginning June 30, 2001, amortized as follows: 10% in years four and five, 15%
in year six, 22.5% in year seven, 27.5% in year eight, and 15% in year nine.
Facility B requires quarterly principal installments of $500,000 commencing
March 31, 1999, with the principal balance due at final maturity. Facility C
requires quarterly principal installments of $750,000 commencing March 31, 1999,
with the principal balance due at final maturity. The New Credit Facility also
provides for other mandatory principal reductions with proceeds arising from
asset sales and other financings, subject to certain exceptions permitting the
Company to use such proceeds to fund certain permitted investments and
acquisitions. The Company may prepay the loans outstanding under the New Credit
Facility at any time without premium or penalty (except for LIBOR breakage
costs).
The Company's obligations under the New Credit Facility are collateralized
by all of the partnership interests and other equity interests of the Restricted
Companies (as described above) under the New Credit Facility, including a pledge
of New Falcon's membership interest in New Falcon II. The Company also granted a
negative pledge on all of the Restricted Companies' assets, subject to a
subsequent grant of a security interest in the Restricted Companies' assets if
the TCI Transaction has not closed by December 31, 1998.
The New Credit Facility also contains various financial covenants which,
among other things, limit the amount of indebtedness the Restricted Companies
may incur. The New Credit Facility also contains various other restrictions
(subject to permitted exceptions), including limits on distributions,
investments, acquisitions, and capital expenditures. The New Credit Facility
does permit the Company to make scheduled interest payments on the Debentures
and to fund the Notes Redemption.
SUBORDINATED NOTES
On October 21, 1991, one of the Owned Subsidiaries issued $15 million
aggregate principal amount of 11.56% Subordinated Notes due 2001 to refinance
certain outstanding indebtedness. At December 31, 1997, the aggregate principal
amount outstanding under these notes was $15 million. These notes mature on
March 31, 2001. The agreement governing these notes contains certain covenants
which are substantially the same as the covenants under the New Credit Facility.
OTHER INDEBTEDNESS
Other Notes payable consist primarily of $7.5 million owed by Enstar Finance
Company, LLC. On June 6, 1997, FHGLP and Enstar formed EFC, an unrestricted
subsidiary. On September 30, 1997, EFC obtained a secured bank facility of $35
million from two agent banks in order to provide funds that would be loaned to
certain Enstar partnerships. The lenders advanced $7.5 million to EFC, which in
turn advanced those funds to a number of Enstar partnerships. The EFC loan is
non-recourse to FHGLP and matures on August 31, 2001, at which time all funds
previously advanced will be due in full.
INTEREST RATE HEDGING AGREEMENTS
The Company utilizes interest rate hedging agreements to establish long-term
fixed interest rates on a portion of its variable-rate debt. The New Credit
Facility requires the Company to maintain hedging arrangements with respect to
at least 50% of its total outstanding indebtedness, excluding the Debentures,
for a two-year period at rates satisfactory to the Administrative Agent in order
to manage the interest rate sensitivity on its borrowings. At March 31, 1998,
the Company participated in interest rate hedging contracts with an aggregate
notional principal amount of $565 million, under which the Company pays interest
at fixed rates ranging from 5.22% to 6.55% (weighted average rate of 5.81%) and
receives interest at variable LIBOR rates. Certain of these contracts relating
to approximately $25 million of aggregate
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notional principal amount were not yet effective at March 31, 1998, but are
scheduled to go into effect during 1998 as certain of the existing contracts
mature. The hedging contracts expire at various dates through July 2001. In
addition to these swaps, the Company has an 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 Company pays variable LIBOR rates subject to a cap of 5.49%.
In connection with the decision to make interest payments on the Notes in
cash and the Notes Tender and Notes Redemption, the Company entered into various
interest rate swap agreements with three banks on February 10, 1998 in order to
reduce interest costs. The agreements call for the Company 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 Company 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 $297.7 million.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Debentures were originally sold by the Issuers on April 3, 1998 to
the Placement Agents pursuant to the Purchase Agreement. The Placement Agents
subsequently placed the Old Debentures with (i) qualified institutional buyers
in reliance on Rule 144A under the Securities Act and (ii) qualified buyers
outside the United States in reliance upon Regulation S under the Securities
Act. As a condition of the Purchase Agreement, the Issuers entered into the
Registration Rights Agreement with the Placement Agents pursuant to which the
Issuers have agreed, for the benefit of the holders of the Old Debentures, at
the Issuers' cost, to file a registration statement for the Exchange Offer (the
"Exchange Offer Registration Statement") (of which this Prospectus is a part)
with the Commission with respect to the Exchange Offer for the Exchange
Debentures. Upon the Exchange Offer Registration Statement being declared
effective, the Issuers will offer the Exchange Debentures in exchange for
surrender of the Old Debentures. For each Old Debenture surrendered to the
Issuers pursuant to the Exchange Offer, the holder of such Old Debenture will
receive an Exchange Debenture having an original Principal Amount at Maturity
equal to that of the surrendered Old Debenture.
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters to third parties (including EXXON CAPITAL HOLDINGS
CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC
No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter
(July 2, 1993)), the Issuers believe that the Exchange Debentures issued
pursuant to the Exchange Offer in exchange for Old Debentures will in general be
freely tradeable after the Exchange Offer without compliance with the
registration and prospectus delivery requirements of the Securities Act.
However, any purchaser of Old Debentures who is an "affiliate" of the Issuers
(within the meaning of Rule 405 under the Securities Act), who does not acquire
the Exchange Debentures in the ordinary course of business or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Debentures could not rely on the position of the staff of the
Commission enunciated in such no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Failure to comply with such requirements in such instance may result in such
holder incurring liability under the Securities Act for which the holder is not
indemnified by the Issuers.
As contemplated by the above-mentioned no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Issuers in the Letter of Transmittal that (i) the
Exchange Debentures are to be acquired by the holder or the person receiving
such Exchange Debentures, whether or not such person is the holder, in the
ordinary course of business, (ii) the holder or any such other person is not
engaging in the distribution of the Exchange Debentures, (iii) the holder or any
such other person has no arrangement or understanding with any person to
participate in the distribution of the Exchange Debentures, (iv) neither the
holder nor any such other person is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act, and (v) the holder or any such
other person acknowledges that if such holder or any other person participates
in the Exchange Offer for the purpose of distributing the Exchange Debentures it
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Debentures and
cannot rely on the above-mentioned no-action letters. As indicated above, each
Participating Broker-Dealer that receives an Exchange Debenture for its own
account in exchange for Old Debentures must acknowledge that it (i) acquired the
Old Debentures for its own account as a result of market-making activities or
other trading activities, (ii) has not entered into any arrangement or
understanding with the Issuers or any "affiliate" of the Issuers (within the
meaning of Rule 405 under the Securities Act) to distribute the Exchange
Debentures to be received in the Exchange Offer and (iii) will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Debentures. For a description of the procedures for
resales by Participating Broker-Dealers, see "Plan of Distribution."
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In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Issuers to effect such an Exchange
Offer, the Exchange Offer is not consummated by September 30, 1998 or the
Exchange Offer has been completed and in the opinion of counsel for the
Placement Agents a Registration Statement must be filed and a Prospectus
delivered by the Placement Agents in connection with any offering or sale of the
Old Debentures, the Issuers will (i) file the Shelf Registration Statement
covering resales of the Old Debentures; (ii) use their best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
and (iii) use their best efforts to keep effective the Shelf Registration
Statement until the earlier of (i) two years after the date of the original
issuance of the Old Debentures or (ii) such time as all of the applicable Old
Debentures have been sold thereunder. The Issuers will, in the event of the
filing of the Shelf Registration Statement, provide to each applicable holder of
the Old Debentures copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resale of the Old Debentures. A holder of the Old Debentures
that sells such Old Debentures pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations).
The Registration Rights Agreement provides that the Issuers will file an
Exchange Offer Registration Statement with the Commission. In the event that
Exchange Offer is not consummated and the Shelf Registration Statement is not
declared effective on or prior to September 30, 1998, the interest rate on the
Old Senior Debentures will be increased by 0.5% per annum and interest on the
Old Senior Discount Debentures (in addition to accrual of original issue
discount during the period ending April 15, 2003 and in addition to interest
otherwise due on such Debentures after such date) will accrue at a rate of 0.5%
per annum of the Accreted Value thereof on the preceding semi-annual accrual
date, and be payable in cash semi-annually, commencing October 15, 1998, until
(i) the Exchange Offer is consummated, (ii) the Shelf Registration Statement is
declared effective by the Commission or (iii) the Old Debentures become freely
tradable without registration under the Securities Act, at which time, in any
such case, the interest rate with respect to the Old Debentures shall return to
the rate established on the date such Debentures were originally issued, as
adjusted by any other provision of the Indenture subsequent to such date.
Holders of Old Debentures will be required to make certain representations
to the Issuers (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement, if required, and to
provide comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Debentures
included in the Shelf Registration Statement and benefit from the provisions
regarding Additional Interest set forth above.
Following the consummation of the Exchange Offer, holders of the Old
Debentures who were eligible to participate in the Exchange Offer but who did
not tender their Old Debentures will not have any further registration rights
and such Old Debentures will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old Debentures could
be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept any and all Old
Debentures validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Issuers will issue (i) $1,000 principal amount
of Senior Exchange Debentures for $1,000 principal amount Old Senior Debentures,
and (ii) $1,000 original principal amount at maturity of Senior Exchange
Discount Debentures in exchange for each $1,000 original principal amount at
maturity of outstanding Old Senior Discount Debentures accepted in
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the Exchange Offer. Holders may tender some or all of their Old Debentures
pursuant to the Exchange Offer. However, Old Debentures may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Debentures are the same as the form and
terms of the Old Debentures except that (i) the Exchange Debentures have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (ii) the holders of the Exchange Debentures will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the interest rate on the Old
Debentures in certain circumstances relating to the timing of the Exchange
Offer, all of which rights will terminate when the Exchange Offer is terminated.
The Exchange Debentures will evidence the same debt as the Old Debentures and
will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $325,000,000 aggregate original principal
amount of the Old Senior Debentures are outstanding, and $435,250,000 aggregate
original principal amount at maturity of the Old Senior Discount Debentures are
outstanding. The Issuers have fixed the close of business on , 1998 as
the record date for the Exchange Offer for purposes of determining the persons
to whom this Prospectus and the Letter of Transmittal will be mailed initially.
Holders of Old Debentures do not have any appraisal or dissenters' rights
under Delaware law, California law or the Indenture in connection with the
Exchange Offer. The Issuers intend to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Issuers shall be deemed to have accepted validly tendered Old Debentures
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Debentures from the Issuers.
If any tendered Old Debentures are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Debentures will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Debentures in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Debentures pursuant to the Exchange Offer. The Issuers will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Issuers shall keep the Exchange Offer open for at least 20 business days
(or longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to holders of Old Debentures. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on , 1998, unless the Issuers, in
their sole discretion, extend the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 11:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date.
The Issuers reserve the right, in their sole discretion, (i) to delay
accepting any Old Debentures, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner.
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Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
PROCEDURES FOR TENDERING
Only a holder of Old Debentures may tender such Old Debentures in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal or transmit an
Agent's Message in connection with a book-entry transfer, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or Agent's Message,
together with the Old Debentures and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
In addition, either (i) certificates for such Old Debentures must be received by
the Exchange Agent prior to the Expiration Date along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Debentures into the Exchange Agent's account at The
Depository Trust Company ("DTC" or the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Old Debentures, or Book-Entry Confirmation, as the case may be,
the Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "--Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO
THE BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURE DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
DTC has authorized DTC participants that hold Old Debentures on behalf of
beneficial owners of Old Debentures through DTC to tender their Old Debentures
as if they were holders. To effect a tender of Old Debentures, DTC participants
should either (i) complete and sign the Letter of Transmittal (or a manually
signed facsimile thereof), have the signature thereon guaranteed if required by
the instructions to the Letter of Transmittal, and mail or deliver the Letter of
Transmittal (or such manually signed facsimile) to the Exchange Agent pursuant
to the procedure set forth in "Procedures for Tendering" or (ii) transmit their
acceptance to DTC through the DTC Automated Tender Offer Program ("ATOP") for
which the transaction will be eligible and follow the procedure for book-entry
transfer set forth in "--Book-Entry Transfer."
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Issuers the representations set forth above in the third paragraph
under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Issuers will
constitute agreement between such holder and the Issuers in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD DEBENTURES, THE LETTER OF TRANSMITTAL OR
AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD DEBENTURES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Debentures are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered
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holder promptly and instruct such registered holder to tender on such beneficial
owner's behalf. See "Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner" included with the Letter of
Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Debentures tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Debentures listed therein, such Old Debentures must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old
Debentures with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Debentures or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Issuers of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Debentures and withdrawal of tendered Old
Debentures will be determined by the Issuers in their sole discretion, which
determination will be final and binding. The Issuers reserve the absolute right
to reject any and all Old Debentures not properly tendered or any Old Debentures
the Issuers' acceptance of which would, in the opinion of counsel for the
Issuers, be unlawful. The Issuers also reserve the right in their sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Debentures. The Issuers' interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Debentures must be
cured within such time as the Issuers shall determine. Although the Issuers
intend to notify holders of defects or irregularities with respect to tenders of
Old Debentures, neither the Issuers, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of Old
Debentures will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Debentures received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
ACCEPTANCE OF OLD DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE
For each Old Debenture accepted for exchange, the holder of such Old
Debenture will receive an Exchange Debenture having a Principal Amount at
Maturity equal to that of the surrendered Old Debenture. For purposes of the
Exchange Offer, the Issuers shall be deemed to have accepted properly tendered
Old Debentures for exchange when, as and if the Issuers have given oral or
written notice thereof to the Exchange Agent.
In all cases, the issuance of Exchange Debentures for Old Debentures that
are accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Debentures or
a timely Book-Entry Confirmation of such Old Debentures into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal or Agent's Message and all other required
documents. If any tendered Old Debentures are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer, such unaccepted or
non-exchanged Old Debentures will be returned without expense to the tendering
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holder thereof (or, in the case of Old Debentures tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
non-exchanged Old Debentures will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the Expiration
Date.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish a new account or utilize an existing
account with respect to the Old Debentures at DTC promptly after the date of
this Prospectus, and any financial institution that is a participant in DTC and
whose name appears on a security position listing as the owner of Old Debentures
may make a book-entry tender of Old Debentures by causing DTC to transfer such
Old Debentures into the Exchange Agent's account in accordance with DTC's
procedures for such transfer. However, although tender of Old Debentures may be
effected through book- entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or a manually signed facsimile thereof), properly
completed and validly executed, with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be received by the Exchange Agent at its address
set forth below under the caption "Exchange Agent" on or prior to the Expiration
Date, or the guaranteed delivery procedures described below must be complied
with. The confirmation of book-entry transfer of Old Debentures into the
Exchange Agent's account at DTC as described above is referred to herein as a
"Book-Entry Confirmation." Delivery of documents to DTC in accordance with DTC's
procedures does not constitute delivery to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering the Old Debentures stating (i) the aggregate
principal amount of Old Debentures which have been tendered by such participant,
(ii) that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and (iii) that the Issuers may enforce such agreement
against the participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Debentures and (i) whose Old Debentures
are not immediately available, (ii) who cannot deliver their Old Debentures, the
Letter of Transmittal or any other required documents to the Exchange Agent or
(iii) who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Old Debentures and the principal amount of Old
Debentures tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof) (or
in the case of a book-entry transfer, an Agent's Message) together with
the certificate(s) representing the Old Debentures (or a confirmation of
book-entry transfer of such Debentures into the Exchange Agent's account
at the Book-Entry Transfer Facility), and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) the certificate(s) representing all tendered Old Debentures in proper
form for transfer (or a confirmation of book-entry transfer of such Old
Debentures into the Exchange Agent's account
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at the Book-Entry Transfer Facility), together with a Letter of
Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees (or, in the case of a book-entry
transfer, an Agent's Message) and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Debentures according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Debentures may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date; otherwise such tenders are irrevocable.
To withdraw a tender of Old Debentures in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Debentures to be
withdrawn (the "Depositor"), (ii) identify the Old Debentures to be withdrawn
(including the certificate number(s) and principal amount of such Old
Debentures, or, in the case of Old Debentures transferred by book-entry
transfer, the name and number of the account at the Book-Entry Transfer Facility
to be credited), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Debentures
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Debentures register the transfer of such Old Debentures into the name of the
person withdrawing the tender and (iv) specify the name in which any such Old
Debentures are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Issuers, whose determination shall be
final and binding on all parties. Any Old Debentures so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Exchange Debentures will be issued with respect thereto unless the Old
Debentures so withdrawn are validly retendered. Any Old Debentures which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Debentures may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange Exchange Debentures for, any Old
Debentures, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Debentures, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Issuers, might materially impair the
ability of the Issuers to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding
with respect to the Issuers or any of their subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in the sole judgment
of the Issuers, might materially impair the ability of the Issuers to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuers; or
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(c) any governmental approval has not been obtained, which approval the
Issuers shall, in their sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Issuers determine in their sole discretion that any of the conditions
are not satisfied, the Issuers may (i) refuse to accept any Old Debentures and
return all tendered Old Debentures to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Debentures tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Old Debentures (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Debentures which have not been withdrawn. The Issuers shall keep the
Exchange Offer open for at least 20 business days (or longer if required by
applicable law, including in connection with any material modification or waiver
of the terms or conditions of the Exchange Offer that requires such extension
under applicable law) after the date notice of the Exchange Offer is mailed to
holders of Old Debentures.
EXCHANGE AGENT
U.S. Trust Company of New York has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
U.S. Trust Company of New York U.S. Trust Company of New York
P.O. Box 844 770 Broadway
Cooper Station New York, New York 10003
New York, New York 10276-0844 Attn: Corporate Trust, 13th Floor
BY HAND: BY FACSIMILE:
U.S. Trust Company of New York (212) 780-0592
111 Broadway, Lower Level
Corporation Trust Window Confirm by telephone:
New York, New York 10006 (800) 548-6565
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Issuers and their affiliates.
The Issuers have not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Issuers, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
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ACCOUNTING TREATMENT
The Exchange Debentures will be recorded at the same carrying value as the
Old Debentures, which is face value, as reflected in the Issuers' accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Issuers. The expenses of the Exchange Offer
will be expensed over the term of the Exchange Debentures.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Debentures that are not exchanged for Exchange Debentures pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such Old
Debentures may be resold only (i) to the Issuers (upon redemption thereof or
otherwise), (ii) so long as the Old Debentures are eligible for resale pursuant
to Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Issuers), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE DEBENTURES
With respect to resales of Exchange Debentures, based upon interpretations
by the staff of the Commission set forth in certain no-action letters issued to
third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter
(April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5,
1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the
Issuers believe that a holder or other person who receives Exchange Debentures,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Issuers within the meaning of Rule 405 under the Securities
Act) who receives Exchange Debentures in exchange for Old Debentures in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Debentures, will be allowed to
resell the Exchange Debentures to the public without further registration under
the Securities Act and without delivering to the purchasers of the Exchange
Debentures a prospectus that satisfies the requirements of Section 10 of the
Securities Act. However, if any holder acquires Exchange Debentures in the
Exchange Offer for the purpose of distributing or participating in a
distribution of the Exchange Debentures, such holder cannot rely on the position
of the staff of the Commission enunciated in the above mentioned no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Debentures for its own account in exchange for Old Debentures, where
such Old Debentures were acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Debentures.
As contemplated by the above mentioned no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Issuers in the Letter of Transmittal that (i) the
Exchange Debentures are to be acquired by the holder or the person receiving
such Exchange Debentures, whether or not such person is the holder, in the
ordinary course of business, (ii) the holder or any such other person is not
engaging in the distribution of the Exchange Debentures, (iii) the holder or any
such other person has no arrangement or understanding with any person to
participate in the distribution of the Exchange Debentures, (iv) neither the
holder nor any such other person is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act, and (v) the holder or any such
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other person acknowledges that if such holder or other person participates in
the Exchange Offer for the purpose of distributing the Exchange Debentures it
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Debentures and
cannot rely on the above mentioned no-action letters. As indicated above, each
Participating Broker-Dealer that receives Exchange Debentures for its own
account in exchange for Old Debentures must acknowledge that it (i) acquired the
Old Debentures for its own account as a result of market-making activities or
other trading activities, (ii) has not entered into any arrangement or under-
standing with the Issuers or any "affiliate" of the Issuers (within the meaning
of Rule 405 under the Securities Act) to distribute the Exchange Debentures to
be received in the Exchange Offer and (iii) will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Debentures. For a description of the procedures for resales by
Participating Broker-Dealers, see "Plan of Distribution."
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DESCRIPTION OF THE DEBENTURES
The form and terms of the Exchange Debentures are the same as the form and
terms of the Old Debentures (which they replace) except that (i) the issuance of
the Exchange Debentures have been registered under the Securities Act and,
therefore, the Exchange Debentures will not bear legends restricting the
transfer thereof, and (ii) the holders of Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement, including the provisions
providing for an increase in the interest rate on the Old Debentures in certain
circumstances relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated. A copy of the Indenture has
been filed as an exhibit to the Exchange Offer Registration Statement of which
this Prospectus forms a part. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. Whenever particular defined terms of
the Indenture not otherwise defined herein are referred to, the definitions
ascribed to such terms in the Indenture are incorporated herein by reference.
For definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions."
GENERAL
The Debentures are joint and several senior unsecured obligations of the
Issuers and will mature on April 15, 2010. The Senior Debentures are limited to
$375.0 million aggregate principal amount and the Senior Discount Debentures are
limited to $435.25 million aggregate principal amount at maturity. Each Senior
Debenture bears interest at 8.375% per annum from the Issue Date or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semiannually (to holders of record at the close of business on the
April 1 or October 1 immediately preceding the Interest Payment Date) on April
15 and October 15 of each year, commencing on October 15, 1998.
The Senior Discount Debentures were sold at a substantial discount from
their principal amount at maturity. See "Federal Income Tax
Considerations--United States Holders--Original Issue Discount." Until April 15,
2003, no interest will accrue on the Senior Discount Debentures, but the
Accreted Value (representing the amortization of original issue discount) will
accrete at an annual rate of 9.285% between the Issue Date and April 15, 2003,
on a semiannual bond equivalent basis using a 360-day year comprised of twelve
30-day months such that the Accreted Value of a Senior Discount Debenture shall
equal the full principal amount of such Senior Discount Debenture on April 15,
2003; PROVIDED, HOWEVER, that at any time prior to April 15, 2003, the Issuers
may elect to commence the accrual of cash interest on a Semiannual Accrual Date
(from and after such Semiannual Accrual Date), in which case the outstanding
principal amount at Stated Maturity of each Senior Discount Debenture will on
such Semiannual Accrual Date be reduced to the Accreted Value of such Senior
Discount Debenture as of such Semiannual Accrual Date and cash interest shall be
payable on such Senior Discount Debenture on each Interest Payment Date
thereafter. The initial Accreted Value per $1,000 principal amount of Senior
Discount Debentures was $633.29 (representing the original price at which Senior
Discount Debentures were sold).
Beginning on April 15, 2003, cash interest on the Senior Discount Debentures
will accrue at the rate of 9.285% per annum and will be payable semiannually in
arrears on April 15 and October 15, commencing October 15, 2003, to Holders of
record at the close of business on the April 1 or October 1 immediately
preceding the Interest Payment Date.
The Indenture provides that, if the TCI Contribution is not consummated on
or before June 30, 1999, (a) effective July 1, 1999, the interest rate on the
Senior Debentures will increase by 0.75% per annum, (b) from July 1, 1999 until
April 15, 2003, the Company will pay cash interest on the Senior Discount
Debentures (in addition to accretion of principal), semiannually in arrears on
each April 15 and October 15, commencing October 15, 1999, equal to 0.75% per
annum of the then outstanding Accreted Value of the Senior Discount Debentures
and (c) from April 15, 2003 until the maturity of the Senior Discount
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Debentures, the interest rate on the Senior Discount Debentures will increase by
0.75% per annum; PROVIDED, that such additional interest will no longer be
payable if the TCI Contribution is consummated on or before December 31, 1999.
In the event that the Issuers have not consummated a registered exchange
offer for the Debentures or have caused a shelf registration statement with
respect to the Debentures to be declared effective on or prior to September 30,
1998, (i) the annual interest rate borne by the Senior Debentures will be
increased by 0.5%, (ii) prior to April 15, 2003, the Senior Discount Debentures
will bear annual cash interest equal to 0.5% of the Accreted Value of the Senior
Discount Debentures and (iii) on and after April 15, 2003, the annual interest
rate borne by the Senior Discount Debentures will be increased by 0.5%. Such
additional interest amounts will be payable in cash, semiannually in arrears on
each April 15 and October 15, until (i) the Exchange Offer is consummated, (ii)
the Issuers cause a shelf registration with respect to resales of the Debentures
to become effective under the Securities Act or (iii) the date that the
Debentures become freely tradeable without registration under the Securities
Act, at which time, in any such case, the interest rate with respect to the
Debentures shall return to the rate set forth on the cover page of this
Prospectus, as adjusted by any other provision of the Indenture.
Principal of, premium, if any, and interest on the Debentures will be
payable, and the Debentures may be exchanged or transferred, at the office or
agency of the Issuers in the Borough of Manhattan, the City of New York (which
initially will be the corporate trust office of the Trustee); PROVIDED that, at
the option of the Issuers, payment of interest may be made by check mailed to
the holders of the Debentures (the "Holders") at their addresses as they appear
in the Security Register.
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See "--Book Entry; Delivery and Form." No service charge will
be made for any registration of transfer or exchange of Debentures, but the
Issuers may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Company is a holding company that conducts substantially all of its
business through subsidiaries. The Debentures will be the obligations of the
Issuers only, and the Issuers' subsidiaries will not have any obligation to pay
any amounts due under the Debentures. Therefore, the Debentures will be
effectively subordinated to all existing and future liabilities of the Issuers'
subsidiaries. As of March 31, 1998, after giving pro forma effect to the
Offering, the refinancing of the Bank Credit Agreement with proceeds from the
New Credit Facility, the repurchase of all of the Notes pursuant to the Notes
Tender and the consummation of the TCI Transaction, (i) the Issuers (excluding
indebtedness of their subsidiaries) would not have had any indebtedness
outstanding other than the Debentures (representing aggregate indebtedness of
approximately $650.6 million as of the date of issuance) and (ii) the Issuers'
subsidiaries would have had approximately $936.5 million of indebtedness
outstanding, all of which would have been effectively senior to the Debentures.
Subject to the covenants described below under "Covenants" and applicable
law, the Issuers may issue additional Debentures under the Indenture. The Senior
Debentures offered hereby and any additional Senior Debentures subsequently
issued would be treated as a single class for all purposes under the Indenture.
The Senior Discount Debentures offered hereby and any additional Senior Discount
Debentures subsequently issued would be treated as a single class for all
purposes under the Indenture.
OPTIONAL REDEMPTION
The Debentures will be redeemable, at the Issuers' option, in whole or in
part, at any time on or after April 15, 2003 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice mailed by first class mail to
each Holder's last address as it appears in the Security Register. The Senior
Debentures are redeemable at the redemption prices set forth below (expressed in
percentages of principal amount),
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plus accrued and unpaid interest, if any, to the redemption date, if redeemed
during the twelve-month period beginning on April 15 of the years set forth
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 104.188%
2004.............................................................................. 102.792%
2005.............................................................................. 101.396%
2006 and thereafter............................................................... 100.000%
</TABLE>
The Senior Discount Debentures are redeemable at the redemption prices set
forth below (expressed in percentages of Accreted Value), plus accrued and
unpaid interest, if any, to the redemption date, if redeemed during the
twelve-month period beginning on April 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 104.643%
2004.............................................................................. 103.095%
2005.............................................................................. 101.548%
2006 and thereafter............................................................... 100.000%
</TABLE>
In addition, prior to April 15, 2001, the Issuers may redeem up to 35% of
the aggregate principal amount or Accreted Value, as applicable, of the
Debentures with the net cash proceeds of one or more sales by the Company of its
Capital Stock (other than Redeemable Capital Stock), at any time or from time to
time in part, at a redemption price, in the case of Senior Debentures, equal to
108.375% of the principal amount thereof and, in the case of Senior Discount
Debentures, equal to 109.285% of the Accreted Value thereof, in each case plus
accrued and unpaid interest, if any, to the date of redemption (subject to the
rights of Holders of record on the relevant record date that is prior to the
redemption date to receive interest due on an Interest Payment Date); PROVIDED,
that at least $195.0 million in aggregate principal amount of Senior Debentures
remains outstanding immediately after each such redemption (excluding any Senior
Debentures owned by the Issuers or any of their Affiliates) and at least 65% in
aggregate principal amount at maturity of the Senior Discount Debentures
originally issued remains outstanding immediately after each such redemption
(excluding any Senior Discount Debentures owned by the Issuers or any of their
Affiliates).
In the case of any partial redemption, selection of the Debentures for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Debentures are
listed, or if the Debentures are not listed on a national securities exchange,
by lot or by such other method as the Trustee in its sole discretion shall deem
fair and appropriate; PROVIDED that no Debenture of $1,000 in principal amount
or less shall be redeemed in part. If any Debenture is to be redeemed in part
only, the notice of redemption relating to such Debenture shall state the
portion of the principal amount thereof to be redeemed. A new Debenture in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Debenture.
SINKING FUND
There will be no sinking fund payments for the Debentures.
The Issuers have agreed with the Placement Agents, for the benefit of the
Holders, that the Issuers will use their best efforts, at their cost, to file
and cause to become effective a registration statement with respect to a
registered offer to exchange (the "Exchange Offer Registration Statement") the
Old Debentures for the Exchange Debentures. The Exchange Offer will remain open
for not less than 20 business days after the date notice of the Exchange Offer
is mailed to Holders. For each old Debenture
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surrendered to the Issuers under the Exchange Offer, the Holder thereof will
receive a corresponding Exchange Debenture of equal principal amount or
principal amount at maturity, as applicable. In the event that applicable
interpretations of the staff of the Commission do not permit the Issuers to
effect the Exchange Offer, or under certain other circumstances, the Issuers
will, at their cost, use their best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration Statement") with respect to
resales of the Debentures and to keep the Shelf Registration Statement effective
until the expiration of the time period referred to in Rule 144(k) under the
Securities Act after the Issue Date, or such shorter period that will terminate
when all Debentures covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement. The Issuers will, in the event of
such a shelf registration, provide to each Holder copies of the prospectus,
notify each Holder when the Shelf Registration Statement for the Debentures has
become effective and take certain other actions as are required to permit
resales of the Debentures. A Holder that sells its Debentures pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
Holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated on or prior to the
date that is 180 days after the Issue Date, (i) the annual interest rate borne
by the Senior Debentures will be increased by 0.5%, (ii) prior to April 15,
2003, the Senior Discount Debentures will bear annual cash interest equal to
0.5% of the Accreted Value of the Senior Discount Debentures and (iii) on and
after April 15, 2003, the annual interest rate borne by the Senior Discount
Debentures will be increased by 0.5%. Such additional interest amounts be
payable in cash, semiannually in arrears on each April 15 and October 15, until
(i) the Exchange Offer is consummated, (ii) the Issuers cause a shelf
registration with respect to resales of the Debentures to become effective under
the Securities Act or (iii) the date that the Debentures become freely tradeable
without registration under the Securities Act, at which time, in any such case,
the interest rate with respect to the Debentures shall return to the rate set
forth on the cover page of this Prospectus, as adjusted by any other provision
of the Indenture.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement.
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CERTAIN DEFINITIONS
"Accreted Value" means with respect to any Senior Discount Debenture, as of
any specified date on or prior to April 15, 2003, the amount provided below for
each $1,000 principal amount at maturity of Senior Discount Debentures:
(i) if the specified date occurs on one of the following dates after the
Issue Date (each a "Semiannual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMIANNUAL ACCRUAL DATE VALUE
- --------------------------------------------------------------------------------- ----------
<S> <C>
Issue Date....................................................................... $ 633.29
October 15, 1998................................................................. $ 664.70
April 15, 1999................................................................... $ 695.56
October 15, 1999................................................................. $ 727.85
April 15, 2000................................................................... $ 761.64
October 15, 2000................................................................. $ 797.00
April 15, 2001................................................................... $ 834.00
October 15, 2001................................................................. $ 872.72
April 15, 2002................................................................... $ 913.23
October 15, 2002................................................................. $ 955.63
April 15, 2003................................................................... $ 1,000.00
</TABLE>
(ii) if the specified date occurs before October 15, 1998, the Accreted
Value will equal the sum of (a) $633.29 and (b) an amount equal to the
product of (1) the Accreted Value on October 15, 1998 less $633.29
MULTIPLIED BY (2) a fraction, the numerator of which is the number of days
from the Issue Date to the specified date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days from the
Issue Date to the first Semiannual Accrual Date, using a 360-day year of
twelve 30-day months; or
(iii) if the specified date occurs between two Semiannual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semiannual Accrual Date immediately preceding such specified date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semiannual Accrual Date less the Accreted Value for the
immediately preceding Semiannual Accrual Date MULTIPLIED BY (2) a fraction,
the numerator of which is the number of days from the immediately preceding
Semiannual Accrual Date to the specified date, using a 360-day year of 12
30-day months; PROVIDED, HOWEVER, that, for any date after April 15, 2003,
the Accreted Value with respect to each $1,000 principal amount at maturity
of Senior Discount Debentures will be $1,000; PROVIDED, FURTHER, that,
notwithstanding any other provision of this definition, if the Issuers elect
to commence the accrual of cash interest on a Semiannual Accrual Date, the
Accreted Value of a Senior Discount Debenture will thereafter be the
Accreted Value of such Senior Discount Debenture as specified in clause (i)
above on such Semiannual Accrual Date.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person is merged with or into the Company or a Subsidiary of the
Company or becomes a Subsidiary of the Company or (b) assumed in connection with
the acquisition of assets from such Person, and not Incurred by such Person in
connection with, or in anticipation of, such Person becoming a Subsidiary or
such acquisition of assets.
"Annualized Operating Cash Flow" means for any Person, for any fiscal
quarter, an amount equal to Operating Cash Flow of such Person for such quarter
multiplied by four.
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"Affiliate" means, as applied to any specified Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) (i) of all or substantially all of the Capital Stock of
any Restricted Subsidiary, or (ii) of all or substantially all of the assets
that constitute a division or line of business of the Company or of any
Restricted Subsidiary, or (iii) of any cable television system.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction but excluding any
exchange of assets (including an exchange of assets in which no more than 30% of
the value of the consideration paid or received by the Company or a Restricted
Subsidiary in connection therewith consists of cash or Cash Equivalents);
PROVIDED that the fair market value of the consideration received by the Company
in connection with such exchange of assets is at least equal to the fair market
value of the assets transferred by the Company in connection with such exchange)
in one transaction or a series of related transactions by the Company or any of
its Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries (other than the Capital Stock or other Investment in an
Unrestricted Subsidiary) outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
assets of the Company; PROVIDED that "Asset Sale" shall not include (a) sales or
other dispositions of inventory, receivables and other current assets, (b)
sales, transfers or other dispositions of assets with a fair market value not in
excess of $1.0 million in any transaction or series of related transactions, (c)
sales, transfers or other dispositions of assets constituting a Restricted
Payment permitted to be made under the "Limitation on Restricted Payments"
covenant, (d) sales or other dispositions of assets for consideration at least
equal to the fair market value of the assets sold or disposed of, to the extent
that the consideration received would satisfy clause (B) of the "Limitation on
Asset Sales" covenant or (e) sales, transfers or other dispositions of property
or equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or its
Restricted Subsidiaries.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (A)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (B) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Bank Credit Agreement" means that certain Amended and Restated Credit
Agreement, dated as of July 12, 1996, among 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 First, Inc., Falcon Telecable, a
California Limited Partnership, Falcon Telecom, L.P., 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, including any
deferrals, renewals, extensions, restatements, replacements, restructurings,
refinancings or refundings thereof or amendments, modifications or supplements
thereto, and any agreement or agreements providing therefor, whether involving
one or more members of the Restricted Group, whether by or with the same or any
other lender, creditor, group or groups of lenders or group or groups of
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creditors, and including related Debentures, guarantee and security agreements
and other instruments and agreements executed in connection therewith.
"Board of Directors" means (i) subject to clause (iv) below, in the case of
a Person that is a partnership, the board of directors of such Person's
corporate general partner (or if such general partner is itself a partnership,
the board of directors of such general partner's corporate general partner),
(ii) in the case of a Person that is a corporation, the board of directors of
such Person, (iii) in the case of any other Person, the board of directors,
management committee or similar governing body or any authorizing committee
thereof responsible for the management of the business and affairs of such
Person and (iv) in the case of FHGLP, the Board of Representatives of FHGLP
established pursuant to Section 11.4 of the Partnership Agreement (but only for
so long as such Board of Representatives remains in existence).
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's capital stock or other equity interests,
including, without limitation, partnership interests, whether now outstanding or
issued after the Issue Date.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligation" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Cash Equivalents" means (i) any security maturing not more than six months
after the date of acquisition issued by the United States of America or an
instrumentality or agency thereof and guaranteed fully as to principal, premium,
if any, and interest by the United States of America, (ii) any certificate of
deposit, time deposit, money market account or bankers' acceptance maturing not
more than six months after the date of acquisition issued by any commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $500.0
million whose debt has a rating, at the time as of which any investment therein
is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or
any successor rating agency, or "A-1" (or higher) according to Standard & Poor's
Rating Services, or any successor rating agency and (iii) commercial paper
maturing not more than three months after the date of acquisition issued by any
corporation (other than an Affiliate of the Issuers) organized and existing
under the laws of the United States of America with a rating, at the time of
which any investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. or any successor rating agency, or "A-1" (or higher)
according to Standard & Poor's Rating Services or any successor rating agency.
"Cash Flow Ratio" means, as at any date, the ratio of (i) the sum of the
aggregate outstanding principal amount of all Indebtedness (or, if the terms of
such Indebtedness provide that an amount less than the principal amount thereof
shall be due upon any declaration of acceleration thereof, the aggregate
outstanding accreted value of such Indebtedness at the date of determination) of
the Company and the Restricted Subsidiaries determined on a consolidated basis,
but excluding all obligations under Interest Rate Agreements entered into by the
Company or any Restricted Subsidiary outstanding on such date, plus (but without
duplication of Indebtedness supported by letters of credit) the aggregate
undrawn face amount of all letters of credit outstanding on such date to (ii)
Annualized Operating Cash Flow of the Company and its Restricted Subsidiaries
determined as at the last day of the most recently completed fiscal quarter. In
calculating the "Cash Flow Ratio" as of any particular date (the "Determination
Date") Annualized Operating Cash Flow shall be determined on the basis of the
most recently completed fiscal quarter (the "Measurement Period"). For purposes
of calculating Annualized Operating Cash Flow for the Measurement Period
associated with a Determination Date, (i) any Person that is a Restricted
Subsidiary on the Determination Date (or would become a Restricted Subsidiary on
such Determination Date in connection with the transaction that requires the
determination of such Annualized Operating Cash Flow)
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will be deemed to have been a Restricted Subsidiary at all times during such
Measurement Period, (ii) any Person that is not a Restricted Subsidiary on such
Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Annualized Operating Cash Flow) will be deemed not to have
been a Restricted Subsidiary at any time during such Measurement Period and
(iii) if the Company or any Restricted Subsidiary shall have in any manner (x)
acquired (including through the commencement of activities constituting such
operating business) or (y) disposed of (including by way of an Asset Disposition
or the termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the end
of such period and on or prior to such Determination Date, such calculation will
be made on a pro forma basis in accordance with GAAP as if, in the case of an
acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated on the first day of such
Measurement Period and, in the case of an Asset Disposition or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of 35% or more of the total voting power of the outstanding Voting
Stock of the Company or Falcon, as the case may be, and such ownership
represents a greater percentage of the total voting power of the Voting Stock of
the Company or Falcon, as the case may be, on a fully diluted basis, than is
held by the Permitted Holders in the aggregate on such date and, in the case of
the Company (if the Company is then a partnership), any Person other than a
Permitted Holder is a managing general partner of the Company; (b) the Company
or Falcon, as the case may be, consolidates with, or merges with or into,
another Person or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Company or Falcon, as the case
may be, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company or Falcon, as the case may be, is converted into or
exchanged for cash, securities or other property and, immediately after such
transaction, the Permitted Holders in the aggregate or the holders of the Voting
Stock of the Company or Falcon, as the case may be, immediately prior thereto
own, directly or indirectly, less than 35% of the total voting power of the
outstanding Voting Stock of the surviving or transferee Person and, in the case
of the Company (if the Company is then a partnership), any Person other than a
Permitted Holder is a managing general partner of the Company; (c) the sale,
lease or transfer, conveyance or other disposition (other than by way of a
merger, consolidation, liquidation or dissolution), in one or a series of
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries, taken as a whole, to any "person" (as such term is used in Section
13(d)(e) of the Exchange Act) other than to one or more Permitted Holders, (e)
the first day on which the Company or any successor thereto pursuant to the
covenant under "Mergers" fails to own 100% of the issued and outstanding Capital
Stock of FFC, (f) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company or
Falcon, as the case may be (together with any new directors whose election to
such Board of Directors was approved by the Permitted Holders or by a vote of at
least a majority of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved), cease for any reason (other than by action of the
Permitted Holders) to constitute a majority of the Board of Directors of the
Company or Falcon, as the case may be, then in office in any such case in
connection with any actual or threatened solicitation of proxies or consents.
"Company" means FHGLP or any Person that is a successor to FHGLP pursuant
to, and in accordance with, the covenant set forth below under "Mergers."
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"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate amount of interest in respect of Indebtedness (including
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; and the net costs associated with Interest Rate Agreements, but
excluding interest and fees on any letter of credit, bond, performance bond,
performance guarantee or similar obligation incurred in connection with the
day-to-day operations of its business to secure the performance of a cable
television franchise, pole attachment agreement, lease or other similar
agreement incurred in the ordinary course of such business) and all but the
principal component of rentals in respect of Capitalized Lease Obligations paid,
accrued or scheduled to be paid or to be accrued by such Person and its
consolidated subsidiaries during such period, all as determined on a
consolidated basis in conformity with GAAP.
"Consolidated Net Tangible Assets" of any Person means, as of any date, (a)
all amounts that would be shown as assets on a consolidated balance sheet of
such Person and its Restricted Subsidiaries prepared in accordance with GAAP,
less (b) the amount thereof constituting goodwill and other intangible assets as
calculated in accordance with GAAP.
"Contribution Agreement" means that certain Contribution and Purchase
Agreement, dated as of December 30, 1997, by and among FHGLP, New Falcon,
Falcon, TCI Falcon Holdings, LLC, Belo Ventures, Inc. and the other parties that
are signatories thereto, as amended and in effect on the Issue Date.
"Cumulative Cash Flow Credit" means cumulative Operating Cash Flow during
the period commencing on the Issue Date and ending on the last day of the most
recent month preceding the date of the proposed Restricted Payment for which
financial information is available or, if cumulative Operating Cash Flow for
such period is negative, minus the amount by which cumulative Operating Cash
Flow is less than zero.
"Cumulative Interest Expense" means, for the period commencing on the Issue
Date and ending on the last day of the most recent month preceding the proposed
Restricted Payment for which financial information is available, the aggregate
of the interest expense of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP, including
interest expense attributable to Capitalized Lease Obligations.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under pressure
or compulsion to complete the transaction; PROVIDED, HOWEVER, that the Fair
Market Value of any such asset or assets shall be determined by the Board of
Directors of the Company, acting in good faith.
"Falcon" means Falcon Holding Group, Inc., a California corporation and the
managing general partner of FHGLP, and, as the context may require, its
successors and assigns.
"Falcon Investors Partnership" means the limited partnership, if any,
created by the partners of FHGLP under Section 7.8 of the Partnership Agreement
as in effect on the Issue Date.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
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and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business or
obligations assuring the performance of an obligor in connection with a letter
of credit, bond, performance bond, performance guarantee or similar obligation
incurred in connection with the day-to-day operations of its business to secure
the performance of a cable television franchise, pole attachment agreement,
lease or other similar agreement incurred in the ordinary course of such
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness;
provided that neither the accrual of interest (whether such interest is payable
in cash or kind) nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (a)
debt of such Person for borrowed money, debt of such Person that represents the
deferred purchase price of property, and similar monetary obligations of such
Person that are evidenced by bonds, Debentures, debentures, or other instruments
and Capitalized Lease Obligations, but excluding liabilities or obligations with
respect to subscriber deposits, obligations under Interest Rate Agreements,
accrued interest, other accrued expenses, trade accounts payable, and other
similar items, (b) guarantees, endorsements, and other contingent obligations of
such Person, whether direct or indirect, in respect of liabilities of any other
Person of any of the types described in clause (a) above (other than
endorsements for collection or deposit in the ordinary course of business), and
(c) liabilities of any other Person of any of the types described in clause (a)
above to the extent secured by a Lien on any asset of such Person but, if such
liabilities are otherwise non-recourse to such Person, only to the extent of the
lesser of (x) the Fair Market Value of such asset at the time of determination
and (y) the amount of such liabilities; provided, however, that Indebtedness of
any Person shall not include liabilities or obligations arising under any letter
of credit, bond, performance bond, performance guarantee or similar obligation
securing the obligations of such Person under any cable television franchise,
pole attachment agreement, lease, or other similar agreement incurred in the
ordinary course of its business entered into in connection with the day-to-day
operations of such business.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect the Company or any of its Restricted Subsidiaries against
fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers, suppliers or
contractors in the ordinary course of business that are, in conformity with
GAAP, recorded as accounts receivable, prepaid expenses or deposits on the
balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, Debentures, debentures or other
similar instruments issued by, such
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Person and shall include (i) the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary and (ii) the Fair Market Value of the Capital Stock (or
any other Investment), held by the Company or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary.
"Issue Date" means the date of original issuance of the Debentures under the
Indenture.
"Lien" means any lien, security interest, charge or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature of a security interest and any agreement to give any security
interest). A Person shall be deemed to own subject to a lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under a conditional sale agreement, capital lease or other title retention
agreement.
"Nathanson Family Investors" means Marc B. Nathanson, Greg Nathanson (the
brother of Marc B. Nathanson), Liliane Vladimirschi (the sister-in-law of Marc
B. Nathanson), any of their respective spouses, estates, lineal descendants
(including adoptive children), heirs, executors, personal representatives,
administrators, trusts for any of their benefit, and charitable foundations to
which Voting Stock of the Company or any successor thereto beneficially owned by
any of the foregoing have been transferred and corporations and partnerships in
which one or more of the foregoing own more than 51% of the Voting Stock.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds of
such Asset Sale in the form of cash or Cash Equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or Cash Equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or Cash
Equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable), including without limitation, distributions by
the Company or a Restricted Subsidiary pursuant to clause (iv) of the third
paragraph set forth under the covenant "Limitation on Restricted Payments" below
as a result of such Asset Sale, without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP.
"New Credit Facility" means that certain revolving and term loan credit
facility, in an aggregate principal amount of $1.3 billion and the related
acquisition facility, in an aggregate principal amount of $200.0 million,
described in that certain Commitment Letter, dated as of March 12, 1998, among
FHGLP, BankBoston, N.A., NationsBank of Texas, N.A., Toronto Dominion (Texas)
Inc., Bank of America NT&SA, The Chase Manhattan Bank, BancBoston Securities,
Inc., NationsBanc Montgomery Securities, LLC, TD Securities (USA) Inc.,
BancAmerica Robertson Stephens and Chase Securities, Inc., including any
deferrals, renewals, extensions, restatements, replacements, refinancings,
restructurings or refundings thereof or amendments, modifications or supplements
thereto, and any agreement or agreements providing therefor, whether involving
one or members of the Restricted Group, whether by or with the same or any other
lender, creditor, group or groups of lenders or group or groups of creditors,
and including related Debentures, guarantee and security agreements and other
instruments and agreements executed in connection therewith.
"New Falcon" means Falcon Communications, L.P., a California limited
partnership.
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"New Falcon II" means Falcon Communications, LLC, a limited liability
company to which New Falcon will contribute substantially all of its assets
immediately following the consummation of the TCI Transaction.
"Notes" means the 11% Senior Subordinated Notes due 2003 of the Company.
"Notes Indenture" means the Indenture dated as of March 29, 1993, between
the Company and United States Trust Company of New York, as trustee, relating to
the Notes, as amended as of the Issue Date.
"Offer to Purchase" means an offer by the Company to purchase Debentures
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Debentures validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Debenture not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the purchase price, any Debenture accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest or
accrete Accreted Value, as appropriate, on and after the Payment Date; (v) that
Holders electing to have a Debenture purchased pursuant to the Offer to Purchase
will be required to surrender the Debenture, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Debenture
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Debentures delivered for purchase and a statement that such Holder is
withdrawing his election to have such Debentures purchased; and (vii) that
Holders whose Debentures are being purchased only in part will be issued new
Debentures equal in principal amount or Accreted Value, as applicable, to the
principal amount or Accreted Value, as applicable, of the unpurchased portion of
the Debentures surrendered; PROVIDED that each Debenture purchased and each new
Debenture issued shall be in a principal amount of $1,000 or integral multiples
thereof. On the Payment Date, the Company shall (i) accept for payment on a pro
rata basis Debentures or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Debentures or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Debentures or portions
thereof so accepted together with an Officers' Certificate specifying the
Debentures or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail to the Holders of Debentures so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly authenticate
and mail to such Holders a new Debenture equal in principal amount to any
unpurchased portion of the Debenture surrendered; PROVIDED that each Debenture
purchased and each new Debenture issued shall be in a principal amount of $1,000
or integral multiples thereof. The Trustee shall act as the Paying Agent for an
Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, in the event that the Company is required
to repurchase Debentures pursuant to an Offer to Purchase.
"Operating Cash Flow" means, for any Person, for any period, an amount equal
to (i) the net income (or loss) of such Person (exclusive of any extraordinary
gain or loss and of any gain or loss realized in such period upon an Asset
Disposition), plus (ii) the sum of depreciation, amortization, income tax
expense, Consolidated Interest Expense and other non-cash charges, in each case
to the extent deducted in determining such net income, and any one-time payments
under deferred compensation plans or arrangements (PROVIDED that such payments
are not made under such plans or arrangements more than three times), minus
(iii) all non-cash items increasing such net income for such period, all as
determined on a consolidated basis in accordance with GAAP consistently applied,
except that with respect to the Restricted Group, each of the foregoing shall be
determined on a consolidated basis with respect to the
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Company and its Restricted Subsidiaries only; PROVIDED, HOWEVER, that (A) the
portion of net income (or loss) attributable to minority interests in Persons
shall be included in such net income (or loss) only to the extent that cash
dividends or distributions have actually been received by such Person or one of
its Restricted Subsidiaries and (B) the net income (or loss) of the Company
shall include the amount of all cash dividends received by the Company or any of
its Restricted Subsidiaries from an Unrestricted Subsidiary.
"Partnership Agreement" means the Third Amended and Restated Agreement of
Limited Partnership of the Company, dated as of December 28, 1995, as amended
and in effect as of the Issue Date.
"Permitted Holders" means any of (a) Falcon for so long as a majority of the
voting power of the voting Capital Stock of such Person is beneficially owned by
any of the Persons listed in the other clauses of this definition, (b) any
Nathanson Family Investor, (c) TCI and TCI Communications, Inc., a Delaware
corporation, (d) any Person in which TCI is the owner, directly or indirectly,
of at least 25% of the outstanding equity of such Person, and (e) any Person
controlling, controlled by or under common control with any other Person
described in clauses (a)-(d) of this definition; provided, that for purposes of
calculating the amount of Voting Stock in any Person held by Permitted Holders,
Voting Stock held by directors and executive officers of Falcon shall be deemed
to be held by Permitted Holders.
"Permitted Investments" means (a) Cash Equivalents, (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits, (c) loans and
advances to employees made in the ordinary course of business not to exceed
$10.0 million in the aggregate at any one time outstanding, (d) Interest Rate
Agreements, (e) transactions with officers, directors and employees of the
Company, Falcon or any Restricted Subsidiary entered into in the ordinary course
of business (including compensation or employee benefit arrangements with any
such director or employee), (f) Investments existing as of the Issue Date and
any amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the Company
or any Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith, (g) Investments in any
Restricted Subsidiary and (h) the deposit of proceeds from an asset sale or
other disposition with a "qualified intermediary," "qualified trustee" or
similar person for purposes of facilitating a like kind exchange under
applicable provisions of the Internal Revenue Code of 1986, as amended.
"Permitted Liens" means the following types of Liens:
(a) Liens existing on the Issue Date;
(b) Liens on shares of the capital stock of an entity that is not a
Restricted Subsidiary, which Liens solely secure a guarantee by the Company
or a Restricted Subsidiary, or both, of Indebtedness of such entity;
(c) Liens on Receivables and Related Assets (and proceeds thereof)
securing only Indebtedness otherwise permitted to be incurred by a
Restricted Subsidiary;
(d) Liens on shares of the Capital Stock or assets of a Subsidiary of
the Company securing Indebtedness under the Bank Credit Agreement, the New
Credit Facility or any renewal, replacement or restructuring of the Bank
Credit Agreement or New Credit Facility or with respect to any other
Indebtedness that a Subsidiary is permitted to incur pursuant to the
provisions of the Indenture;
(e) Liens granted in favor of the Company or any Restricted Subsidiary;
(f) Liens securing the Debentures;
(g) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by the Company or a Restricted Subsidiary; PROVIDED, that such Lien does not
extend to any property or assets of the Company or any Restricted
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Subsidiary other than the assets acquired in connection with the incurrence
of such Acquired Indebtedness;
(h) Liens securing obligations under Interest Rate Agreements or "margin
stock", as defined in Regulations G and U of the Board of Governors of the
Federal Reserve System;
(i) Statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business of the Company or any Restricted Subsidiary and
with respect to amounts not yet delinquent or being contested in good faith
by appropriate proceedings;
(j) Liens of taxes, assessments, government charges or claims not yet
due or that are being contested in good faith by appropriate proceedings;
(k) Zoning restrictions, easements, rights-of-way, restrictions under
cable television franchises or other governmental licenses or
authorizations, restrictions and other similar charges or encumbrances or
minor defects in title not interfering in any material respect with the
business of the Company or any Restricted Subsidiary;
(l) Liens arising by reason of any judgment, decree or order of any
court, arbitral tribunal or similar entity so long as any appropriate legal
proceedings that may have been initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(m) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security or similar legislation;
(n) Liens securing the performance of bids, tenders, leases, contracts,
franchises, public or statutory obligations, surety, stay or appeal bonds,
or other similar obligations arising in the ordinary course of business;
(o) Leases under which the Company or any Restricted Subsidiary is the
lessee or the lessor in the ordinary course of business;
(p) Purchase money mortgages or other purchase money liens (including
without limitation any Capitalized Lease Obligations) upon any fixed or
capital assets acquired after the Issue Date or purchase money mortgages
(including without limitation Capitalized Lease Obligations) on any such
assets, whether or not assumed, existing at the time of acquisition of such
assets, whether or not assumed, so long as (i) such mortgage or lien does
not extend to or cover any other asset of the Company or any Restricted
Subsidiary and (ii) such mortgage or lien secures the obligation to pay the
purchase price of such asset, interest thereon and other charges incurred in
connection therewith (or the obligation under such Capitalized Lease
Obligation) only;
(q) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(r) Liens encumbering deposits made to secure obligations arising under
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(s) Liens to secure other Indebtedness; PROVIDED, HOWEVER, that the
principal amount of any Indebtedness secured by such Liens, together with
the principal amount of any Indebtedness incurred under this clause (s) as
permitted by clause (t) below (and successive refinancings thereof), may not
exceed 15% of the Company's Consolidated Net Tangible Assets as of the last
day of the Company's most recently completed fiscal year for which financial
information is available; and
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(t) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (s); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, limited liability
partnership, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost.
"Receivables and Related Assets" means (i) accounts receivable, instruments,
chattel paper, obligations, general intangibles, equipment and other similar
assets, including interests in merchandise or goods, the sale or lease of which
gives rise to the foregoing, related contractual rights, guarantees, insurance
proceeds, collections and other related assets, (ii) equipment, (iii) inventory
and (iv) proceeds of all of the foregoing.
"Redeemable Capital Stock" means any class or series of Capital Stock of any
Person that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or otherwise, is or upon the happening of an event
or passage of time would be, required to be redeemed (in whole or in part) prior
to the Stated Maturity of the Debentures or is redeemable (in whole or in part)
at the option of the holder thereof at any time prior to the Stated Maturity of
the Debentures.
"Restricted Group" means, collectively, the Company and its Restricted
Subsidiaries.
"Restricted Payment" means (subject to the provisions of the covenant set
forth in "Covenants-- Limitation on Restricted Payments"):
(a) any Stock Payment by the Company or any Restricted Subsidiary;
(b) any direct or indirect payment to redeem, purchase, defease or otherwise
acquire or retire for value, or permit any Restricted Subsidiary to
redeem, purchase, defease or otherwise acquire or retire for value, prior
to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, any Indebtedness of the Company that is subordinate in right of
payment to the Debentures; or
(c) any direct or indirect payment to redeem, purchase, defease or otherwise
acquire or retire for value any Redeemable Capital Stock at its mandatory
redemption date or other maturity date; PROVIDED, HOWEVER, that the
redemption, purchase, defeasance or other acquisition or retirement of
Redeemable Capital Stock at its mandatory redemption or other maturity
date shall not be a Restricted Payment if and to the extent any
Indebtedness incurred to finance all or a portion of the purchase or
redemption price does not have a final scheduled maturity date, or permit
redemption at the option of the holder thereof, earlier than the final
scheduled maturity of such Debenture.
Notwithstanding the foregoing, Restricted Payments shall not include (x)
payments by any Restricted Subsidiary to the Company or any other Restricted
Subsidiary or (y) any Investment or designation of a Restricted Subsidiary as an
Unrestricted Subsidiary permitted under the covenant set forth in
"Covenants--Limitation on Investments in Unrestricted Subsidiaries and
Affiliates."
"Restricted Subsidiary" means any subsidiary of the Company which is not
designated an Unrestricted Subsidiary.
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"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"Stated Maturity," when used with respect to any Debenture or any
installment of interest thereon, as the context may require, means the date
specified in such Debenture as the fixed date on which the principal of such
Debenture or such installment of interest, as the context may require, is due
and payable.
"Stock Payment" means, with respect to any Person, the payment or
declaration of any dividend, either in cash or in property (except dividends
payable in shares of Capital Stock of such Person (other than Redeemable Capital
Stock)), or the making by such Person of any other distribution, on account of
any shares of any class of its Capital Stock, now or hereafter outstanding, or
the redemption, purchase, retirement or other acquisition for value by such
Person, directly or indirectly, of any shares of any class of its Capital Stock
or any direct or indirect parent of such Person, now or hereafter outstanding.
"Subsidiary" means, with respect to any Person, any corporation more than
50% of the voting stock of which is owned directly or indirectly by such Person,
and any partnership, limited liability company, limited liability partnership,
association, joint venture or other entity in which such Person owns more than
50% of the voting equity interests or has the power to elect a majority of the
Board of Directors or other governing body; PROVIDED that a partnership of which
the Company or any of its Subsidiaries is the managing general partner shall be
deemed to be a Subsidiary of the Company.
"Tax Amount" means, with respect to any period, without duplication, the
increase in the cumulative United States federal, state and local tax liability
of holders of equity interests in the Company or a Restricted Subsidiary, as
applicable (or, if such holder is a pass-through entity for United States income
tax purposes, holders of its equity interests) in respect of their interests in
the Company or such Restricted Subsidiary for such period plus any additional
amounts payable to such holders to cover taxes arising from ownership of such
equity interests, but excluding any increase in tax liability or additional
amounts payable in respect of a gain realized by a partner in the Company or a
Restricted Subsidiary upon the sale or other disposition by such partner of any
of its partnership interests, including, without limitation, any redemption
thereof by the Company, in the Company or a Restricted Subsidiary.
"TCI" means Tele-Communications, Inc., a Delaware corporation.
"TCI Contribution" means the closing of the contribution by TCI Falcon
Holdings, LLC to New Falcon, substantially in accordance with the Contribution
Agreement, of cable television systems serving at least 230,000 basic
subscribers.
"TCI Transaction" means the transactions defined as the "TCI Transaction" in
the Prospectus dated as of March 31, 1998, of the Issuers, with respect to the
Debentures.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50.0 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types
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described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's
Rating Services, (v) securities with maturities of one year or less from the
date of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by to Standard &
Poor's Rating Services or Moody's Investors Service, Inc. and (vi) other dollar
denominated securities issued by any Person incorporated in the United States
rated at least "A" or the equivalent by to Standard & Poor's Rating Services or
at least "A2" or the equivalent by Moody's Investors Service, Inc. and in each
case either (A) maturing not more than one year after the date of acquisition or
(B) which are subject to a repricing arrangement (such as a Dutch auction) not
more than one year after the date of acquisition (and reprices at least yearly
thereafter) which the Person making the investment believes in good faith will
permit such Person to sell such security at par in connection with such
repricing mechanism.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly organized Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that such designation would be permitted
under the covenant described under "Covenants--Limitation on Investments in
Unrestricted Subsidiaries and Affiliates." The Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that
immediately after giving effect to such designation (x) the Company could incur
$1.00 of additional Indebtedness under the first paragraph of the covenant
described under "Covenants--Limitation on Indebtedness" below and (y) no Default
or Event of Default shall have occurred and be continuing or shall result as a
consequence thereof. Any such designation by the Company shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions. Notwithstanding the above,
as of the Issue Date, each of the following shall be an "Unrestricted
Subsidiary": (i) Enstar Communications Corporation and its Subsidiaries, (ii)
Enstar Finance Company, LLC and its Subsidiaries, (iii) Falcon Lake Las Vegas
Cablevision, L.P. and its Subsidiaries, (iv) Falcon Video Communications, L.P.
and its Subsidiaries and (v) Falcon/Capital Cable and its Subsidiaries.
"Voting Stock" means, with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to Incur any Indebtedness unless, immediately thereafter and after
giving effect thereto, the Cash Flow Ratio of the Restricted Group will be less
than or equal to 9 to 1.
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Notwithstanding the foregoing limitations, regardless of the amount of
Indebtedness of the Restricted Group, the Company and any Restricted Subsidiary
may Incur each and all of the following (collectively, "Permitted
Indebtedness"):
(i) Indebtedness under the Debentures;
(ii) Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date; PROVIDED that the Debentures shall not be
permitted to be outstanding pursuant to this subparagraph (ii) at any time
after October 14, 1998;
(iii) Indebtedness of the Company and its Restricted Subsidiaries under
the Bank Credit Agreement or the New Credit Facility in an aggregate
principal amount at any one time outstanding, including all Indebtedness
incurred to refinance or replace any Indebtedness incurred pursuant to this
subparagraph (iii), not to exceed $1.5 billion, less (x) the aggregate
amount of all permanent principal repayments, optional or mandatory, made
from time to time after the date of the Indenture with respect to such
Indebtedness (other than repayments made in connection with a refinancing
thereof); PROVIDED, HOWEVER, that the maximum principal amount of
Indebtedness that may be outstanding under the Bank Credit Agreement or the
New Credit Facility pursuant to this subparagraph (iii) may be increased
pursuant to the incurrence of Indebtedness thereunder for the purposes and
subject to the maximum amounts and other limitations set forth in
subparagraph (ix) of this paragraph; PROVIDED that for any amount of such
Indebtedness incurred under this subparagraph (iii), the amount of
Indebtedness permitted to be incurred under paragraph (ix) will be
correspondingly decreased;
(iv) Indebtedness owed by the Company to any Restricted Subsidiary (but
only so long as such Indebtedness is held by such Restricted Subsidiary) and
Indebtedness owed by any Restricted Subsidiary to the Company or any other
Restricted Subsidiary (but only so long as such Indebtedness is held by the
Company or such other Restricted Subsidiary);
(v) Any guarantee of Indebtedness of the Company by any Restricted
Subsidiary permitted by the covenant set forth below under "--Limitation on
Issuances of Guarantees by Restricted Subsidiaries;"
(vi) Indebtedness the net proceeds of which are used to refinance
outstanding Indebtedness incurred under subparagraphs (ii), (vii) and (ix)
of this paragraph in an amount (or, if such new Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, with an original issue price) not to
exceed the amount so refinanced (plus premiums, accrued interest, fees and
expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance the Debentures or Indebtedness that is PARI PASSU with, or
subordinated in right of payment to, the Debentures will be permitted under
this clause (vii) only if (A) in case the Debentures are refinanced in part
or other Indebtedness that is PARI PASSU with the Debentures is refinanced,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is expressly made
PARI PASSU with, or subordinate in right of payment to, the remaining
Debentures, (B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the Debentures, such Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such Indebtedness
is issued or remains outstanding, is expressly made subordinate in right of
payment to the Debentures at least to the extent that the Indebtedness to be
refinanced is subordinated to the Debentures and (C) such new Indebtedness,
determined as of the date of the Incurrence of such new Indebtedness, does
not mature prior to the Stated Maturity of the Indebtedness to be refinanced
and the Average Life of such new Indebtedness is equal to or greater than
the sum of the remaining Average Life of the Indebtedness to be refinanced;
PROVIDED, FURTHER, that in no event may Indebtedness of the Company that is
PARI PASSU with, or subordinated in right of payment to, the Debentures be
refinanced by means of Indebtedness of any Restricted Subsidiary pursuant to
this clause (vi); PROVIDED, that the foregoing shall not limit the
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ability of the Company to conduct a tender offer or redeem the Debentures
with the proceeds of the Bank Credit Agreement or the New Credit Facility;
(vii) Indebtedness of the Company or any of its Restricted Subsidiaries
under Purchase Money Indebtedness or Capitalized Lease Obligations in an
aggregate amount outstanding at any time of not more than $25.0 million; and
(viii) in addition to the items referred to in clauses (i) through (vii)
above, Indebtedness of the Company or any Restricted Subsidiary in an
aggregate amount not to exceed two times the aggregate net cash proceeds to
the Company from the issuance of any Capital Stock of the Company (other
than Redeemable Capital Stock) after the Issue Date; PROVIDED that the
amount of such net cash proceeds with respect to which Indebtedness is
incurred pursuant to this subparagraph (viii) shall not be deemed net cash
proceeds from the issue and sale of Capital Stock for purposes of
subparagraph (iii) of the first paragraph of the covenant under
"--Limitation on Restricted Payments"; and
(ix) in addition to the items referred to in clauses (i) through (viii)
above, Indebtedness of the Company or any of its Restricted Subsidiaries in
an aggregate principal amount not to exceed $25.0 million at any time
outstanding.
Indebtedness specified in clauses (iv), (v) and (vii) shall not under any
circumstances be included in Indebtedness in the application of the covenant
described in the first paragraph of the covenant under "--Limitation on
Indebtedness."
(b) For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in clause (a)
above, the Issuers, in their sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any Restricted Payment if (a) at the time of such proposed Restricted
Payment, a Default or Event of Default shall have occurred and be continuing or
shall occur as a consequence of such Restricted Payment or (b) immediately after
giving effect to such Restricted Payment, the aggregate of all Restricted
Payments that shall have been made on or after the Issue Date would exceed the
sum of (without duplication):
(i) $25.0 million, plus
(ii) an amount equal to the difference between (A) the Cumulative Cash
Flow Credit and (B) 1.2 multiplied by Cumulative Interest Expense, plus
(iii) 100% of the aggregate net cash proceeds and 70% of the Fair Market
Value of the aggregate non-cash net proceeds received by the Company either
(x) as capital contributions to the Company after the Issue Date or (y) from
the issue and sale (other than to a Restricted Subsidiary) of, or from the
exercise of any options, warrants or other rights to acquire its, Capital
Stock (other than Redeemable Capital Stock and other than net proceeds from
the issue and sale of Capital Stock with respect to which Indebtedness is
incurred pursuant to subparagraph (viii) of the covenant under "--Limitation
on Indebtedness" after the Issue Date), plus
(iv) 100% of the aggregate net cash proceeds and 70% of the Fair Market
Value of the aggregate non-cash net proceeds received by the Company or any
Restricted Subsidiary after the Issue Date from the Incurrence of
Indebtedness that has been converted into or exchanged for Capital Stock of
the Company (other than Redeemable Capital Stock).
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If the Company or any Restricted Subsidiary makes a Restricted Payment
which, at the time of the making of such Restricted Payment, would in the good
faith determination of the Company be permitted under the requirements of this
covenant, such Restricted Payment shall be deemed to have been made in
compliance with this covenant notwithstanding any subsequent adjustments made in
good faith to the Company's financial statements affecting Cumulative Cash Flow
Credit or Cumulative Interest Expense for any period.
The foregoing provisions shall not prohibit:
(i) the repurchase, redemption or other acquisition of Capital Stock of
the Company, or the acquisition of Indebtedness of the Company that is
subordinated in right of payment to the Debentures, in each case, in
exchange for, or out of the net cash proceeds of a substantially concurrent
offering (other than to a Restricted Subsidiary) of, Capital Stock of the
Company (other than Redeemable Capital Stock); PROVIDED that the amount of
any such net cash proceeds that are utilized for any such repurchase,
redemption or other acquisition shall be excluded from clause (iii) of the
first paragraph of this covenant;
(ii) the payment of any dividend or distribution on, or redemption of,
Capital Stock within 60 days after the date of declaration of such dividend
or distribution or the giving of formal notice of such redemption if, at the
date of such declaration or giving of such formal notice, such payment or
redemption would comply with the foregoing provisions;
(iii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of the Debentures with the proceeds of Indebtedness
Incurred in compliance with the covenant described under "--Limitation on
Indebtedness" above;
(iv) for so long as the Company or any Restricted Subsidiary is treated
as a pass-through entity for United States federal income tax purposes,
distributions to equity holders of the Company or any Restricted Subsidiary
in an amount not to exceed the Tax Amount for such period;
(v) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Debentures, including premium, if any, and accrued and unpaid
interest, with the proceeds of Indebtedness Incurred under clause (vi) of
the second paragraph of the covenant described under "--Limitation on
Indebtedness" above;
(vi) any payment or distribution made by the Company or any Restricted
Subsidiary in order to purchase, or fund the purchase by the Falcon
Investors Partnership, if any, of the interests in the Capital Stock of the
Company or the Falcon Investors Partnership, if any, held by any of the
Group I Partners, the Group II Partners, the Group III Partners or the Group
IV Partner (as such terms are defined in the Partnership Agreement as in
effect on the Issue Date) pursuant to the provisions of Article 15 of the
Partnership Agreement (or pursuant to such modifications to such provisions
as may be agreed to by the Company, the Falcon Investors Partnership, the
Group I Partners, the Group II Partners, the Group III Partners or the Group
IV Partner; PROVIDED no such modification shall result in such payment or
distribution being made in either a larger amount or at an earlier date than
as provided for in Article 15 of the Partnership Agreement as in effect on
the Issue Date);
(vii) any purchase, redemption, acquisition, cancellation or other
retirement for value of Capital Stock of the Company or any Restricted
Subsidiary or any other transaction that is undertaken in connection with
the consummation of the TCI Transaction and the other transactions
contemplated under the Contribution Agreement;
(viii) the purchase, redemption, acquisition, cancellation or other
retirement for value of Capital Stock of the Company, options on any such
Capital Stock or related equity appreciation rights or similar securities
held by officers or employees or former officers or employees of the
Company, any Restricted Subsidiary (or their estates or beneficiaries under
their estates), upon death, disability,
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retirement or termination of employment; PROVIDED that the aggregate
consideration paid for such purchase, redemption, acquisition, cancellation
or other retirement after the Issue Date does not in any one fiscal year of
the Company exceed an aggregate amount of $7.5 million;
(ix) the payment of any dividend or distribution on Capital Stock of a
Restricted Subsidiary out of such Restricted Subsidiary's net income from
the Issue Date to Persons other than the Company or a Restricted Subsidiary;
PROVIDED that such dividend or distribution is paid pro rata to all holders
of such Capital Stock;
(x) any payment or distribution made by the Company or any Restricted
Subsidiary in order to purchase or fund the purchase by the Company of the
interests in the Capital Stock of FHGLP held by the non-management partners
in FHGLP (including the partnership interest held by Belo Ventures, Inc.)
pursuant to the provisions of Article 9 of the New FHGLP Partnership
Agreement (or pursuant to such modifications to such provisions as may be
agreed to by the Company, New Falcon or such non-management partners;
PROVIDED no such modification shall result in such payment or distribution
being made in either a larger amount or at an earlier date than as provided
in Article 9 of the New FHGLP Partnership Agreement as in effect on the
Issue Date); and
(xi) the distribution under the FHGLP 1993 Incentive Performance Plan,
as amended, of amounts in connection with the TCI Transaction.
PROVIDED, that in the case of each of clauses (i) through (xi), no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof. In determining the amount of Restricted Payments
permissible under this covenant, the amounts expended pursuant to subparagraphs
(ii), (v), (viii) and (ix) of the immediately preceding paragraph shall be
included as Restricted Payments. The amount of any non-cash Restricted Payment
shall be deemed to be equal to the Fair Market Value thereof at the date of the
making of such Restricted Payment.
LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES AND AFFILIATES
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, (i) make any Investment (other than Permitted
Investments) or (ii) allow any Restricted Subsidiary to become an Unrestricted
Subsidiary (a "redesignation of a Restricted Subsidiary"), in each case unless
(a) no Default or Event of Default shall have occurred and be continuing or
shall occur as a consequence of such Investment or such redesignation of a
Restricted Subsidiary and (b) after giving effect thereto, the Cash Flow Ratio
shall be less than or equal to 9 to 1. The foregoing provisions of this covenant
shall not prohibit (i) any renewal or reclassification of any Investment
existing on the Issue Date or (ii) trade credit extended on usual and customary
terms in the ordinary course of business.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Issue Date in the Bank Credit Agreement, the
Indenture or any other agreements in effect on the Issue Date, and any
modifications, extensions, refinancings, renewals, restructurings, substitutions
or replacements of such agreements; PROVIDED that the encumbrances and
restrictions in any such modifications, extensions, refinancings, renewals,
restructurings, substitutions or replacements (a) do not prevent the Company or
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any of its Restricted Subsidiaries from paying interest on the Debentures and
(b) will be no more restrictive in any material respect than encumbrances and
restrictions which could be obtained by a Person comparable to the Company or
such Restricted Subsidiary under then prevailing market conditions; or (ii)
existing under or by reason of applicable law; (iii) existing with respect to
any Person or the property or assets of such Person acquired by the Company or
any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that (1) is a lease, license, conveyance or contract or
similar property or asset or (2) is a cable television franchise or other
governmental license or authorization, (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary; (v) with respect to the Company or a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, the Company or such Restricted Subsidiary; or (vi)
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) the encumbrance or restriction applies only
in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders than is
customary in comparable financings (as determined by the Company) and (C) the
Company determines that any such encumbrance or restriction will not materially
affect the Company's ability to make principal or interest payments on the
Debentures. Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Debentures ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Debentures by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; PROVIDED that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the
Debentures, then the Guarantee of such Guaranteed Indebtedness shall be PARI
PASSU with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to
the Debentures, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale,
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exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release or
discharge of the Guarantee which resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under such
Guarantee.
TENDER AND REDEMPTION OF THE NOTES
FHGLP will, as promptly as reasonably practicable, but in any event within
45 days after the Issue Date, offer to each holder of Notes to purchase all of
the outstanding Notes held by such holder. In addition, prior to October 15,
1998, the Company will redeem any Notes outstanding on such date in accordance
with the provisions of the Notes Indenture.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, sell, lease, transfer or otherwise dispose of any of its properties or
assets to or purchase any property or assets from, or enter into any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, an Affiliate of the Company that is not a Restricted Subsidiary (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is
on terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Restricted Subsidiary with an unrelated Person and (ii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $25.0 million (other
than any transaction related to or arising out of the sale or exchange of cable
television systems between the Company or any of its Restricted Subsidiaries and
(i) TCI or any of its Affiliates, (ii) Enstar Communications Corporation and its
Subsidiaries or (iii) Falcon or any of its Affiliates, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing. This provision shall not apply to Restricted Payments or other
distributions permitted under the covenant described under "--Limitation on
Restricted Payments." In addition, this provision shall not apply to: (i)
customary directors' fees, indemnification and similar arrangements, consulting
fees, employee salaries, bonuses, or employment agreements, compensation or
employee benefit arrangements, and incentive arrangements with any officer,
director or employee of the Company entered into in the ordinary course of
business (including customary benefits thereunder) and payments under any
indemnification arrangements permitted by applicable law, (ii) the Contribution
Agreement, the Partnership Agreement or the partnership agreement of New Falcon,
including any amendments or extensions thereof that do not otherwise violate any
other covenant set forth in the Indenture, and any transactions undertaken or to
be undertaken pursuant to any of such agreements, or pursuant to any other
contractual obligations in existence on the Issue Date (as in effect on the
Issue Date), (iii) the issue and sale by the Company to its partners or
stockholders of Capital Stock (other than Redeemable Capital Stock), (iv) loans
and advances to officers, directors and employees of the Company and the
Restricted Subsidiaries in the ordinary course of business, (v) customary
commercial banking, investment banking, underwriting, placement agent or
financial advisory fees paid in connection with services rendered to the Company
and its Subsidiaries in the ordinary course, (vi) the Incurrence of intercompany
Indebtedness permitted pursuant to clause (iv) under the definition of
"Permitted Indebtedness" set forth under "Covenants--Limitation on
Indebtedness," (vii) the pledge of Capital Stock of Unrestricted Subsidiaries to
support the Indebtedness thereof and (viii) programming agreements, marketing
and promotional agreements and other billing services, equipment agreements and
agreements for
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other goods and services related to the Company's business entered into between
TCI or its Affiliates and the Company or any Subsidiary of the Company.
LIMITATION ON LIENS
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind to secure Indebtedness of the Company,
except for Permitted Liens, on or with respect to any of its property or assets,
whether owned at the Issue Date or thereafter acquired, or any income, profits
or proceeds therefrom, or assign or otherwise convey any right to receive income
thereon, unless (x) in the case of any Lien securing Indebtedness of the Company
that is subordinated in right of payment to the Debentures, the Debentures are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Lien and (y) in the case of any other Lien securing
Indebtedness of the Company that is PARI PASSU in right of payment with the
Debentures, the Debentures are equally and ratably secured.
MERGERS
The Indenture provides that the Company may not consolidate or merge with,
or transfer all or substantially all of its assets to, any Person unless (i) the
successor is organized under the laws of the United States or any state thereof
or the District of Columbia, (ii) the successor assumes all the obligations of
the Company under the Debentures, the Indenture and the Registration Rights
Agreement, (iii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing, and (iv) immediately
after giving effect to such transaction, the successor could incur at least
$1.00 of additional Indebtedness under the covenant described under
"--Limitation on Indebtedness" above; PROVIDED that a pledge pursuant to the
Bank Credit Agreement or the New Credit Facility by the Company of its
partnership interests in the Owned Subsidiaries shall not be deemed to
constitute a transfer of all or substantially all of the Company's assets for
purposes of this covenant. Notwithstanding the foregoing limitations, (a) in
connection with the consummation of the TCI Transaction and FHGLP's transfer of
all or substantially all its assets to New Falcon, New Falcon shall be
substituted for FHGLP as an obligor under the Debentures and the Indenture and
thereupon FHGLP shall be released and discharged from any further obligation or
liability with respect to the Debentures and the Indenture, and (b) in
connection with the subsequent transfer by New Falcon of all or substantially
all of its assets to New Falcon II in connection with the TCI Transaction, New
Falcon shall remain as an obligor under the Debentures and the Indentures and
New Falcon II shall have no obligation to assume or otherwise be liable for any
of the obligations of New Falcon under the Debentures and the Indentures.
LIMITATION ON ASSET SALES
FHGLP will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless (i) the consideration received by the Company or such
Restricted Subsidiary is at least equal to the fair market value of the assets
sold or disposed of and (ii) at least 75% of the consideration received consists
of cash or Temporary Cash Investments or the assumption of senior Indebtedness
of the Company or Indebtedness of a Restricted Subsidiary, PROVIDED that the
Company or such Restricted Subsidiary is irrevocably released from all liability
under such Indebtedness. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Issue Date in any period of 12
consecutive months exceed 15% of Operating Cash Flow of the Restricted Group
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within twelve months after
the date Net Cash Proceeds so received exceed 15% of such Operating Cash Flow
(the "Application Period") (A) apply an amount equal to such excess Net Cash
Proceeds to permanently repay
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senior Indebtedness of the Company, or any Restricted Subsidiary providing a
Subsidiary Guarantee pursuant to the "Limitation on Issuances of Guarantees by
Restricted Subsidiaries" covenant described above or Indebtedness of any other
Restricted Subsidiary, in each case owing to a Person other than the Company or
any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount
not so applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within 12 months after the date of such agreement (the
"Contract Period")), in property or assets (other than current assets) of a
nature or type or that are used in a business (or in a company having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such investment
and (ii) apply (no later than the end of the Application Period or the Contract
Period, as applicable, referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, the Issuers
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount or aggregate Accreted Value, as applicable, of
Debentures equal to the Excess Proceeds on such date, at a purchase price equal
to 100% of the principal amount thereof in the case of Senior Debentures and a
purchase price equal to 100% of the Accreted Value thereof in the case of Senior
Discount Debentures, plus, in each case, accrued interest (if any) to the date
of payment.
LIMITATIONS ON ACTIVITIES OF FFC
FFC will not hold any material assets, become liable for any obligations or
engage in any business activities; PROVIDED that FFC may be a co-obligor of the
Debentures pursuant to the terms of the Indenture and may engage in any
activities directly related thereto or necessary in connection therewith.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Issuers are then required to file reports with the
Commission, the Issuers shall file with the Commission all such reports and
other information as would be required to be filed with the Commission by
Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto,
PROVIDED that, if filing such documents by the Issuers with the Commission is
not permitted under the Exchange Act, the Issuers shall provide such documents
to the Trustee and upon written request supply copies of such documents to any
prospective Holder. The Issuers shall supply the Trustee and each Holder or
shall supply to the Trustee for forwarding to each such Holder, without cost to
such Holder, copies of such reports and other information.
REPURCHASE OF DEBENTURES UPON A CHANGE OF CONTROL
The Issuers must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Debentures then
outstanding, at a purchase price equal to 101% of the principal amount thereof
in the case of Senior Debentures, and 101% of the Accreted Value thereof in the
case of Senior Discount Debentures, in each case plus accrued interest (if any)
to the Payment Date.
There can be no assurance that the Issuers will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Debentures) required by the foregoing covenant (as
well as under covenants that may be contained in other securities of the Issuers
which might be outstanding at the time). The above covenant requiring the
Issuers to repurchase the
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Debentures will, unless consents are obtained, require the Issuers to repay all
indebtedness then outstanding which by its terms would prohibit such Debenture
repurchase, including indebtedness outstanding under the Bank Credit Agreement,
the New Credit Facility and the Debentures, either prior to or concurrently with
such Debenture repurchase.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of the
holders of Debentures to require the Company to repurchase such Debentures as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of the Company and its subsidiaries to another party may be
uncertain.
The Issuers are not required to make an Offer to Purchase pursuant to this
covenant if a third party makes an Offer to Purchase in compliance with this
covenant and repurchases all Debentures validly tendered and not withdrawn under
such Offer to Purchase.
EVENTS OF DEFAULT
The following are defined as "Events of Default" in the Indenture: (i)
default in the payment of principal of or premium, if any, on the Debentures
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (ii) default in the payment of interest on any Debenture when the
same becomes due and payable, and such default continues for a period of 30
days, (iii) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or limitations on the activities
of FFC or the failure to make or consummate an Offer to Purchase in accordance
with the "Limitation on Asset Sales" or "Repurchase of Debentures upon a Change
of Control" covenant; (iv) the Issuers default in the performance of or breach
any other covenant or agreement in the Indenture or under the Debentures (other
than a default specified in clause (i), (ii) or (iii) above) and such default or
breach continues for a period of 30 days after written notice by the Trustee or
the Holders of 25% or more in aggregate principal amount of the outstanding
Senior Debentures or in Accreted Value of the outstanding Senior Discount
Debentures, as the case may be; (v) default by the Company or any Significant
Subsidiary in the payment when due at maturity of indebtedness for borrowed
money in excess of $25.0 million (individually or in the aggregate), and such
defaulted payment shall not have been made, waived, or extended within 30 days
of such payment default; (vi) the acceleration of the maturity of any
indebtedness for borrowed money issued under an indenture or other instrument of
the Company or any Significant Subsidiary in excess of $25.0 million
(individually or in the aggregate), and such indebtedness shall not have been
discharged in full or such acceleration shall not have been rescinded or
annulled within 30 days of such acceleration; (vii) the entry of a final
judgment or order (not subject to appeal) for the payment of money in excess of
$25.0 million (individually or in the aggregate) (net of any amounts covered by
reputable and creditworthy insurance companies) against the Company or any
Significant Subsidiary which remains undischarged or unstayed for a period of 60
days after the date on which the right to appeal such final judgment or order
has expired; (viii) a court having jurisdiction in the premises enters a decree
or order for (A) relief in respect of the Company or any Significant Subsidiary
in an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or (ix) the Company or any
Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or
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taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than as specified in clause (viii) or (ix))
occurs and is continuing, the Trustee or the holders of not less than 25% in
aggregate principal amount of the outstanding Senior Debentures or Senior
Discount Debentures, as the case may be, may, and the Trustee, upon the request
of the holders of not less than 25% in aggregate principal amount of the Senior
Debentures or Senior Discount Debentures, as the case may be, outstanding,
shall, by notice in writing to the Company (and to the Trustee if declaration is
made by the holders) declare the entire unpaid principal or Accreted Value of,
as applicable, premium, if any, and accrued interest on, all such Debentures to
be due and payable immediately. If an Event of Default specified in clause
(viii) or (ix) above occurs and is continuing, then all unpaid principal or
Accreted Value of, as applicable, premium, if any, and accrued interest on, all
the Debentures then outstanding shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. The Trustee may withhold notice to the Holders of any Default or
Event of Default (except in payment of principal of, or premium, if any, or
interest on, the Debentures) if the Trustee considers it in the interest of the
holders of the Debentures to do so.
The Indenture provides that at any time after a declaration of acceleration,
but before a judgment or decree for payment of the money due has been obtained
by the Trustee, the holders of a majority in principal amount of the outstanding
Senior Debentures or Senior Discount Debentures, as the case may be, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if all Events of Default, other than the non-payment of the
principal of, premium, if any, and interest on, all such Debentures that have
become due solely by such declaration of acceleration, have been cured or waived
and the rescission would not conflict with any judgment, order or decree of any
court of competent jurisdiction.
The Indenture provides that no Holder of any Debentures shall have any right
to institute any proceeding, judicial or otherwise, with respect to such
Indenture, or for the appointment for a receiver or trustee, or for any other
remedy hereunder, unless (i) such Holder has previously given written notice to
the Trustee of a continuing Event of Default; (ii) the holders of not less than
25% in principal amount of the outstanding Senior Debentures or in Accreted
Value of the outstanding Senior Discount Debentures, as the case may be, shall
have made written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee; (iii) such holder or holders
shall have offered to the Trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in compliance with such request; (iv)
the Trustee for 60 days after its receipt of such notice, request and offer of
indemnity shall have failed to institute any such proceeding; and (v) no
direction inconsistent with such written request shall have been given to the
Trustee during such 60-day period by the holders of a majority in principal
amount of such outstanding Senior Debentures or Senior Discount Debentures, as
the case may be.
The Indentures provides that the holders of not less than a majority in
aggregate principal amount of the outstanding Senior Debentures or Senior
Discount Debentures, as the case may be, shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, provided
that (a) such direction shall not be in conflict with any rule of law or with
such respective Indenture or expose the Trustee to personal liability; and (b)
the Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
The Indenture provides that the holders of not less than a majority in
aggregate principal amount of the outstanding Senior Debentures or Senior
Discount Debentures, as the case may be, may on behalf of the holders of such
Debentures waive any past default thereunder and its consequences, except a
default in
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the payment of the principal of, premium, if any, or interest on any Debentures,
or in respect of a covenant or provision of such Indenture which cannot be
modified or amended without the consent of the holder of each outstanding
Debenture affected.
The Issuers are required to deliver to the Trustee annually, on or before a
date that is not more than 90 days after the end of each fiscal year, an
Officer's Certificate stating whether or not the officer signing such
certificate knows of any Default or Event of Default that has occurred. If such
officer is aware of a Default or an Event of Default, such certificate will
specify each such Default or Event of Default and the nature and status thereof.
The Issuers also are obligated to notify the Trustee of any Default or Event of
Default in the performance of any covenants or agreements under the Indenture.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Issuers will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Senior Debentures and Senior Discount Debentures on the 123rd day
after the deposit referred to below, and the provisions of the Indenture will no
longer be in effect with respect to the Senior Debentures and Senior Discount
Debentures, as the case may be, (except for, among other matters, certain
obligations to register the transfer or exchange of the Debentures, to replace
stolen, lost or mutilated Debentures, to maintain paying agencies and to hold
monies for payment in trust) if, among other things, (A) the Issuers have
deposited with the Trustee, in trust, money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Senior Debentures
and Senior Discount Debentures on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Debentures, (B) the Issuers
have delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect
that Holders of the Senior Debentures or the Senior Discount Debentures, as the
case may be, will not recognize income, gain or loss for federal income tax
purposes solely as a result of the Issuers' exercise of their option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Issue Date such that a ruling is no
longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a PRO FORMA basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time such Debentures are listed on a national
securities exchange, the Issuers have delivered to the Trustee an Opinion of
Counsel to the effect that the Debentures will not be delisted as a result of
such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Mergers" and all the
covenants described herein under "Covenants," clause (iii) under "Events of
Default" with respect to such clauses (iii) and (iv) under "Mergers," clause
(iv) under "Events of Default" with respect to such other covenants and clause
(vi) under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
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Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Debentures on the Stated Maturity of such payments in accordance with the terms
of the Indenture and the Debentures, the satisfaction of the provisions
described in clauses (B)(ii), (C), (D) and (E) of the preceding paragraph and
the delivery by the Issuers to the Trustee of an Opinion of Counsel to the
effect that, among other things, the Holders will not recognize income, gain or
loss for federal income tax purposes solely as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Issuers
exercise their option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Debentures as described in the immediately
preceding paragraph and the Debentures are declared due and payable because of
the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Debentures at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Debentures at the
time of the acceleration resulting from such Event of Default. However, the
Issuers will remain liable for such payments.
MODIFICATIONS AND AMENDMENTS
The Indenture provides that the Issuers and the Trustee may, without the
consent of holders of the Senior Debentures or Senior Discount Debentures, as
the case may be, amend the Indenture or the Debentures or supplement the
Indenture for certain specified purposes, including providing or making any
other change that does not materially and adversely affect the rights of any
Holder. Modifications and amendments of the Indenture may be made by the Issuer
and the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Senior Debentures and Senior
Discount Debentures; PROVIDED, HOWEVER, that no such modification or amendment
may, without the consent of the holder of each outstanding Debenture affected
thereby: (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Debenture or reduce the principal amount thereof or the rate
of interest thereon or any premium payable upon the redemption thereof, or
change the coin or currency in which any Debenture or any premium or the
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof (or, in
the case of redemption, on or after the redemption date); (ii) reduce the
percentage of the outstanding Senior Debentures or Senior Discount Debentures,
as the case may be, the consent of whose holders is required to modify or amend
the Indenture or the consent of whose holders is required for any waiver of
compliance with certain provisions of the Indenture or certain defaults
thereunder and their consequences provided for in the Indenture; (iii) modify
any of the provisions of the Indenture requiring the consent of holders or
relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase any such percentage of outstanding Senior
Debentures or Senior Discount Debentures, as the case may be, required for such
actions or to provide that certain other provisions of the Indentures cannot be
modified or waived without the consent of the holder of each Debenture affected
thereby.
NO PERSONAL LIABILITY OF PARTNERS, EQUITYHOLDERS, DIRECTORS, OFFICERS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Debentures, or for the performance of
any obligation contained in the Indentures or the Debentures, or for any claim
based on, in respect of, or by reason of, such obligations, shall be had against
any past, present or future partner, equityholder, director, officer, employee
or controlling person, as such, of the Issuers or any successor. Each holder of
the Debentures by accepting a Debenture waives and releases all such liability.
The waiver and release are part of the consideration for the issuance of the
Debentures.
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BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Debentures will be issued in fully
registered form without interest coupons. Debentures sold in offshore
transactions in reliance on Regulation S under the Securities Act will initially
be represented by one or more permanent global Debentures in definitive, fully
registered form without interest coupons (each a "Regulation S Global
Debenture") and will be deposited with the Trustee as custodian for, and
registered in the name of a nominee of, DTC for the accounts of Euroclear and
Cedel Bank. Prior to the 40th day after the Closing Date, beneficial interests
in a Regulation S Global Debenture may only be held through Euroclear or Cedel
Bank, and any resale or transfer of such interests to U.S. persons shall not be
permitted during such period unless such resale or transfer is made pursuant to
Rule 144A or Regulation S.
Debentures sold in reliance on Rule 144A will be represented by one or more
permanent global Debentures in definitive, fully registered form without
interest coupons (each a "Restricted Global Debenture"; and together with the
Regulation S Global Debenture, the "Global Debentures") and will be deposited
with the Trustee as custodian for, and registered in the name of a nominee of,
DTC.
Each Global Debenture (and any Debentures issued for exchange therefor) will
be subject to certain restrictions on transfer set forth therein as described
under "Transfer Restrictions."
Debentures originally purchased by or transferred to Institutional
Accredited Investors who are not qualified institutional buyers ("Non-Global
Purchasers") will be in registered form without interest coupons ("Certificated
Debentures"). Upon the transfer of Certificated Debentures initially issued to a
Non-Global Purchaser to a qualified institutional buyer or in accordance with
Regulation S, such Certificated Debentures will, unless the applicable
Restricted Global Debenture has previously been exchanged in whole for
Certificated Debentures, be exchanged for an interest in such Restricted Global
Debenture. For a description of the restrictions on the transfer of Certificated
Debentures, see "Transfer Restrictions."
Ownership of beneficial interests in a Global Debenture will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Debenture will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified institutional buyers
may hold their interests in a Restricted Global Debenture directly through DTC
if they are participants in such system, or indirectly through organizations
which are participants in such system.
Investors may hold their interests in a Regulation S Global Debenture
directly through Cedel Bank or Euroclear, if they are participants in such
systems, or indirectly through organizations that are participants in such
system. On or after the 40th day following the Closing Date, investors may also
hold such interests through organizations other than Cedel Bank or Euroclear
that are participants in the DTC system. Cedel Bank and Euroclear will hold
interests in the Regulation S Global Debentures on behalf of their participants
through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Debenture, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Debentures represented by such Global Debenture
for all purposes under the Indenture and the Debentures. No beneficial owner of
an interest in a Global Debenture will be able to transfer that interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Debenture will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Issuers, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments
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made on account of beneficial ownership interests in a Global Debenture or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Debenture, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Debenture
as shown on the records of DTC or its nominee. The Issuers also expect that
payments by participants to owners of beneficial interests in such Global
Debenture held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
The Issuers expect that DTC will take any action permitted to be taken by a
holder of Debentures (including the presentation of Debentures for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Debenture is credited and only in respect
of such portion of the aggregate principal amount of Debentures as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Debentures, DTC will exchange the applicable
Global Debenture for Certificated Debentures, which it will distribute to its
participants and which may be legended as set forth under the heading "Transfer
Restrictions."
The Issuers understand that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Debenture
among participants of DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuers nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Debentures and a successor depositary is not appointed by the Issuers
within 90 days, the Issuers will issue Certificated Debentures, which may bear
the legend referred to under "Transfer Restrictions," in exchange for the Global
Debentures. Holders of an interest in a Global Debenture may receive
Certificated Debentures, which may bear the legend referred to under "Transfer
Restrictions," in accordance with the DTC's rules and procedures in addition to
those provided for under the Indenture.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the Debentures, but
is not purported to be a complete analysis of all potential tax effects. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. Unless
otherwise specifically noted, this summary applies only to those persons who are
the initial Holders of Debentures, who acquired the Debentures for cash at the
issue price as defined below and who hold Debentures as capital assets, and does
not address the tax consequences to taxpayers who are subject to special rules
(such as financial institutions, tax-exempt organizations, insurance companies,
S corporations, regulated investment companies, real estate investment trusts,
broker-dealers, taxpayers subject to the alternative minimum tax and persons
that will hold the Debentures as part of a position in a "straddle" or as part
of a "hedging" or "conversion" transaction) or aspects of federal income
taxation that might be relevant to a prospective investor based upon such
investor's particular tax situation. Accordingly, prospective purchasers of
Debentures should consult their own tax advisors with respect to the particular
consequences to them of the purchase, ownership and disposition of the
Debentures, including the applicability of any state or local laws to which they
may be subject, as well as with respect to the possible effects of changes in
federal and other tax laws.
EFFECT OF EXCHANGE OF OLD SENIOR DISCOUNT DEBENTURES FOR SENIOR DISCOUNT
EXCHANGE DEBENTURES
The Issuers believe that the exchange of Old Senior Discount Debentures for
Senior Discount Exchange Debentures pursuant to the Exchange Offer will not be
treated as an "exchange" for federal income tax purposes because the Senior
Discount Exchange Debentures will not be considered to differ materially in kind
or extent from the Old Senior Discount Debentures. Rather, the Senior Discount
Exchange Debentures received by a holder will be treated as a continuation of
the Old Senior Discount Debentures in the hands of such holder. As a result,
holders will not recognize any taxable gain or loss or any interest income as a
result of exchanging Old Senior Discount Debentures for Senior Discount Exchange
Debentures pursuant to the Exchange Offer, the holding period of the Senior
Discount Exchange Debentures will include the holding period of the Old Senior
Discount Debentures, and the basis of the Senior Discount Exchange Debentures
will equal the basis of the Old Senior Discount Debentures immediately before
the exchange.
UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income tax consequences of the ownership and sale or other disposition of the
Debentures by a Holder that, for United States federal income tax purposes, is a
"United States person". For purposes of this discussion, a "United States
person" means a citizen or individual resident (as determined for U.S. federal
income tax purposes) of the United States; a corporation, partnership or other
entity created or organized in the United States or under the laws of the United
States or of any political subdivision thereof; an estate the income of which is
includible in gross income for U.S. federal income tax purposes, regardless of
its source; or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. Resident alien individuals will be subject to United States federal
income tax with respect to the Debentures as if they were United States
citizens.
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TAXABLE INTEREST
Holders of the Senior Debentures will be taxed at ordinary income tax rates
on interest received during the taxable year in accordance with such Holders'
regular method of accounting for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
Because the Senior Discount Debentures are being issued at a discount from
their "stated redemption price at maturity," they will bear original issue
discount ("OID") for federal income tax purposes. For federal income tax
purposes, OID on a Senior Discount Debenture is the excess of the stated
redemption price at maturity of the Senior Discount Debenture over its "issue
price." The issue price of the Senior Discount Debentures will be the price paid
by the first purchaser, including the aggregate payments made by the purchaser
under the purchase agreement (including modifications thereof). For purposes of
this discussion, it is assumed that all initial holders will purchase their
Senior Discount Debentures at the issue price. The stated redemption price at
maturity of a Senior Discount Debenture will be the sum of all payments to be
made on such Senior Discount Debenture, including all stated interest payments,
other than payments of "qualified stated interest." Qualified stated interest is
stated interest that is unconditionally payable at least annually at a single
fixed rate that appropriately takes into account the length of the interval
between payments. Because there will be no required payment of interest on the
Senior Discount Debentures (assuming there has been no election by the Issuers
to start the earlier accrual of cash interest) until October 15, 2003, none of
the interest payments on the Senior Discount Debentures will constitute
qualified stated interest. Because the stated redemption price at maturity of
the Senior Discount Debentures will exceed their issue price by more than a DE
MINIMIS amount, each Senior Discount Debenture will bear OID in an amount equal
to the excess of (i) the sum of its principal amount and all stated interest
payments over (ii) its issue price.
A Holder will be required to include OID in income periodically over the
term of a Senior Discount Debenture before receipt of the cash or other payment
attributable to such income, regardless of the Holder's method of tax
accounting. The amount of OID required to be included in a Holder's gross income
for any taxable year is the sum of the "daily portions" of OID with respect to
the Senior Discount Debenture for each day during the taxable year (or portion
of the taxable year) during which such Holder holds the Senior Discount
Debenture. In general, the includible amount is computed using the "constant
yield method". Under the constant yield method, the daily portion is determined
by allocating to each day of any "accrual period" within a taxable year a pro
rata portion of an amount equal to the excess of (i) the product of the
"adjusted issue price" of the debt instrument at the beginning of the accrual
period and the "yield-to-maturity" of the debt instrument, over (ii) the total
amounts payable as interest on the debt instrument during that accrual period.
For purposes of computing OID, the Company will use six-month accrual
periods that end on the days in the calendar year corresponding to the maturity
date of the Senior Discount Debentures and the date six months prior to such
maturity date, with the exception of an initial short accrual period. A Holder
is permitted to use different accrual periods, provided that each accrual period
is no longer than one year, and each scheduled payment of interest or principal
occurs on either the first or last day of an accrual period. The adjusted issue
price of a debt instrument at the beginning of any accrual period is the issue
price of the debt instrument increased by the amount of OID previously
includible in the gross income of the Holder, and decreased by any payments
previously made to the Holder on the debt instrument. The original
yield-to-maturity is the discount rate that, when used in computing the present
value of all payments of principal and interest to be made on a debt instrument,
produces an amount equal to the issue price of the debt instrument.
The Treasury Regulations explain that (i) if a debt instrument provides for
an alternative payment schedule or schedules where the timing and amount of the
payments that comprise each schedule are
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known as of the issue date, and (ii) if any particular payment schedule for a
debt instrument is significantly more likely than not to occur, the yield and
maturity of the debt instrument are to be computed by assuming that payments
will be made according to that schedule. Accordingly, a prepayment assumption
would apply (that is, the Company would be deemed to exercise its option to
redeem the Senior Discount Debentures prior to their stated maturity date) only
if the Company's exercise of its prepayment option would lower the
yield-to-maturity of the instruments. Because the Company's exercise of its
prepayment option would result in the same or a higher yield-to-maturity,
depending upon the date of exercise, the Company believes that it would not be
presumed under these rules to exercise its right to redeem the Debentures prior
to their stated maturity date. However, if the Company does in fact exercise its
prepayment option, then for purposes of the OID rules, a Senior Discount
Debenture will be treated as retired and then reissued on the date of the
Company's exercise of its prepayment option for an amount equal to the adjusted
issue price on that date. In that event, another OID computation would have to
be made with respect to the constructively issued new debt instrument.
Under these rules and the stated payment schedule, Holders of Senior
Discount Debentures will be required to include in gross income increasingly
greater amounts of OID in each successive accrual period. A Holder's tax basis
in a Senior Discount Debenture will be increased by the amount of any OID
includible in the Holder's income under these rules and decreased by the amount
of any payment to the Holder (including payments of stated interest) with
respect to the Senior Discount Debenture.
On any Interest Payment Date prior to April 15, 2003, the Company may elect
to commence the accrual of cash interest on the Senior Discount Debentures, in
which case cash interest will be payable on each Interest Payment Date
thereafter. Under the OID rules, solely for purposes of determining the amount
of OID that is includible in income by a Holder of a Senior Discount Debenture,
it is presumed that the Company will exercise an option to pay cash interest
early if such exercise would lower the yield-to-maturity of the Senior Discount
Debenture. The Company believes that the exercise of its option to pay interest
early would not lower the yield-to-maturity of the Senior Discount Debentures.
Under the OID rules, therefore, the Company would be presumed not to exercise
its option to pay interest early. However, if, contrary to that presumption, the
Company exercises such option, then solely for purposes of the accrual of OID,
the yield and maturity of the Senior Discount Debentures will be redetermined by
treating the Senior Discount Debentures as reissued on such date for an amount
equal to the adjusted issue price on that date.
The Company is obligated to pay additional interest ("Additional Interest")
to the Holders under certain circumstances described under "Description of the
Debentures--General" and "--Registration Rights." No amount of Additional
Interest is being included in computing the yield-to-maturity of the Senior
Discount Debentures because it is assumed that the Company will take all steps
reasonably necessary to avoid incurring the obligation to pay Additional
Interest. However, if the Company becomes obligated to pay Additional Interest,
then solely for purposes of the accrual of OID, the yield-to-maturity of the
Senior Discount Debentures will be redetermined by treating the Debentures as
reissued on the date the Company becomes obligated to pay Additional Interest
for an amount equal to the adjusted issue price on that date.
SALE, EXCHANGE OR REDEMPTION OF DEBENTURES
Generally, a sale, exchange or redemption of Debentures will result in
taxable gain or loss equal to the difference between the amount of cash or other
property received and the Holder's adjusted tax basis in the Debenture. A
Holder's adjusted tax basis for determining gain or loss on the sale or other
disposition of a Debenture will initially equal the cost of the Debenture to
such Holder, and will be increased by any amounts included in income as OID and
decreased by the amount of any cash payments received by such Holder, except
Additional Interest, regardless of whether such payments are denominated as
principal or interest. Gain or loss upon a sale, exchange, or redemption of a
Debenture will be capital gain or loss if the Debenture is held as a capital
asset.
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Individuals will generally be taxed on net capital gain at a maximum rate of
(i) 28% for property held for 18 months or less but more than one year, (ii) 20%
for property held more than 18 months, and (iii) 18% for property acquired after
December 31, 2000 and held for more than five years. Special rules (and
generally lower maximum rates) apply to individuals in lower tax brackets.
Neither an exchange of the Debentures for Exchange Debentures of the Company
with terms identical to those of the Debentures, nor the filing of a
registration statement with respect to the resale of the Debentures should be a
taxable event to the Holders of the Debentures, and Holders should not recognize
any taxable gain or loss or any interest income as a result of such an exchange
or such a filing.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, information reporting
requirements apply to interest (including OID) paid to, and to the proceeds of
sales or other dispositions before maturity by, certain non-corporate persons.
In addition, a 31% backup withholding tax applies if a non-corporate person (i)
fails to furnish such person's Taxpayer Identification Number ("TIN") (which,
for an individual, is his or her Social Security Number) to the payor in the
manner required, (ii) furnishes an incorrect TIN and the payor is so notified by
the Internal Revenue Service (the "Service"), (iii) is notified by the Service
that such person has failed properly to report payments of interest and
dividends, or (iv) in certain circumstances, fails to certify, under penalties
of perjury, that such person has not been notified by the Service that such
person is subject to backup withholding for failure properly to report interest
and dividend payments. Backup withholding does not apply to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a person under the backup withholding rules are
allowed as a refund or a credit against such person's United States federal
income tax, provided that the required information is furnished to the Service.
NON-UNITED STATES HOLDERS
STATED INTEREST
Interest paid (including OID) by the Company to any beneficial owner of a
Debenture that is not a United States person ("Non-United States Holder") will
not be subject to United States federal income or withholding tax if such
interest is not effectively connected with the conduct of a trade or business
within the United States by such Non-United States Holder and (a) such
Non-United States Holder (i) does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company; (ii)
is not a controlled foreign corporation with respect to which the Company is a
"related person" within the meaning of the Code; and (iii) satisfies certain
certification requirements or (b) such Non-United States Holder is entitled to
the benefits of an income tax treaty under which the interest is exempt from
United States withholding tax, and such Non-United States Holder provides a
properly executed IRS Form 1001 claiming the exemption (or, after December 31,
1998, IRS Form W-8, which may require obtaining a Taxpayer Identification Number
and making certain certifications).
SALE, EXCHANGE OR RETIREMENT OF THE DEBENTURES
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption, retirement at
maturity or other disposition of a Debenture unless (i) the gain is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder or (ii) in the case of a Non-United States Holder
who is a nonresident alien individual and holds the Debenture as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year and certain other requirements are met.
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FEDERAL ESTATE TAXES
If interest on the Debentures is exempt from withholding of United States
federal income tax under clause (a) of the rules described under "Stated
Interest," the Debentures will not be included in the estate of a deceased
Non-United States Holder for United States federal estate tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Company will, where required, report to the holders of Debentures and
the Internal Revenue Service the amount of any interest paid on the Debentures
in each calendar year and the amounts of tax withheld, if any, with respect to
such payments.
In the case of payments of interest (including OID) to Non-United States
Holders, Treasury Regulations provide that the 31% backup withholding tax and
certain information reporting will not apply to such payment with respect to
which either the requisite certification has been received or an exemption has
otherwise been established; provided that neither the Company nor its payment
agent has actual knowledge that the holder is a United States person or that the
conditions of any other exemption are not in fact satisfied. Under the Treasury
Regulations, these information reporting and backup withholding requirements
will apply, however, to the gross proceeds paid to a Non-United States Holder on
the disposition of the Debentures by or through a United States office of a
United States or foreign broker, unless certain certification requirements are
met or the holder otherwise establishes an exemption. Information reporting
requirements, but not backup withholding, will also apply to a payment of the
proceeds of a disposition of the Debentures by or through a foreign office of a
United States broker or foreign broker with certain types of relationships to
the United States unless the holder is an exempt recipient (as demonstrated
through appropriate certification) or such broker has documentary evidence in
its file that the holder of the Debentures is not a United States person and has
no actual knowledge to the contrary and certain other conditions are met.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the Debentures by or through a
foreign office of a foreign broker not subject to the preceding sentence. Backup
withholding does not apply to payments made to certain exempt recipients, such
as tax-exempt organizations.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Service. Non-United States Holders are
urged to consult their tax advisors with respect to the application of these
final regulations.
Recently, the Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not significantly alter the substantive
withholding and information requirements but unify current certification
procedures and forms and clarify reliance standards. Under the final
regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations would generally be effective
for payments made after December 31, 1998, subject to certain transition rules.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Debentures for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Debentures. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by any Participating Broker-Dealer subject to the prospectus delivery
requirements of the Securities Act (other than an Excluded Participating
Broker-Dealer). Until , 1998 (90 days after the commencement of the
Exchange Offer), all dealers effecting transactions in the Exchange Debentures
may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sales of the Exchange
Debentures by Participating Broker-Dealers. Exchange Debentures received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-the-
counter market, in negotiated transactions, through the writing of options on
the Exchange Debentures or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-Dealer
and/or the purchasers of any such Exchange Debentures. Any Participating
Broker-Dealer that resells the Exchange Debentures that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Debentures may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Debentures and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Issuers will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that has provided the Issuers, pursuant to the Letter of Transmittal, with
notice of its status as a Participating Broker-Dealer.
The Debentures will not be listed on any stock exchange. The Debentures are
designated for trading in the PORTAL market, and application is being made to
list the Debentures on the Luxembourg Stock Exchange. However, there can be no
assurance that an active trading market will exist for the Debentures or that
such trading market will be liquid. See "Risk Factors--Lack of Public Market for
the Debentures."
Affiliates of BancAmerica Robertson Stephens, BancBoston Securities Inc.,
Chase Securities Inc., CIBC Oppenheimer, NationsBanc Montgomery Securities LLC
and TD Securities (USA) Inc. were lenders under the Bank Credit Agreement and
are lenders under the New Credit Facility. See "Description of Certain
Indebtedness." Lazard Freres & Co. LLC, one of the Placement Agents, has from
time to time provided investment banking services to the Company and received
customary compensation for such services. In connection with the TCI
Transaction, Mr. Steven Rattner, a limited partner of FHGLP and a member of its
Board of Representatives, will receive certain distributions. Mr. Rattner is
Deputy Chief Executive of Lazard Freres & Co. LLC.
159
<PAGE>
LEGAL MATTERS
The validity of the Exchange Debentures will be passed upon by Dow, Lohnes &
Albertson, PLLC, Washington, D.C.
EXPERTS
The consolidated financial statements of Falcon Holding Group, L.P. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 and the balance sheet of Falcon Funding Corporation as of
March 27, 1998 included in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of TCI Falcon Systems as of December 31,
1996 and 1997 and for each of the years in the three-year period ended December
31, 1997 have been included herein and in this Prospectus in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
FHGLP has filed with the Commission a Registration Statement (of which this
Prospectus is a part and which term shall encompass any amendments thereto) on
Form S-4, pursuant to the Securities Act, with respect to the Exchange
Debentures offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement, and the exhibits and schedules thereto. For further
information about the Issuers and the Debentures, reference is hereby made to
the Registration Statement and to such exhibits and schedules.
In addition, FHGLP files reports with the Commission and, as a result of the
Exchange Offer, will be subject to the informational requirements of the
Exchange Act. In addition, under the Indenture governing the Debentures, FHGLP
is required to furnish to the Trustee and to registered holders of the
Debentures audited annual consolidated financial statements, unaudited quarterly
consolidated financial reports and certain other reports. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports and
other information filed by FHGLP with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected without charge
and copied upon payment of certain fees at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048, and Chicago Regional Office, Northwestern Atrium, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports and other information regarding registrants that file
electronically with the Commission.
160
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FALCON HOLDING GROUP, L.P.
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
Condensed Consolidated Balance Sheet at March 31, 1998 (unaudited)....................................... F-33
Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 and 1998
(unaudited)............................................................................................ F-34
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1998
(unaudited)............................................................................................ F-35
Notes to Condensed Consolidated Financial Statements (unaudited)......................................... F-36
TCI FALCON SYSTEMS
Independent Auditors' Report............................................................................. F-38
Combined Balance Sheets at December 31, 1996 and 1997.................................................... F-39
Combined Statements of Operations and Parent's Investment for each of the three years in the period ended
December 31, 1997...................................................................................... F-40
Combined Statements of Cash Flows for each of the three years in the period ended December 31, 1997...... F-41
Notes to Combined Financial Statements................................................................... F-42
Combined Balance Sheets at December 31, 1997 and March 31, 1998 (unaudited).............................. F-49
Combined Statements of Operations and Parent's Investment for the three months ended March 31, 1997 and
1998 (unaudited)....................................................................................... F-50
Combined Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited)......... F-51
Notes to Combined Financial Statements (unaudited)....................................................... F-52
FALCON FUNDING CORPORATION
Report of Ernst & Young LLP, Independent Auditors........................................................ F-56
Balance Sheet at March 27, 1998.......................................................................... F-57
Note to Balance Sheet.................................................................................... F-58
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Partners
Falcon Holding Group, L.P.
We have audited the accompanying consolidated balance sheets of Falcon
Holding Group, L.P. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, partners' deficit and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Falcon Holding Group, L.P. at December 31, 1996 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 17, 1998
F-2
<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........................................ (58,326) (72,641) (81,326)
Interest income......................................... 549 1,039 2,189
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 $5.0 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.
F-12
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--PARTNERSHIP MATTERS (CONTINUED)
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 (which
equity interest includes the purchase of interests in New Falcon by TCI from
certain limited partners of FHGLP, as described below). 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.
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
F-13
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PARTNERSHIP MATTERS (CONTINUED)
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 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.
F-14
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PARTNERSHIP MATTERS (CONTINUED)
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 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
F-15
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND SALES (CONTINUED)
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>
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.
F-16
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND SALES (CONTINUED)
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 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 were designated for sale
as of the December 28, 1995 acquisition date and generated approximately 1.9% of
consolidated revenues for the six months ended June 30, 1996. Given the
designation of the assets for sale and 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:
F-17
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
F-18
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 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>
F-19
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-20
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTES PAYABLE (CONTINUED)
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.
(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.
F-21
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTES PAYABLE (CONTINUED)
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.
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.
F-22
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTES PAYABLE (CONTINUED)
(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 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-23
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTES PAYABLE (CONTINUED)
(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.
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
F-24
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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
F-25
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
contracts. Management believes, however, that the Partnership's relations with
its programming suppliers generally are good.
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 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.
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 (including the Action) will not, in
the aggregate, have a material adverse effect on the financial condition or
results of operations of the Partnership.
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.
F-26
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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.
F-27
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED)
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 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.
F-28
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
Lawsuit settlement costs, net of $500,000 insurance
recovery.................................................... -- -- (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.
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
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)
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.
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.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
------------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
<S> <C>
ASSETS:
Cash and cash equivalents......................................................................... $ 11,162
Receivables:
Trade, less allowance of $781,000 for possible losses........................................... 12,291
Affiliates...................................................................................... 11,309
Other assets...................................................................................... 15,647
Other investments................................................................................. 1,555
Property, plant and equipment, less accumulated depreciation and amortization of $275,806,000..... 358,074
Franchise cost, less accumulated amortization of $211,870,000..................................... 218,844
Goodwill, less accumulated amortization of $20,010,000............................................ 71,487
Customer lists and other intangible costs, less accumulated amortization of $28,578,000........... 88,360
Deferred loan costs, less accumulated amortization of $7,681,000.................................. 11,597
------------
$ 800,326
------------
------------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable..................................................................................... $ 1,001,054
Accounts payable.................................................................................. 6,476
Accrued expenses.................................................................................. 44,812
Customer deposits and prepayments................................................................. 1,652
Deferred income taxes............................................................................. 7,026
Minority interest................................................................................. 346
Equity in losses of affiliated partnerships in excess of investment............................... 3,251
------------
TOTAL LIABILITIES................................................................................... 1,064,617
------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY......................................................................... 171,373
------------
PARTNERS' DEFICIT:
General partner................................................................................... (13,389)
Limited partners.................................................................................. (422,275)
------------
TOTAL PARTNERS' DEFICIT............................................................................. (435,664)
------------
$ 800,326
------------
------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33
<PAGE>
FALCON HOLDING GROUP, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUES.................................................................................. $ 63,984 $ 64,557
---------- ----------
EXPENSES:
Service costs........................................................................... 18,295 19,565
General and administrative expenses..................................................... 11,179 11,678
Depreciation and amortization........................................................... 29,793 31,079
---------- ----------
Total expenses........................................................................ 59,267 62,322
---------- ----------
Operating income...................................................................... 4,717 2,235
OTHER INCOME (EXPENSE):
Interest expense, net................................................................... (20,384) (20,487)
Equity in net loss of investee partnerships............................................. (71) (248)
Other expense, net...................................................................... (163) (774)
Income tax benefit...................................................................... 566 365
---------- ----------
NET LOSS.................................................................................. $ (15,335) $ (18,909)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-34
<PAGE>
FALCON HOLDING GROUP, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................................................. $ 15,322 $ 2,729
---------- ----------
Cash flows from investing activities:
Acquisition of cable television systems................................................. -- (76,789)
Capital expenditures.................................................................... (10,624) (18,021)
Increase in intangible assets........................................................... (326) (550)
Other................................................................................... 9 42
---------- ----------
Net cash used in investing activities................................................. (10,941) (95,318)
---------- ----------
Cash flows from financing activities:
Borrowings from notes payable........................................................... 8,000 96,472
Repayment of debt....................................................................... (15,179) (6,638)
Other................................................................................... 24 --
---------- ----------
Net cash provided by (used in) financing activities................................... (7,155) 89,834
---------- ----------
Net decrease in cash and cash equivalents................................................. (2,774) (2,755)
Cash and cash equivalents at beginning of period.......................................... 13,633 13,917
---------- ----------
Cash and cash equivalents at end of period................................................ $ 10,858 $ 11,162
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-35
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS 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"). 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"). The
Affiliated Systems operate 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 condensed 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 condensed consolidated financial
statements also 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 Companys"), which are Affiliated Systems.
NOTE 2--INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three months ended March 31, 1997
and 1998 are unaudited. These condensed interim financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Partnership's latest Annual Report on Form 10-K. In the opinion
of management, such statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
of such periods. The results of operations for the three months ended March 31,
1998 are not necessarily indicative of results for the entire year.
NOTE 3--MINORITY INTEREST
Included in the operations of Falcon Telecable, one of the Owned
Subsidiaries, are the results of operations of Lake Las Vegas Cablevision, L.P.,
a Delaware limited partnership, which is a joint venture owned 66 2/3% by Falcon
Telecable. The minority interest reflects the 33 1/3% of the venture that Falcon
Telecable does not own.
NOTE 4--ACQUISITION
In March 1998 the Partnership paid to Falcon Classic Cable Income
Properties, L.P. ("Falcon 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 the assets of Falcon Classic) in order to
purchase substantially all of the assets of Falcon Classic, other than the cable
television system serving the City of Somerset, Kentucky. The Partnership also
paid approximately $1.2 million to the settlement fund established in connection
with the settlement of the above-referenced litigation, $500,000 of which was
reimbursed by insurance on May 1, 1998. 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. On July 16, 1998, the Partnership completed
the acquisition of the City of Somerset assets for approximately $6.5 million.
F-36
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SUBSEQUENT EVENTS
On April 3, 1998 the Partnership and its wholly-owned subsidiary, Falcon
Funding Corporation ("FFC" and, collectively with the Partnership, the
"Issuers"), consummated the issuance of $375,000,000 aggregate principal amount
of 8.375% Senior Debentures due 2010 (the "Senior Debentures") and $435,250,000
aggregate principal amount at maturity of 9.285% Senior Discount Debentures due
2010 (the "Senior Discount Debentures" and, collectively with the Senior
Debentures, the "Debentures") in a private placement exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"). The Issuers
are obligated to consummate an offer to exchange, pursuant to an effective
registration statement under the Securities Act, the Debentures for debentures
with terms identical to the corresponding Debentures, or to cause resales of the
Debentures to be registered under the Securities Act pursuant to a shelf
registration statement.
The Senior Debentures were issued at a price of 99.732% of their principal
amount, for total gross proceeds to the Issuers of approximately $374.0 million.
The Senior Discount Debentures were issued at a price of $633.29 per $1,000
aggregate principal amount at maturity, for total gross proceeds to the Issuers
of approximately $275.6 million, and will accrete to stated value at an annual
rate of 9.285% until April 15, 2003. After giving effect to offering discounts,
commissions and estimated expenses of the offering, the sale of the Debentures
generated net proceeds to the Issuers of approximately $631 million.
The Partnership used substantially all the net proceeds from the sale of the
Debentures to repay outstanding bank indebtedness. On April 20, 1998, the
Partnership made a tender offer for all of its 11% Senior Subordinated Notes due
2003 (the "11% Notes") which expired on May 18, 1998. On May 19, 1998, the
Partnership repurchased approximately $247.8 million aggregate principal amount
of the 11% Notes with borrowings under the Partnership's Amended and Restated
Credit Agreement. The remaining aggregate amount of 11% Notes not tendered of
approximately $34.4 million will be redeemed prior to October 15, 1998 in
accordance with the redemption provisions of the indenture governing the 11%
Notes. The Partnership recorded an extraordinary loss of $19.6 million relating
to the tender of the 11% Notes.
On June 30, 1998, the Partnership entered into a new bank credit agreement
(the "New Credit Facility"). The Partnership borrowed approximately $425.8
million under the New Credit Facility on June 30, 1998, approximately $329
million of which was used to repay the remaining indebtedness outstanding under
the Company's existing Amended and Restated Credit Agreement.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
TCI Communications, Inc.:
We have audited the accompanying combined balance sheets of the TCI Falcon
Systems (as defined in Note 1 to the combined financial statements) as of
December 31, 1996 and 1997, and the related combined statements of operations
and parent's investment and cash flows for each of the years in the three-year
period ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the TCI Falcon
Systems as of December 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
March 4, 1998
F-38
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash...................................................................................... $ 2,614 --
Trade and other receivables, net.......................................................... 3,021 4,665
Property and equipment, at cost:
Land.................................................................................... 1,017 1,232
Distribution systems.................................................................... 133,312 137,767
Support equipment and buildings......................................................... 16,804 18,354
---------- ----------
151,133 157,353
Less accumulated depreciation........................................................... 58,658 69,857
---------- ----------
92,475 87,496
---------- ----------
Franchise costs........................................................................... 393,292 393,540
Less accumulated amortization........................................................... 52,436 62,849
---------- ----------
340,856 330,691
---------- ----------
Other assets, at cost, net of amortization................................................ 589 714
---------- ----------
$ 439,555 423,566
---------- ----------
---------- ----------
LIABILITIES AND PARENT'S INVESTMENT
Cash overdraft............................................................................ $ -- 5,209
Accounts payable.......................................................................... 135 350
Accrued expenses.......................................................................... 3,284 3,487
Deferred income taxes (note 4)............................................................ 114,002 121,183
---------- ----------
Total liabilities....................................................................... 117,421 130,229
Parent's investment (note 5).............................................................. 322,134 293,337
---------- ----------
Commitments and contingencies (note 7).................................................... $ 439,555 423,566
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue......................................................................... $ 87,086 102,155 113,897
Operating costs and expenses:
Operating (note 6)............................................................ 28,245 33,521 39,392
Selling, general and administrative........................................... 18,265 21,695 19,687
Administrative fees (note 6).................................................. 4,085 5,768 5,034
Depreciation.................................................................. 11,316 12,077 12,724
Amortization.................................................................. 7,235 8,184 9,785
---------- --------- ---------
69,146 81,245 86,622
---------- --------- ---------
Operating income.............................................................. 17,940 20,910 27,275
Other income (expense):
Intercompany interest expense (note 6)........................................ (5,923) (4,701) (5,832)
Other, net.................................................................... 16 (44) (84)
---------- --------- ---------
(5,907) (4,745) (5,916)
---------- --------- ---------
Earnings before income taxes.................................................. 12,033 16,165 21,359
Income tax expense (note 4)..................................................... (4,758) (6,239) (8,808)
---------- --------- ---------
Net earnings.................................................................. 7,275 9,926 12,551
Parent's investment:
Beginning of year............................................................. 225,354 265,497 322,134
Change in due to TCI Communications, Inc. ("TCIC")............................ 32,868 46,711 (41,348)
---------- --------- ---------
End of year................................................................... $ 265,497 322,134 293,337
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-40
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................................... $ 7,275 9,926 12,551
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization................................................ 18,551 20,261 22,509
Deferred income tax expense.................................................. 869 4,533 7,181
Changes in operating assets and liabilities, net of effects of acquisitions:
Change in receivables...................................................... (1,042) (55) (1,644)
Change in other assets..................................................... (139) (248) (125)
Change in accounts payable and accrued expenses............................ 708 (473) 418
---------- --------- ---------
Net cash provided by operating activities................................ 26,222 33,944 40,890
---------- --------- ---------
Cash flows from investing activities:
Capital expended for property and equipment.................................... (15,877) (13,278) (7,586)
Cash paid for acquisitions..................................................... (47,490) (68,240) --
Cash proceeds from sale of assets, at book value, to TCIC...................... 5,088 -- --
Other investing activities..................................................... 850 732 221
---------- --------- ---------
Net cash used in investing activities.................................... (57,429) (80,786) (7,365)
---------- --------- ---------
Cash flows from financing activities:
Change in due to TCIC.......................................................... 32,868 46,711 (41,348)
Change in cash overdraft....................................................... -- -- 5,209
---------- --------- ---------
Net cash provided by (used in) financing activities...................... 32,868 46,711 (36,139)
---------- --------- ---------
Net increase (decrease) in cash.......................................... 1,661 (131) (2,614)
Cash:
Beginning of year...................................................... 1,084 2,745 2,614
---------- --------- ---------
End of year............................................................ $ 2,745 2,614 --
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......................................... $ 5,923 4,701 5,832
---------- --------- ---------
---------- --------- ---------
Cash paid during the year for income taxes..................................... $ 78 86 140
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-41
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) BASIS OF PRESENTATION
The combined financial statements include the accounts of thirteen of TCIC's
cable television systems serving certain subscribers within Oregon, Washington,
Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). The
TCI Falcon Systems are indirectly wholly-owned by various subsidiaries of TCIC.
TCIC is a subsidiary of Tele-Communications, Inc. ("TCI"). All significant
inter-entity accounts and transactions have been eliminated in combination.
The TCI Falcon Systems have been acquired through a series of transactions
where TCIC acquired various larger cable entities (the "Original Systems"). The
TCI Falcon Systems' combined financial statements include an allocation of
certain purchase accounting adjustments, including the related deferred tax
effects, from TCIC's acquisition of the Original Systems. Such allocation and
the related franchise cost amortization is based on the relative fair market
value of systems involved. In addition, certain operating costs of TCI are
charged to the TCI Falcon Systems based on their number of subscribers (see note
6). Although such allocations are not necessarily indicative of the costs that
would have been incurred by the TCI Falcon Systems on a stand alone basis,
management believes that the resulting allocated amounts are reasonable.
PROPOSED PARTNERSHIP FORMATION
Effective December 30, 1997, TCIC and Falcon Holding Group, LP ("Falcon")
entered into a Contribution and Purchase Agreement, pursuant to which TCIC will
contribute the TCI Falcon Systems to a newly formed partnership (the
"Partnership") between TCIC and Falcon in exchange for an approximate 47%
ownership interest in the Partnership. In addition, the Partnership will assume
a portion of the intercompany amounts owed by the TCI Falcon Systems to TCIC and
its affiliates. Consummation of the transaction is subject to, among other
matters, regulatory approvals. There is no assurance that such transaction will
be consummated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1997 was not significant.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. During 1995, 1996
and 1997, interest capitalized was not significant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
systems in their entirety.
F-42
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE COSTS
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such amounts
are generally amortized on a straight-line basis over 40 years. Costs incurred
by the TCI Falcon Systems in negotiating and renewing franchise agreements are
amortized on a straight-line basis over the life of the franchise, generally 10
to 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying amounts of property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
REVENUE RECOGNITION
Cable revenue for customer fees, equipment rental, advertising, pay-per-view
programming and revenue sharing agreements is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable television system.
COMBINED STATEMENTS OF CASH FLOWS
Transactions effected through the intercompany account with TCIC have been
considered constructive cash receipts and payments for purposes of the combined
statements of cash flows.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) ACQUISITIONS
On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom which owned Viacom's cable systems
and related assets (the "Viacom Acquisition"). The purchase price for the Viacom
Acquisition was comprised of $1.7 billion in assumed debt and the issuance of
$0.6 billion in preferred stock. In connection with the Viacom Acquisition, the
Redding, California cable system ("Redding") was transferred to the TCI Falcon
Systems at TCIC's allocated cost of approximately $68 million, which amount has
been reflected as an increase in due to TCIC in the accompanying combined
financial statements.
F-43
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(3) ACQUISITIONS (CONTINUED)
The acquisition of Redding has been accounted for by the purchase method by
the TCI Falcon Systems. Accordingly, the results of operations of Redding have
been combined with those of the TCI Falcon Systems since the date of
acquisition, and the TCI Falcon Systems have recorded Redding's assets and
liabilities at fair value. On a pro forma basis, the TCI Falcon Systems' revenue
and net earnings would have been increased by $8,273,000 and decreased by
$474,000, respectively, for the year ended December 31, 1996 had Redding been
combined with the TCI Falcon Systems on January 1, 1996. The foregoing unaudited
pro forma financial information is based upon historical results of operations
adjusted for acquisition costs and, in the opinion of management, is not
necessarily indicative of the results had the TCI Falcon Systems operated
Redding since January 1, 1996.
As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable")
consummated a transaction, whereby TeleCable was merged into TCIC. The TeleCable
acquisition has been accounted for by the purchase method. The aggregate $1.6
billion purchase price was satisfied by TCIC's assumption of approximately $300
million of TeleCable's net liabilities and the issuance to TeleCable
shareholders of TCI Class A common stock and TCI Convertible Preferred Stock,
Series D. In connection with the TeleCable acquisition, the Decatur, Alabama
cable system was transferred to the TCI Falcon Systems at TCIC's allocated cost
of approximately $47 million, which amount has been reflected as an increase in
due to TCIC in the accompanying combined financial statements.
(4) INCOME TAXES
The TCI Falcon Systems are included in the consolidated federal income tax
return of TCI. Income tax expense for the TCI Falcon Systems is based on those
items in the consolidated calculation applicable to the TCI Falcon Systems.
Intercompany tax allocation represents an apportionment of tax expense or
benefit (other than deferred taxes) among subsidiaries of TCI in relation to
their respective amounts of taxable earnings or losses. The payable or
receivable arising from the intercompany tax allocation is recorded as an
increase or decrease in due to TCIC. Deferred income taxes are based on the book
and tax basis differences of the assets and liabilities within the TCI Falcon
Systems.
F-44
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(4) INCOME TAXES (CONTINUED)
Income tax expense for the years ended December 31, 1995, 1996 and 1997
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Year ended December 31, 1995:
Intercompany allocation.......................................................... $ (3,811) -- (3,811)
Federal.......................................................................... -- (387) (387)
State and local.................................................................. (78) (482) (560)
--------- ----------- ---------
$ (3,889) (869) (4,758)
--------- ----------- ---------
--------- ----------- ---------
Year ended December 31, 1996:
Intercompany allocation.......................................................... $ (1,620) -- (1,620)
Federal.......................................................................... -- (4,032) (4,032)
State and local.................................................................. (86) (501) (587)
--------- ----------- ---------
$ (1,706) (4,533) (6,239)
--------- ----------- ---------
--------- ----------- ---------
Year ended December 31, 1997:
Intercompany allocation.......................................................... $ (1,487) -- (1,487)
Federal.......................................................................... -- (5,862) (5,862)
State and local.................................................................. (140) (1,319) (1,459)
--------- ----------- ---------
$ (1,627) (7,181) (8,808)
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
Income tax expense differs from the amounts computed by applying the federal
income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Computed "expected" tax expense...................................................... $ (4,212) (5,658) (7,476)
Amortization not deductible for tax purposes......................................... (155) (178) (265)
State and local income taxes, net of federal income tax benefit...................... (364) (382) (948)
Other................................................................................ (27) (21) (119)
--------- --------- ---------
$ (4,758) (6,239) (8,808)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-45
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(4) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities at December 31,
1996 and 1997 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Deferred tax asset--principally due to non-deductible accruals............................. $ 81 128
---------- ---------
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation................... 18,195 20,985
Franchise costs, principally due to differences in amortization and initial basis........ 95,888 100,326
---------- ---------
Total gross deferred tax liabilities................................................... 114,083 121,311
---------- ---------
Net deferred tax liability............................................................. $ 114,002 121,183
---------- ---------
---------- ---------
</TABLE>
(5) PARENT'S INVESTMENT
Parent's investment in the TCI Falcon Systems at December 31, 1996 and 1997
is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Due to TCIC................................................................................ $ 260,807 219,459
Retained earnings.......................................................................... 61,327 73,878
---------- ---------
$ 322,134 293,337
---------- ---------
---------- ---------
</TABLE>
The amount due to TCIC represents advances for operations, acquisitions and
construction costs as well as the allocation of certain costs from TCIC. See
note 6.
(6) TRANSACTIONS WITH RELATED PARTIES
The amounts due to TCIC consist of various intercompany advances and expense
allocations. TCIC charges intercompany interest expense at variable rates to
cable systems within the TCI Falcon Systems based upon amounts due to TCIC from
the cable systems. As a result of TCIC's ownership of 100% of the TCI Falcon
Systems, the amounts due to TCIC have been classified as a component of parent's
investment in the accompanying combined financial statements. Such amounts are
due on demand.
The TCI Falcon Systems purchase, at TCIC's cost, substantially all of their
pay television and other programming from affiliates of TCIC. Charges for such
programming were $15,774,000, $20,248,000 and $25,500,000 for 1995, 1996 and
1997, respectively, and are included in operating expenses in the accompanying
combined financial statements.
Certain subsidiaries of TCIC provide administrative services to the TCI
Falcon Systems and have assumed managerial responsibility of the TCI Falcon
Systems' cable television system operations and construction. As compensation
for these services, the TCI Falcon Systems pay a monthly fee calculated on a
per-subscriber basis.
F-46
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(6) TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The intercompany advances and expense allocation activity in amounts due to
TCIC consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996 1997
---------- --------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Beginning of year............................................................... $ 181,228 214,096 260,807
Transfer of cable system acquisition purchase price........................... 47,490 68,240 --
Programming charges........................................................... 15,774 20,248 25,500
Administrative fees........................................................... 4,085 5,768 5,034
Intercompany interest expense................................................. 5,923 4,701 5,832
Tax allocations............................................................... 3,811 1,620 1,487
Cash transfer................................................................. (44,215) (53,866) (79,201)
---------- --------- ---------
End of year..................................................................... $ 214,096 260,807 219,459
---------- --------- ---------
---------- --------- ---------
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the Federal Communications Commission ("FCC") adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, the TCI Falcon Systems' basic and tier
service rates and its equipment and installation charges (the "Regulated
Services") are subject to the jurisdiction of local franchising authorities and
the FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation charges
are based on actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate regulations. The
rate regulations do not apply to the relatively few systems which are subject to
"effective competition" or to services offered on an individual service basis,
such as premium movie and pay-per-view services.
The TCI Falcon Systems believe that they have complied in all material
respects with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the TCI Falcon Systems' rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed, or the appropriate
franchise authority, if such authority has been certified. If, as a result of
the review process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions.
Certain plaintiffs have filed or threatened separate class action complaints
against certain of the TCI Falcon Systems, alleging that the systems' practice
of assessing an administrative fee to subscribers whose payments are delinquent
constitutes an invalid liquidated damage provision, a breach of contract, and
violates local consumer protection statutes. Plaintiffs seek recovery of all
late fees paid to the subject systems as a class purporting to consist of all
subscribers who were assessed such fees during the applicable
F-47
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
limitation period, plus attorney fees and costs. In addition to such matters,
the TCI Falcon Systems have contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. Although it is
possible the TCI Falcon Systems may incur losses upon conclusion of the matters
referred to above, an estimate of any loss or range of loss cannot presently be
made. Based upon the facts available, management believes that, although no
assurance can be given as to the outcome of these actions, the ultimate
disposition should not have a material adverse effect upon the combined
financial condition or results of operations of the TCI Falcon Systems.
Management of the TCI Falcon Systems has not yet assessed the cost
associated with its year 2000 readiness efforts to ensure that its computer
systems and related software properly recognize the year 2000 and continue to
process business information, and the related potential impact on the TCI Falcon
Systems' results of operations. Amounts expended to date have not been material,
although there can be no assurance that costs ultimately required to be paid to
ensure the TCI Falcon Systems' year 2000 readiness will not have an adverse
effect on the TCI Falcon Systems' financial position or results of operations.
Additionally, there can be no assurance that the systems of the TCI Falcon
Systems' suppliers will be converted in time or that any such failure to convert
by such third parties will not have an adverse effect on the TCI Falcon Systems'
financial position or results of operations.
The TCI Falcon Systems lease business offices, have entered into pole rental
agreements and use certain equipment under lease arrangements. Rental expense
under such arrangements amounted to $1,152,000, $1,370,000 and $1,868,000 in
1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancellable operating leases for each
of the next five years are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 908
1999................................................................................. 760
2000................................................................................. 665
2001................................................................................. 531
2002................................................................................. 468
Thereafter........................................................................... 3,181
---------
$ 6,513
---------
---------
</TABLE>
F-48
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
AMOUNTS IN THOUSANDS
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash.................................................................................... $ -- --
Trade and other receivables, net........................................................ 4,665 2,557
Property and equipment, at cost:
Land.................................................................................. 1,232 1,233
Distribution systems.................................................................. 137,767 141,653
Support equipment and buildings....................................................... 18,354 18,581
------------ -----------
157,353 161,467
Less accumulated depreciation......................................................... 69,857 73,158
------------ -----------
87,496 88,309
------------ -----------
Franchise costs......................................................................... 393,540 398,527
Less accumulated amortization......................................................... 62,849 65,332
------------ -----------
330,691 333,195
------------ -----------
Other assets, at cost, net of amortization.............................................. 714 700
------------ -----------
$ 423,566 424,761
------------ -----------
------------ -----------
LIABILITIES AND PARENT'S INVESTMENT
Cash overdraft.......................................................................... $ 5,209 1,841
Accounts payable........................................................................ 350 600
Accrued expenses........................................................................ 3,487 3,458
Deferred income taxes................................................................... 121,183 121,362
------------ -----------
Total liabilities................................................................. 130,229 127,261
Parent's investment (note 3)............................................................ 293,337 297,500
------------ -----------
Commitments and contingencies (note 5).................................................. $ 423,566 424,761
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to combined financial statements.
F-49
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
AMOUNTS IN THOUSANDS
(UNAUDITED)
<S> <C> <C>
Revenue................................................................................... $ 28,576 28,421
Operating costs and expenses:
Operating (note 4)...................................................................... 9,942 10,418
Selling, general and administrative..................................................... 4,933 5,433
Administrative fees (note 4)............................................................ 1,303 1,126
Depreciation............................................................................ 2,998 3,311
Amortization............................................................................ 2,443 2,480
---------- ----------
21,619 22,768
---------- ----------
Operating income...................................................................... 6,957 5,653
Other income (expense):
Intercompany interest expense (note 4).................................................. (1,120) (1,448)
Other, net.............................................................................. (48) 59
---------- ----------
(1,168) (1,389)
---------- ----------
Earnings before income taxes.......................................................... 5,789 4,264
Income tax expense........................................................................ (2,235) (1,793)
---------- ----------
Net earnings.......................................................................... 3,554 2,471
Parent's investment:
Beginning of year....................................................................... 322,134 293,337
Change in due to TCI Communications, Inc. ("TCIC")...................................... (9,152) 1,692
---------- ----------
End of period........................................................................... $ 316,536 297,500
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-50
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
AMOUNTS IN THOUSANDS
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................................................................ $ 3,554 2,471
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization......................................................... 5,441 5,791
Deferred income tax expense........................................................... 1,624 179
Changes in operating assets and liabilities, net of effects of acquisitions:
Change in receivables............................................................... 470 2,108
Change in other assets.............................................................. 114 14
Change in accounts payable and accrued expenses..................................... (844) 221
---------- ----------
Net cash provided by operating activities......................................... 10,359 10,784
---------- ----------
Cash flows from investing activities:
Capital expended for property and equipment............................................. (609) (2,024)
Other investing activities.............................................................. 151 (61)
---------- ----------
Net cash used in investing activities............................................. (458) (2,085)
---------- ----------
Cash flows from financing activities:
Change in due to TCIC................................................................... (9,152) (5,331)
Change in cash overdraft................................................................ -- (3,368)
---------- ----------
Net cash used in financing activities............................................. (9,152) (8,699)
---------- ----------
Net increase in cash.............................................................. 749 --
Cash:
Beginning of year............................................................... 2,614 --
---------- ----------
End of year..................................................................... $ 3,363 --
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-51
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The combined financial statements include the accounts of thirteen of TCIC's
cable television systems serving certain subscribers within Oregon, Washington,
Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). The
TCI Falcon Systems are indirectly wholly-owned by various subsidiaries of TCIC.
TCIC is a subsidiary of Tele-Communications, Inc. ("TCI"). All significant
inter-entity accounts and transactions have been eliminated in combination.
The accompanying interim combined financial statements are unaudited but, in
the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These combined financial statements
should be read in conjunction with the combined financial statements and notes
thereto contained in the TCI Falcon Systems' report for the year ended December
31, 1997.
The TCI Falcon Systems have been acquired through a series of transactions
where TCIC acquired various larger cable entities (the "Original Systems"). The
TCI Falcon Systems' combined financial statements include an allocation of
certain purchase accounting adjustments, including the related deferred tax
effects, from TCIC's acquisition of the Original Systems. Such allocation and
the related franchise cost amortization is based on the relative fair market
value of systems involved. In addition, certain operating costs of TCI are
charged to the TCI Falcon Systems based on their number of subscribers (see note
4). Although such allocations are not necessarily indicative of the costs that
would have been incurred by the TCI Falcon Systems on a stand alone basis,
management believes that the resulting allocated amounts are reasonable.
PROPOSED PARTNERSHIP FORMATION
Effective December 30, 1997, TCIC and Falcon Holding Group, LP ("Falcon")
entered into a Contribution and Purchase Agreement, pursuant to which TCIC will
contribute the TCI Falcon Systems to a newly formed partnership (the
"Partnership") between TCIC and Falcon in exchange for an approximate 47%
ownership interest in the Partnership. In addition, the Partnership will assume
a portion of the intercompany amounts owed by the TCI Falcon Systems to TCIC and
its affiliates. Consummation of the transaction is subject to, among other
matters, regulatory approvals. There is no assurance that such transaction will
be consummated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) ACQUISITION
On January 1, 1998, a subsidiary of TCIC acquired certain cable television
assets in and around Ellensburg, WA from King Videocable Company. On the same
date, these assets were transferred to the
F-52
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
(2) ACQUISITION (CONTINUED)
TCI Falcon Systems. As a result of these transactions, the TCI Falcon Systems
recorded non-cash increases in property and equipment of $2,100,000, in
franchise costs of $4,923,000, and in parent's investment of $7,023,000.
Assuming the acquisition had occurred on January 1, 1997, the TCI Falcon
Systems' pro forma results of operations would not have been materially
different from the results of operations for the three months ended March 31,
1997.
(3) PARENT'S INVESTMENT
Parent's investment in the TCI Falcon Systems at December 31, 1997 and March
31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Due to TCIC........................................................ $ 219,459 $ 221,151
Retained earnings.................................................. 73,878 76,349
------------ ----------
$ 293,337 $ 297,500
------------ ----------
------------ ----------
</TABLE>
The amount due to TCIC represents advances for operations, acquisitions and
construction costs as well as the allocation of certain costs from TCIC. See
note 4.
(4) TRANSACTIONS WITH RELATED PARTIES
The amounts due to TCIC consist of various intercompany advances and expense
allocations. TCIC charges intercompany interest expense at variable rates to
cable systems within the TCI Falcon Systems based upon amounts due to TCIC from
the cable systems. As a result of TCIC's ownership of 100% of the TCI Falcon
Systems, the amounts due to TCIC have been classified as a component of parent's
investment in the accompanying combined financial statements. Such amounts are
due on demand.
The TCI Falcon Systems purchase, at TCIC's cost, substantially all of their
pay television and other programming from affiliates of TCIC. Charges for such
programming were $6,445,000 and $7,133,000 for the three months ended March 31,
1997 and 1998, respectively, and are included in operating expenses in the
accompanying combined financial statements.
Certain subsidiaries of TCIC provide administrative services to the TCI
Falcon Systems and have assumed managerial responsibility of the TCI Falcon
Systems' cable television system operations and construction. As compensation
for these services, the TCI Falcon Systems pay a monthly fee calculated on a
per-subscriber basis.
F-53
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
(4) TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The intercompany advances and expense allocation activity in amounts due to
TCIC consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------
AMOUNTS IN THOUSANDS
<S> <C>
Beginning of period..................................................... $ 219,459
Transfer of cable system acquisition purchase price................... 7,023
Programming charges................................................... 7,133
Administrative fees................................................... 1,126
Intercompany interest expense......................................... 1,448
Tax allocations....................................................... 1,614
Cash transfer......................................................... (16,652)
--------
End of period........................................................... $ 221,151
--------
--------
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the Federal Communications Commission ("FCC") adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, the TCI Falcon Systems' basic and tier
service rates and its equipment and installation charges (the "Regulated
Services") are subject to the jurisdiction of local franchising authorities and
the FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation charges
are based on actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate regulations. The
rate regulations do not apply to the relatively few systems which are subject to
"effective competition" or to services offered on an individual service basis,
such as premium movie and pay-per-view services.
The TCI Falcon Systems believe that they have complied in all material
respects with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the TCI Falcon Systems' rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed, or the appropriate
franchise authority, if such authority has been certified. If, as a result of
the review process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions.
Certain plaintiffs have filed or threatened separate class action complaints
against certain of the TCI Falcon Systems, alleging that the systems' practice
of assessing an administrative fee to subscribers whose payments are delinquent
constitutes an invalid liquidated damage provision, a breach of contract, and
violates local consumer protection statutes. Plaintiffs seek recovery of all
late fees paid to the subject systems as a class purporting to consist of all
subscribers who were assessed such fees during the applicable
F-54
<PAGE>
TCI FALCON SYSTEMS
(DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
limitation period, plus attorney fees and costs. In addition to such matters,
the TCI Falcon Systems have contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. Although it is
possible the TCI Falcon Systems may incur losses upon conclusion of the matters
referred to above, an estimate of any loss or range of loss cannot presently be
made. Based upon the facts available, management believes that, although no
assurance can be given as to the outcome of these actions, the ultimate
disposition should not have a material adverse effect upon the combined
financial condition or results of operations of the TCI Falcon Systems.
The TCI Falcon Systems lease business offices, have entered into pole rental
agreements and use certain equipment under lease arrangements. Rental expense
under such arrangements amounted to $441,000 and $527,000 for the three months
ended March 31, 1997 and 1998, respectively.
Management of the TCI Falcon Systems has not yet assessed the cost
associated with its year 2000 readiness efforts to ensure that its computer
systems and related software properly recognize the year 2000 and continue to
process business information, and the related potential impact on the TCI Falcon
Systems' results of operations. Amounts expended to date have not been material,
although there can be no assurance that costs ultimately required to be paid to
ensure the TCI Falcon Systems' year 2000 readiness will not have an adverse
effect on the TCI Falcon Systems' financial position or results of operations.
Additionally, there can be no assurance that the systems of the TCI Falcon
Systems' suppliers will be converted in time or that any such failure to convert
by such third parties will not have an adverse effect on the TCI Falcon Systems'
financial position or results of operations.
F-55
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholder
Falcon Funding Corporation
We have audited the accompanying balance sheet of Falcon Funding Corporation
as of March 27, 1998. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Falcon Funding Corporation as of
March 27, 1998 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 31, 1998
F-56
<PAGE>
FALCON FUNDING CORPORATION
BALANCE SHEET
MARCH 27, 1998
<TABLE>
<S> <C>
Assets--Cash........................................................................ $ 1,000
---------
---------
Shareholder's Equity
Common stock, par value $0.01; 1,000 shares authorized,
100 shares issued and outstanding............................................... $ 1
Additional paid-in capital........................................................ 999
---------
$ 1,000
---------
---------
</TABLE>
F-57
<PAGE>
FALCON FUNDING CORPORATION
NOTE TO BALANCE SHEET
MARCH 27, 1998
NOTE 1--BASIS OF PRESENTATION
Falcon Funding Corporation ("FFC"), a California corporation, is a wholly-owned
subsidiary of Falcon Holding Group, L.P. FFC was organized on March 16, 1998
("inception") solely for the purpose of acting as co-issuer with Falcon Holding
Group, L.P., of $649.6 million (gross proceeds) of senior debentures and senior
discount debentures due 2010. FFC had no operations from inception through March
27, 1998 and is not expected to have material operations or assets in the
future. FFC is not expected to participate in servicing the principal, interest,
premium, if any, or any payment obligations on the debentures.
F-58
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the fees and expenses payable by the
Registrants in connection with the Exchange Offer. All amounts are estimated
except the filing fees:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee............................... $ 191,939
Printing and Engraving Fees....................................................... 35,000
Fees of Trustee................................................................... 5,000
Legal Fees and Expenses........................................................... 75,000
Accounting Fees and Expenses...................................................... 70,000
Miscellaneous..................................................................... 23,061
----------
Total........................................................................... $ 400,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION UNDER THE EXISTING PARTNERSHIP AGREEMENT. The Existing
Partnership Agreement provides that FHGLP will indemnify and hold harmless
certain Indemnified Persons from any liability, loss, or damage incurred by the
Indemnified Person (and will not hold the Indemnified Person liable to FHGLP for
any liability, loss, or damage incurred by FHGLP) by reason of any act performed
or omitted to be performed by the Indemnified Person in connection with the
business of FHGLP; provided that if the liability, loss, damage or claim arises
out of any action or inaction of the Indemnified Person, indemnification will be
available only if (i) the Indemnified Person determined, in good faith, that its
or his course of conduct was in, or not opposed to, the best interests of FHGLP,
or the Indemnified Person did not intend its or his inaction to be harmful or
opposed to the best interests of FHGLP, and (ii) the action or inaction did not
constitute fraud, gross negligence, breach of fiduciary duty (which shall not be
construed to encompass mistakes in judgment or any breach of any Indemnified
Person's duty of care that did not constitute gross negligence), or willful
misconduct by the Indemnified Person. The class of Indemnified Persons includes
Falcon in its capacity as the general partner (and its officers, directors,
shareholders, employees, and agents), and the employees, officers, and agents of
FHGLP, the members of the Board of Representatives ((and the partners that
appointed such member to the extent such partner suffers any liability, loss, or
damage as a result of the actions of such member of the Board of
Representatives). Indemnification under the Existing Partnership Agreement is
recoverable only from the assets of FHGLP and not from any assets of the
partners. FHGLP may pay for insurance covering liability of the Indemnified
Persons for negligence in operation of FHGLP's affairs. The Company may enter
into agreements with certain of the Indemnified Persons setting forth procedures
for implementing the indemnities provided in the Existing Partnership Agreement,
subject to the approval procedures provided for in the Existing Partnership
Agreement. The indemnification provisions under the Existing Partnership
Agreement do not constitute a waiver by any limited partner of any right that
such limited partner may have against any party, including Falcon, under federal
or state securities laws.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
authorizes a limited partnership to indemnify and hold harmless any partner or
other person from and against any and all claims and demands whatsoever, subject
to such standards and restrictions, if any, as are set forth in its partnership
agreement.
INDEMNIFICATION UNDER NEW PARTNERSHIP AGREEMENT. The New Partnership
Agreement provides that the Partnership will indemnify and hold harmless certain
Indemnified Persons from any liability, loss, or damage incurred by the
Indemnified Person (and will not hold the Indemnified Person liable to the
Partnership for any liability, loss, or damage incurred by the Partnership) by
reason of any act performed
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<PAGE>
or omitted to be performed by the Indemnified Person in connection with the
business of the Partnership; provided that if the liability, loss, damage or
claim arises out of any action or inaction of the Indemnified Person,
indemnification will be available only if (i) the Indemnified Person determined,
in good faith, that its or his course of conduct was in, or not opposed to, the
best interests of the Partnership, or the Indemnified Person did not intend its
or his inaction to be harmful or opposed to the best interests of the
Partnership, and (ii) the action or inaction did not constitute fraud, gross
negligence, breach of fiduciary duty (which shall not be construed to encompass
mistakes in judgment or any breach of any Indemnified Person's duty of care that
did not constitute gross negligence), or willful misconduct by the Indemnified
Person. The class of Indemnified Persons includes Falcon in its capacity as the
general partner (and its officers, directors, shareholders, employees, and
agents), and the employees, officers, and agents of The Partnership.
Indemnification under the New Partnership Agreement is recoverable only from the
assets of The Partnership and not from any assets of the partners. The
Partnership may pay for insurance covering liability of the Indemnified Persons
for negligence in operation of The Partnership's affairs. The Company may enter
into agreements with certain of the Indemnified Persons (and will enter into
agreements with the officers of [Falcon/FHGI]) setting forth procedures for
implementing the indemnities provided in the New Partnership Agreement. The
indemnification provisions under the New Partnership Agreement do not constitute
a waiver by any limited partner of any right that such limited partner may have
against any party, including Falcon, under federal or state securities laws.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
authorizes a limited partnership to indemnify and hold harmless any partner or
other person from and against any and all claims and demands whatsoever, subject
to such standards and restrictions, if any, as are set forth in its partnership
agreement.
INDEMNIFICATION UNDER FHGI AND FFC ARTICLES OF INCORPORATION. The Articles
of Incorporation of FHGI and FFC authorize the corporation to provide
indemnification of agents (as defined by Section 317 of the California
Corporations Code) through by-law provisions, agreements with such persons,
votes of stockholders or disinterested directors, or otherwise, to the fullest
extent permissible under California law. The by-laws of FHGI provide that the
corporation shall indemnify such agents to the maximum extent permitted by
California law; the by-laws of FFC provide that the corporation shall have the
power to indemnify officers, directors, employees and agents (including, without
limitation, fiduciaries of an employee benefit plan governed by the Employee
Retirement Income Security Act of 1974) of FFC, and such other persons
designated by the Board of Directors, to the full extent permitted under
California law, as amended from time to time.
Section 317 of the California Corporations Code defines "agent" as any
person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation which was the
predecessor corporation of the corporation or of another enterprise at the
request of the predecessor corporation. Section 317 also provides that a
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the corporation to procure a judgment in its favor) by reason of
the fact that the person is or was an agent of the corporation, against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. In addition,
a corporation shall have power to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed action
by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was an agent of the corporation,
against expenses actually and reasonably incurred by that person in connection
with the defense or settlement of the action if the person acted in good faith,
in a manner the person believed to be
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<PAGE>
in the best interests of the corporation and its shareholders. No
indemnification shall be made under Section 317 for any of the following: (i) in
respect of any claim, issue or matter as to which the person shall have been
adjudged to be liable to the corporation in the performance of that person's
duty to the corporation and its shareholders, unless and only to the extent that
the court in which the proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine; (ii) amounts paid in settling or
otherwise disposing of a pending action without court approval; or (iii)
expenses incurred in defending a pending action which is settled or otherwise
disposed of without court approval.
INDEMNIFICATION UNDER NEWFALCON PARTNERSHIP AGREEMENT. The NewFalcon
Partnership Agreement provides that the Company will indemnify and hold harmless
certain Indemnified Persons from any liability, loss, or damage incurred by the
Indemnified Person (and will not hold the Indemnified Person liable to the
Company for any liability, loss, or damage incurred by the Company) by reason of
any act performed or omitted to be performed by the Indemnified Person in
connection with the business of the Company; provided that if the liability,
loss, damage or claim arises out of any action or inaction of the Indemnified
Person, indemnification will be available only if (i) the Indemnified Person
determined, in good faith, that its or his course of conduct was in, or not
opposed to, the best interests of the Company, or the Indemnified Person did not
intend its or his inaction to be harmful or opposed to the best interests of the
Company, and (ii) the action or inaction did not constitute fraud, gross
negligence, breach of fiduciary duty (which shall not be construed to encompass
mistakes in judgment or any breach of any Indemnified Person's duty of care that
did not constitute gross negligence), or willful misconduct by the Indemnified
Person. The class of Indemnified Persons includes FHGLP in its capacity as the
managing general partner (and its officers, directors, shareholders, employees,
and agents), the employees, officers, and agents of the Company, the members of
the Advisory Committee (and the partner that appointed such member to the extent
such partner suffers any liability, loss, or damage as a result of the actions
of such member of the Advisory Committee). Indemnification under the NewFalcon
Partnership Agreement is recoverable only from the assets of the Company and not
from any assets of the partners. The Company may pay for insurance covering
liability of the Indemnified Persons for negligence in operation of the
Company's affairs. The Company may enter into agreements with certain of the
Indemnified Persons (and will enter into agreements with the officers of FGHI)
setting forth procedures for implementing the indemnities provided in the
NewFalcon Partnership Agreement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On March 17, 1998, in connection with the formation of the FFC, FFC issued
1,000 shares of its voting common stock, one cent ($.01) par value per share, to
FHGLP for cash consideration of $1,000. The issuance of FFC common stock to
FHGLP was deemed to be exempt from the registration requirements of the Act as a
transaction not involving any public offering, pursuant to Section 4(2) of the
Act.
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<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<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 Certificates 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)
3.4 Form of Fourth Amended and Restated Agreement of Limited Partnership of FHGLP (1)
3.5 Form of Amended and Restated Agreement of Limited Partnership of New Falcon*
3.6 Articles of Incorporation of FFC*
3.7 Bylaws of FFC*
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 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)
4.6 Indenture for the Debentures, dated as of April 3, 1998, by and among FHGLP, FFC and United States Trust
Company of New York, as Trustee*
5.1 Opinion of Dow, Lohnes & Albertson, PLLC
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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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)
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 an 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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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)
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 of America 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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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)
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 (17)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 (17)
10.61 First Amendment to Contribution and Purchase Agreement, dated as of March 23, 1998, by and among Falcon
Holding Group, L.P., Falcon Communications, L.P., and TCI Falcon Holdings, LLC. (18)
10.62 Second Amendment to Contribution and Purchase Agreement, dated as of April 2, 1998, between Falcon
Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC. (18)
10.63 Waiver Letter, dated as of March 27, 1998, among Falcon Holding Group, L.P., Falcon Communications, L.P.
and TCI Falcon Holdings, LLC relating to the Amended and Restated Agreement of Limited Partnership of
Falcon Communications, L.P., dated as of December 30, 1997. (18)
10.64 Contribution and Purchase Agreement, dated December 30, 1997, by and among Falcon Holding Group, L.P.,
Falcon Communications, L.P., Falcon Holding Group, Inc., TCI Falcon Holdings, LLC, Belo Ventures,
Inc., and the other parties executing the Agreement. (16)
10.65 Third Amendment to Contribution and Purchase Agreement, dated as of May 12, 1998, by and among Falcon
Holding Group, L.P., Falcon Communications, L.P. and TCI Holdings LLC.*
10.66 Credit Agreement, dated as of June 30, 1998, by and among BankBoston, N.A., The Chase Manhattan Bank,
NationsBank, N.A., Toronto Dominion (Texas) Inc., Bank of America, N.T. & S.A. and other lenders
signatory thereto.*
12 Computation of Deficiency of Earnings to Fixed Charges*
23.1 Consent of Dow, Lohnes & Albertson, PLLC (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young, LLP
23.3 Consent of KPMG Peat Marwick LLP
25.1 Form T-1 (Statement of Eligibility of Trustee)*
27.1 Financial Data Schedule of FHGLP*
27.2 Financial Data Schedule of FFC*
99.1 Letter of Transmittal*
99.2 Notice of Guaranteed Delivery*
</TABLE>
- ------------------------
* Previously filed with this Registration Statement.
(1) Incorporated by reference to the exhibits to FHGLP's Registration Statement
on Form S-4, Registration No. 33-60776.
(2) Incorporated by reference to the exhibits to FHGLP'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 FHGLP'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 FHGLP's Annual Report on Form
10-K, File No. 33-60776 for the fiscal year ended December 31, 1993.
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<PAGE>
(5) Incorporated by reference to the exhibits to FHGLP'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 FHGLP's Quarterly Report on
Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1995.
(7) Incorporated by reference to the exhibits to FHGLP's current Report on Form
8-K, File No. 33-60776 dated December 28, 1995.
(8) Incorporated by reference to the exhibits to FHGLP'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 FHGLP'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 FHGLP'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 FHGLP'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 FHGLP'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 FHGLP'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 FHGLP'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 FHGLP's Quarterly Report on
Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1997.
(16) Incorporated by reference to the exhibits to FHGLP's Current Report on
Form 8-K, File No. 33-60776, dated December 30, 1997.
(17) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form
10-K, File No. 33-60776 for the fiscal year ended December 31, 1997.
(18) Incorporated by reference to the exhibits to FHGLP's quarterly report on
Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1998.
(b)Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts of Falcon Holding Group, L.P.
for each of the three years in the period ended December 31, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the
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<PAGE>
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrants hereby undertake that:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the provisions, or otherwise, the Registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this Registration Statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issues undertake that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
the reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
Every prospectus: (i) that is filed pursuant to the immediately preceding
paragraph or (ii) that purports to meet the requirements of Section 10(a)(3) of
the Act and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Falcon Holding Group, L.P. has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on July 31,
1998.
<TABLE>
<S> <C> <C>
FALCON HOLDING GROUP L.P.
By: Falcon Holding Group, Inc.,
its General Partner
By: /s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
CHIEF FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Director of Falcon Holding
* Group, Inc. and Chief
- ------------------------------ Executive Officer of the July 31, 1998
Marc B. Nathanson Registrant (Principal
Executive Officer)
*
- ------------------------------ President and Chief July 31, 1998
Frank J. Intiso Operating Officer
*
- ------------------------------ Director of Falcon Holding July 31, 1998
Stanley S. Itskowitch Group, Inc.
Chief Financial Officer
/s/ MICHAEL K. MENEREY and Secretary of the
- ------------------------------ Registrant (Principal July 31, 1998
Michael K. Menerey Financial and Accounting
Officer)
*POWER OF ATTORNEY
Michael K. Menerey, by signing his name hereto, does sign this document on
behalf of each of the persons indicated above for whom he is attorney-in-fact
pursuant to a power of attorney duly executed by such person and filed with the
Securities and Exchange Commission.
<TABLE>
<S> <C> <C>
/s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Falcon Funding Corporation has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on July 31,
1998.
<TABLE>
<S> <C> <C>
FALCON FUNDING CORPORATION
By: /s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
CHIEF FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Director and Chief
* Executive Officer of the
- ------------------------------ Registrant (Principal July 31, 1998
Marc B. Nathanson Executive Officer)
*
- ------------------------------ Director and President and July 31, 1998
Frank J. Intiso Chief Operating Officer
* Director and Executive
- ------------------------------ Vice President and July 31, 1998
Stanley S. Itskowitch General Counsel
Director and Chief
Financial Officer and
/s/ MICHAEL K. MENEREY Secretary of the
- ------------------------------ Registrant (Principal July 31, 1998
Michael K. Menerey Financial and Accounting
Officer)
*POWER OF ATTORNEY
Michael K. Menerey, by signing his name hereto, does sign this document on
behalf of each of the persons indicated above for whom he is attorney-in-fact
pursuant to a power of attorney duly executed by such person and filed with the
Securities and Exchange Commission.
<TABLE>
<S> <C> <C>
/s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
ATTORNEY-IN-FACT
</TABLE>
II-12
<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.
<PAGE>
[LETTERHEAD OF DOW, LOHNES & ALBERTSON, PLLC APPEARS HERE]
Exhibit 5.1
July 31, 1998
Falcon Holding Group, L.P.
Falcon Funding Corporation
10900 Wilshire Boulevard
15th Floor
Los Angeles, California 90024
Re: Falcon Holding Group, L.P.
Falcon Funding Corporation
Registration Statement on Form S-4
(Registration No. 333-55755)
Ladies and Gentlemen:
We refer to the above-referenced Registration Statement (the "Registration
Statement") on Form S-4, filed on June 1, 1998, by Falcon Holding Group, L.P.
("FHGLP") and Falcon Funding Corporation ("FFC" and, together with FHGLP, the
"Issuers"), with the Securities and Exchange Commission (the "Commission"), for
the purpose of registering under the Securities Act of 1933, as amended (the
"Securities Act"), the Issuers' 8.375% Series B Senior Debentures due 2010 (the
"Senior Exchange Debentures") and 9.285% Series B Senior Discount Debentures due
2010 (the "Senior Discount Exchange Debentures" and collectively with the Senior
Exchange Debentures, the "Exchange Debentures"), to be offered in exchange (the
"Exchange Offer") for the Issuers' outstanding 8.375% Series A Senior Debentures
due 2010 (the "Old Senior Debentures") and 9.285% Series A Senior Discount
Debentures due 2010 (the "Old Senior Discount Debentures" and collectively with
the Old Senior Debentures, the "Old Debentures"). The Old Debentures were
issued under, and the Exchange Debentures are to be issued under, an Indenture,
dated as of April 3, 1998, among FHGLP, FFC and United States Trust Company of
New York, as Trustee (the "Indenture").
In connection with the foregoing registration, we have acted as special
counsel for the Issuers, and have examined originals or copies of (i) the Third
Amended and Restated Agreement of Limited Partnership and Certificate of Limited
Partnership of FHGLP in effect as of the date hereof, (ii) the Articles of
<PAGE>
Incorporation and Bylaws of FFC in effect as of the date hereof, (iii) the
Indenture, (iv) the Registration Rights Agreement, dated as of April 3, 1998
(the "Registration Rights Agreement"), by and among the Issuers, Morgan Stanley
& Co. Incorporated, Lazard Freres & Co. LLC, Donaldson, Lufkin & Jenrette
Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BancAmerica Robertson Stephens, BancBoston Securities Inc., CIBC Oppenheimer,
NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc., as the
Placement Agents for the initial offering of the Old Debentures, and (v) the
Registration Statement. We have also examined all such records of the Issuers
and all such agreements, certificates of public officials, certificates of
officers or representatives of the Issuers and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinion set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to use as certified
or photostatic copies and the authenticity of the originals of such latter
documents. As to any facts relevant to the opinion expressed herein, we have
relied upon statements and representations of officers and other representatives
of the Issuers and others (all of which we assume to be true, complete and
accurate in all respects).
As to matters of law set forth below, our opinion is limited to matters of
law under the laws of the District of Columbia, the laws of the State of New
York to the extent that the Indenture, the Old Debentures and the Exchange
Debentures are governed thereby, the laws of the United States to the extent
applicable hereto, the Delaware General Corporation Law and the Delaware Revised
Uniform Limited Partnership Act, and we express no opinion as to conflicts of
law rules, or the laws of any states or jurisdictions other than as specified
above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that the Exchange Debentures have been duly
authorized and when executed by the proper officers of the Issuers, duly
authenticated by the Trustee, and issued by the Issuers in accordance with the
provisions of the Indenture, against surrender and cancellation of a like
aggregate principal amount of Old Debentures pursuant to the Exchange Offer as
contemplated in the Registration Rights Agreement, will constitute the legal,
valid and binding obligations of the Issuers enforceable against the Issuers in
accordance with their terms, except to the extent that (a) the
2
<PAGE>
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium (whether general or specific), fraudulent
conveyance or other similar laws now or hereafter in effect affecting the
enforcement of creditors' rights and remedies generally, (b) the remedy of
specific performance and injunctive and other forms of equitable relief may
be limited by equitable defenses and the discretion of the court before which
any proceeding therefor may be brought (whether such proceeding is at law or
in equity or in a bankruptcy proceeding) or limited by other equitable
principles of general applicability, and (c) the waiver as to usury, stay or
extension laws may be unenforceable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statement (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm under the caption "Legal Matters" contained in this prospectus filed as a
part thereof. In giving such consent, we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act.
Very truly yours,
Dow, Lohnes & Albertson, PLLC
By: /s/ Edward J. O'Connell
---------------------------
Edward J. O'Connell
Member
3
<PAGE>
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on the consolidated financial statements of Falcon
Holding Group, L.P. dated March 17, 1998 and the balance sheet of Falcon
Funding Corporation dated March 31, 1998 in Amendment No. 2 to the
Registration Statement (Form S-4 No. 333-55755) and related Prospectus of
Falcon Holding Group, L.P. and Falcon Funding Corporation for the
registration of 8.375% Senior Debentures and 9.285% Senior Discount
Debentures.
Our audits also included the financial statement schedule of Falcon Holding
Group, L.P. listed in Item 16(b). This schedule is the responsibility of
the Partnership's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
-----------------------
Los Angeles, California
July 31, 1998
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
-------------------------------
The Board of Directors
TCI Communications, Inc.:
We consent to the inclusion in the registration statement (No. 333-55755) on
Form S-4, as amended, of Falcon Holding Group, L.P. and Falcon Holding
Corporation of our report, dated March 4, 1998, relating to the combined
balance sheets of the TCI Falcon Systems (as defined in Note 1 to the
combined financial statements) as of December 31, 1996 and 1997, and the
related combined statements of operations and parent's investment and cash
flows for each of the years in the three-year period ended December 31, 1997,
and to the reference to our firm under the heading "Experts" in the
registration statement.
KPMG Peat Marwick LLP
Denver, Colorado
July 30, 1998
