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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER: 33-60776
FALCON HOLDING GROUP, L.P.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4408577
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD--15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 824-9990
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of equity securities held by non-affiliates of
the Registrant: There is no public trading market for the equity securities of
the Registrant and, accordingly, the Registrant is not presently able to
determine the market value of the equity securities held by non-affiliates.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Partnership's equity
securities and no distributions have been paid or declared in respect thereof
since the formation of the Partnership on March 29, 1993. As of March 1, 1998,
there were 26 partners, including FHGI, in the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership for the five
years ended December 31, 1997. This data should be read in conjunction with the
Partnership's financial statements included in Item 8 hereof and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues................................. $ 146,469 $ 147,229 $ 151,208 $ 217,320 $ 255,886
Costs and expenses....................... (67,025) (67,711) (71,652) (97,180) (122,080)
Depreciation and amortization............ (57,771) (60,935) (54,386) (100,415) (118,856)
--------- --------- --------- --------- ---------
Operating income......................... 21,673 18,583 25,170 19,725 14,950
Interest expense, net(2)................. (49,122) (49,859) (57,777) (71,602) (79,137)
Equity in net loss of investee
partnerships........................... (3,596) (1,782) (5,705) (44) 443
Other income (expense), net.............. (403) (455) 13,077 814 885
Income tax benefit....................... -- -- -- 1,122 2,021
--------- --------- --------- --------- ---------
Loss before extraordinary item........... $ (31,448) $ (33,513) $ (25,235) $ (49,985) $ (60,838)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER OPERATING DATA
EBITDA(4)................................ $ 79,444 $ 79,518 $ 79,556 $ 120,140 $ 133,806
EBITDA margin............................ 54.2% 54.0% 52.6% 55.3% 52.3%
Total debt to EBITDA..................... 6.7x 6.8x 7.0x(5) 6.6x(5) 6.8x
Net cash provided by operating
activities............................. $ 51,642 $ 49,076 $ 43,162 $ 90,631 $ 79,537
Net cash used in investing activities.... (27,562) (36,065) (22,674) (284,247) (76,287)
Net cash provided by (used in) financing
activities............................. (25,221) (18,169) (15,906) 192,199 (2,966)
Capital expenditures(6).................. 25,798 28,232 37,149 57,668 76,323
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................. $ 15,626 $ 10,468 $ 15,050 $ 13,633 $ 13,917
Total assets.......................................... 432,668 425,402 585,258 774,323 740,358
Total debt............................................ 532,938 538,626 669,019 885,786 911,221
Redeemable partners' equity(7)........................ 93,964 93,964 271,902 271,902 171,373
Partners' deficit..................................... (236,096) (256,758) (411,681) (456,499) (416,755)
</TABLE>
FOOTNOTES ON THE FOLLOWING PAGE
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FOOTNOTES TO ITEM 6--"SELECTED FINANCIAL DATA"
(1) The December 31, 1995 consolidated balance sheet includes the assets and
liabilities of Falcon First which were acquired on December 28, 1995. The
consolidated statement of operations data for the year ended December 31,
1995 excludes the operations of Falcon First due to the proximity of the
acquisition date to the end of the year, except that management fees from
Falcon First of $1.6 million are included in the consolidated statement of
operations data. On July 12, 1996, the Partnership acquired the assets of
FCSC and, accordingly, the results of the FCSC systems have been included
from July 12, 1996. Management fees and reimbursed expenses received in 1996
by the Partnership from FCSC prior to July 12, 1996 amounted to $1.5 million
and $1.0 million, respectively, and are included in the 1996 consolidated
statement of operations data. The amounts attributable to management fees
and reimbursed expenses received by the Partnership in 1995 were $2.6
million and $2.0 million, respectively.
(2) Interest expense, net includes payment-in-kind interest expense amounting to
$17.5 million, $24.5 million, $27.1 million, $26.6 million and $20.4 million
during 1993, 1994, 1995, 1996 and 1997, respectively. See Note 7 to the
Consolidated Financial Statements.
(3) Other income (expense), net in 1995 includes a gain on sale of marketable
securities.
(4) EBITDA is calculated as operating income before 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
Partnership's definition of EBITDA may not be identical to similarly titled
measures used by other companies.
(5) Total debt to EBITDA has been computed on a pro forma basis for 1995 to
include the EBITDA of Falcon First of $15.9 million, making the combined
1995 EBITDA $95.4 million. Similarly, total debt to EBITDA has also been
computed on a pro forma basis for 1996 to include the EBITDA of FCSC of
$13.6 million, making the combined 1996 EBITDA $133.8 million. Without these
pro forma adjustments, 1995 data would include the debt incurred to acquire
Falcon First, but would exclude Falcon First's EBITDA, 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. See Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(6) Excluding acquisitions of cable television systems.
(7) The Third Amended and Restated Partnership Agreement dated December 28, 1995
(the "Existing FHGLP Partnership Agreement") provides that certain holders
of partnership interests have various redemption rights, which will be
deferred and reduced upon consummation of the TCI Transaction as more fully
described in Note 2 to the consolidated financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The 1992 Cable Act required the FCC to, among other things, implement
extensive regulation of the rates charged by cable television systems for basic
and programming service tiers, installation, and customer premises equipment
leasing. Compliance with those rate regulations has had a negative impact on the
Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will be phased out altogether in
1999. Because cable service rate increases have continued to outpace inflation
under the FCC's existing regulations, the Partnership expects Congress and the
FCC to explore additional methods of regulating cable service rate increases,
including deferral or repeal of the March 31, 1999 sunset of CPST rate
regulation. There can be no assurance as to what, if any, further action may be
taken by the FCC, Congress or any other regulatory authority or court, or the
effect thereof on the Partnership's business. Accordingly, the Partnership's
historical financial results as described below are not necessarily indicative
of future performance. See "Legislation and Regulation."
This Report includes certain forward looking statements regarding, among
other things, future results of operations, regulatory requirements, pending
business combination and acquisition transactions, competition, capital needs
and general business conditions applicable to the Partnership. Such forward
looking statements involve risks and uncertainties including, without
limitation, the uncertainty of legislative and regulatory changes and the rapid
developments in the competitive environment facing cable television operators
such as the Partnership, as discussed more fully elsewhere in this Report.
RESULTS OF OPERATIONS
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 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
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$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 Partnership'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 million 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 Partnership 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 Partnership'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 4 to "Selected Financial Data." EBITDA as a
percentage of revenues decreased from 55.3% 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 Partnership'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
5
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$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 Partnership 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 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 Partnership's net loss increased
from $25.2 million to $50 million, or by 98.1%, during 1996 compared to 1995.
EBITDA is calculated as operating income before depreciation and
amortization See footnote 4 to "Selected Financial Data." EBITDA as a percentage
of revenues increased from 52.6% during 1995 to
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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%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Partnership's primary need for capital has been to acquire
cable systems and to finance plant extensions, rebuilds and upgrades, and to add
addressable converters to certain of the Owned Systems. The Partnership spent
$76.3 million during 1997 on capital expenditures. In addition to the purchase
of substantially all of the Falcon Classic Systems in March 1998 for $76.8
million and the anticipated subsequent purchase of Classic's Somerset system for
approximately $6.4 million, management's current plan calls for the expenditure
of approximately $101 million in capital expenditures in 1998, including
approximately $68.2 million to rebuild and upgrade certain of the Owned Systems.
The Partnership's proposed spending plans (including its plans for 1998) are
constantly being reviewed and revised with respect to changes in technology,
acceptable leverage parameters (including those specified in its debt
agreements), franchise requirements, competitive circumstances and other
factors.
As noted in "Business--Overview of the Systems--The Owned Systems," many of
the 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
Systems remain competitive within the industry. For the three-year period ended
December 31, 1997, capital expenditures for line extensions, rebuilds and
upgrades, and new equipment for the Partnership totaled approximately $171.2
million, with approximately $88 million of these capital expenditures being
attributable to upgrading and rebuilding existing distribution plant.
The Partnership postponed a number of rebuild and upgrade projects that were
planned for 1994 and 1995 because of the uncertainty related to implementation
of the 1992 Cable Act and the impact thereof on the Partnership's business and
access to capital. As a result, even after giving effect to certain upgrades and
rebuilds that were started or completed in 1996 and 1997, the Partnership's
Systems are significantly less technically advanced than had been expected prior
to the implementation of re-regulation. The Partnership believes that the delays
in upgrading many of its Systems will, under present market conditions, most
likely have an adverse effect on the value of the Systems compared to systems
that have been rebuilt to a higher technical standard. The Partnership's
management has selected a technical standard that incorporates a fiber-to-the
feeder architecture for the majority of its Systems that are to be rebuilt. A
system built with this type of architecture can provide for future channels of
analog video service. Such a system will also permit the introduction of
high-speed data transmission and telephony services in the future after
incurring incremental capital expenditures related to these services, as well as
new digital services. The Partnership is also evaluating the use of digital
compression technology in its Systems. See "Business--Technological
Developments" and "--Digital Compression."
The Partnership's future capital expenditure plans are, however, all subject
to the availability of adequate capital on terms satisfactory to the
Partnership, as to which there can be no assurances. The Partnership plans to
finance capital expenditures with cash flow from operations and borrowings under
the existing and any future credit facilities. Subject to the Partnership's
ability to remain in compliance with certain covenants of its debt, the
Partnership presently intends to spend approximately $101 million for capital
expenditures in 1998.
As discussed in Note 3 to the consolidated financial statements, on July 12,
1996 the Partnership amended its principal credit facility with a $775 million
Amended and Restated Credit Agreement (the "Amended and Restated Credit
Agreement") in order to finance the $247.4 million acquisition of the assets of
FCSC, pay transaction and financing costs of approximately $5.6 million and
prepay $28.6 million of subordinated debt. The Amended and Restated Credit
Agreement provides for maximum available borrowings of $774 million at December
31, 1997, reducing to $185 million at December 31, 2004. As of
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December 31, 1997, the amount outstanding under the Amended and Restated Credit
Agreement was $606 million and, subject to complying with covenants, the
Partnership had available to it additional borrowings thereunder of
approximately $38.3 million. On a proforma basis to reflect the March 1998
acquisition of substantially all of the Falcon Classic systems, the amount
outstanding would have been $682.8 million and the Partnership would have had
available to it additional borrowings of approximately $20.2 million. The
Amended and Restated Credit Agreement requires that interest be tied to the
ratio of consolidated total debt to consolidated annualized cash flow (in each
case, as defined therein), and further requires that the Partnership maintain
hedging arrangements with respect to at least 50% of the outstanding borrowings
thereunder. As of December 31, 1997, borrowings under the Amended and Restated
Credit Agreement bore interest at an average rate of 7.69% (including the effect
of interest rate hedging agreements). The Partnership has entered into fixed
interest rate hedging agreements with an aggregate notional amount at December
31, 1997 of $560 million. Agreements in effect at December 31, 1997 totaled $520
million, with the remaining $40 million to become effective as certain of the
existing contracts mature during 1998. The agreements serve as a hedge against
interest rate fluctuations associated with the Partnership's variable rate debt.
These agreements expire through July 2001. In addition to these agreements the
Partnership has one interest rate swap contract with a notional amount of $25
million under which it pays variable LIBOR rates and receives fixed rate
payments, and one $25 million interest rate cap contract under which the
Partnership pays variable Libor rates, subject to a cap of 5.49%. In The Amended
and Restated Credit Agreement also contains various restrictions relating to,
among other things, mergers and acquisitions, a change in control and the
incurrence of additional indebtedness and also requires compliance with certain
financial covenants. The Partnership's management believes that it was in
compliance with all such requirements as of December 31, 1997.
On March 29, 1993, the Partnership issued $175 million aggregate principal
amount of its 11% Senior Subordinated Notes (the "Notes") in connection with the
Partnership's formation. As a result of payment-in-kind interest payments under
the Notes, the aggregate principal of the Notes outstanding as of December 31,
1997 had increased to $282.2 million. Future interest payments are permitted to
be paid in kind until the year 2000, when cash payment is required. However the
Partnership, as permitted by the terms of the Indenture, has elected to begin to
pay interest payments in cash beginning with the payment due March 15, 1998.
This election required an amendment to the Amended and Restated Credit
Agreement, which had prohibited cash interest payments on the Notes until
September 30, 2000. The Notes also contain various restrictions relating to,
among other things, mergers and acquisitions, a change in control and the
incurrence of additional indebtedness. The incurrence of additional indebtedness
test limits the ratio of the total debt of the Partnership to Operating Cash
Flow (as defined in the indenture) to 7.5 to 1 if such indebtedness is incurred
through December 31, 1999 and to 6.5 to 1 thereafter.
The Partnership is presently pursuing a private placement of $500 million
gross proceeds of Debentures. The net proceeds of the Offering are to be used to
repay certain outstanding indebtedness, including all outstanding Notes. The
offering is being made in a private placement only to certain specified
qualified institutional buyers, non-United States persons and a limited number
of accredited institutional investors. Such offering will only be made by
confidential offering memorandum delivered to specified qualified investors.
There can be no assurance that such placement will be successfully completed.
The Partnership is also negotiating a new Bank Credit Agreement which would
replace the Amended and Restated Credit Agreement and provide funds for the
closing of the TCI Transaction. There can be no assurance that the Partnership
will be able to negotiate a new Bank Credit Facility on acceptable terms.
At the closing of the TCI Transaction, New Falcon will assume the rights and
obligations of FHGLP under the indenture for any of the Notes then outstanding,
if any, and will be substituted for FHGLP as the obligor under the Notes. In
addition, New Falcon will assume certain other indebtedness of FHGLP and TCI,
including amounts outstanding under the Amended and Restated Credit Agreement.
The TCI Transaction is conditioned upon New Falcon's obtaining new financing in
an amount sufficient to pay off
8
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the indebtedness under the Amended and Restated Bank Agreement and the other
indebtedness to be assumed by New Falcon as a result of the TCI Transaction.
The Contribution Agreement provides that immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to New Falcon II, subject to certain indebtedness to be
assumed by New Falcon II, including the Notes and the New Credit Facility. Thus,
New Falcon II will be substituted for New Falcon as the obligor under the Notes
and the New Credit Facility. Any of the Notes then outstanding will be redeemed
in full by New Falcon II prior to October 1998 in accordance with the redemption
provisions of the indenture if the related financings described herein are
completed and the TCI Transaction is consummated. The Partnership has received
the necessary approvals from its senior lenders to effect such redemption. The
Notes are redeemable at the option of the obligor, in whole or in part, at any
time on or after September 15, 1998, at 105.5% of the outstanding principal
amount, plus accrued interest to the redemption date.
In connection with the decision to make interest payments on the Notes in
cash and the anticipated redemption of the Notes, the Partnership entered into
various interest rate swap agreements with three banks on February 10, 1998 in
order to reduce the interest cost. The agreements call for the Partnership to
receive payments at 11%; and to make payments at 7.625% for the period September
16, 1997 through September 15, 1998 on a notional principal amount of $282.2
million. The contracts further call for the Partnership to pay at a fixed rate
of 7.625% and receive interest at variable LIBOR--based rates for the period
September 16, 1998 through September 15, 2003 on a notional principal amount of
$297.7 million.
As discussed in Item 1., "Business--Other Investments," on June 6, 1997, the
Partnership and Enstar formed EFC. On September 30, 1997, EFC obtained a secured
bank facility with $35 million of availability from two agent banks in order to
obtain funds that would be loaned to certain Enstar Limited Partnerships. The
lenders advanced $7.5 million to EFC, which in turn advanced those funds to a
number of Enstar Limited Partnerships at closing. The EFC bank facility is
non-recourse to the Partnership and matures on August 31, 2001 at which time all
funds previously advanced will be due in full.
Beginning in August 1997, the General Partner elected to self-insure the
Partnership's cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to the geographical
diversification of the Partnership's asset base and due to significant increases
in the cost of insurance coverage and decreases in the amount of insurance
coverage available. The Partnership continues to purchase insurance coverage in
amounts its management views as appropriate for all other property, liability,
automobile, workers' compensation and other types of insurable risks.
The Partnership (I.E., FHGLP) is a separate, stand-alone holding company
which employs all of the management personnel. Prior to October 1995, the
Partnership conducted certain international investment and development
activities. In October 1995, the Partnership sold certain of its international
investments to FIC for approximately $6.3 million. The Partnership was
reimbursed $1.9 and $1.1 million in 1995 and 1996, respectively, for operating
costs related to these investments. The Partnership expects to incur no further
liquidity obligations in respect of international investments, although the
amount of reimbursement FHGLP receives from FIC with respect to the salaries of
certain of its employees has been significantly reduced for 1997. All of the
Owned Systems are owned by subsidiaries of the Partnership. Accordingly, the
Partnership is financially dependent on the receipt of permitted payments from
the Owned Systems, management and consulting fees from domestic cable ventures,
and the reimbursement of specified expenses by certain of the Affiliated Systems
to fund its operations. Expected increases in the funding requirements of the
Partnership combined with limitations on its sources of cash may create
liquidity issues for the Partnership in the future. Specifically, the former
Bank Credit Agreement permitted the Owned Partnerships to remit to FHGLP no more
than 3.75% of their net cable revenues, as defined, in any year. The Amended and
Restated Credit Agreement increased that amount to 4.25% effective July 12,
1996. For the year ended December 31, 1996 the limit was approximately $8.4
million ($3.5 million was actually remitted), and for 1997 the limit was
approximately $10.4 million, with $6.8 million actually remitted. As a
9
<PAGE>
result of the 1998 acquisition of the Falcon Classic systems, the Partnership
will no longer receive management fees and reimbursed expenses from Falcon
Classic. Receivables from the Affiliated Systems for services and reimbursements
described above amounted to approximately $11.3 million at December 31, 1997,
which amount includes $7.5 million of notes receivable from the Enstar Systems.
If the TCI Transaction is consummated as presently structured, of which there
can be no assurance, the management personnel will become employees of New
Falcon, but New Falcon II will be the obligor under the new bank financing and
certain other debt. Consequently, New Falcon will have the same liquidity issues
as outlined above and continue to be dependent on distributions from New Falcon
II, subject to lender restrictions.
The Partnership has historically pursued a strategy of seeking to acquire
attractive acquisition candidates, with an emphasis on the acquisition of
systems which can be integrated with its existing operations. Over the past two
years, the Partnership has emphasized the acquisition of Affiliated Systems due
to its familiarity with these assets and because, in many cases, these assets
were already operationally integrated with Owned Systems located nearby. The
Partnership cannot predict whether it will have access to adequate capital in
the future to make further acquisitions of cable systems. The Partnership
frequently considers opportunities to sell assets that it views as
non-strategic.
Effective as of December 31, 1997, as discussed in Item 1.,
"Business--Recent Developments," FHGLP and certain other parties entered into a
settlement agreement resolving and settling a putative class action lawsuit
relating to the Partnership's acquisition of the Falcon Classic Systems. In
exchange for a complete dismissal of the Lawsuit with prejudice and releases,
and without admitting or conceding any fault, liability or wrongdoing
whatsoever, FHGLP and the other defendants agreed to establish a settlement fund
which, net of agreed-upon insurance proceeds, amounted to $750,000 plus interest
at 10% on the gross settlement amount of $1,250,000 from January 1, 1998 through
closing of the sale as defined in the settlement agreement. The Partnership
estimates the total net amount of the settlement, including its legal fees, will
be approximately $1.0 million. The defendants also agreed to pay interest at 10%
on the projected net sales proceeds of $64 million from January 1, 1998 through
closing of the sale. This aspect increased the sale price of the systems closed
in March 1998 by $1.1 million.
A putative class action complaint has been filed against certain Falcon
Systems in Missouri alleging that the systems' practice of charging a fee to
subscribers whose payments are late constitutes an invalid liquidated damages
provision. Plaintiffs seek recovery of all late fees paid to those systems as a
class purporting to consist of all subscribers in Missouri who were assessed
such fees during the applicable limitations period. Similar lawsuits have been
filed against various other MSOs around the country. Although there can be no
assurances, based in part upon the outcome of other similar lawsuits against
other MSOs, the Company's management does not believe that the disposition of
the Missouri lawsuit will have a material adverse effect on the Company. In
addition, the Company understands that certain of the TCI Systems are involved
with similar lawsuits.
As more fully described in Note 2 to the consolidated financial statements,
the Existing FHGLP Partnership Agreement contains provisions that may require
FHGLP to purchase substantially all of the limited partnership interests in
FHGLP held by its Group I, Group II and Group III limited partners (constituting
approximately 60% of the common equity of FHGLP), at the holders' option.
Certain of these interests are mandatorily redeemable at certain dates. Limited
partnership interests held by the Group IV limited partner become redeemable 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
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
10
<PAGE>
of January 2000 to October 2000, with the Class C partnership interests held by
the Group IV partner becoming mandatorily redeemable in July 2005. If the
Contribution Agreement is terminated prior to December 31, 1998, FHGLP may be
required to redeem certain partnership interests earlier than the dates set
forth above. Subject to certain customary exceptions, the Contribution Agreement
may not be terminated without the consent of FHGLP prior to December 31, 1998.
The purchase price for such partnership interests (other than Class C
partnership interests, which are valued at their liquidation value as determined
in accordance with the Existing FHGLP Partnership Agreement) will generally be
determined through a third party appraisal mechanism, as specified in the
Existing FHGLP Partnership Agreement, at the time such interests are redeemed,
or through negotiation. The estimated purchase price of such non-preferred
partnership interests at December 31, 1997 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 Partnership's debt agreements (including the Amended and Restated Credit
Agreement and the Notes) restrict the Partnership's ability to (i) make
distributions to fund the purchase of these partnership interests pursuant to
the provisions described above, (ii) incur indebtedness or issue debt securities
in connection with such purchase or (iii) sell a substantial amount of its
assets. The obligations of FHGLP to redeem any significant amount of its limited
partnership interests would result in a material liquidity demand on FHGLP, and
there can be no assurance that FHGLP would be able to raise such funds on terms
acceptable to FHGLP, or at all. 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.
The "Year 2000" issue refers to certain contingencies that could result from
computer programs being written using two digits rather than four to define the
year. Many existing computer systems, including certain of the Partnership's
computer systems, process transactions based on two digits for the year of the
transaction (for example, "97" for 1997). These computer systems may not operate
effectively when the last two digits become "00," as will occur on January 1,
2000. The Partnership's management has commenced an assessment of its Year 2000
business risks and its exposure to computer systems, to operating equipment
which is date sensitive and to the interface systems of its vendors and service
providers. Based on a preliminary study, the Partnership's management has
concluded that certain of its information systems were not Year 2000 compliant
and has elected to replace such software and hardware with Year 2000 compliant
applications and equipment, although the decision to replace major portions of
such software and hardware had previously been made without regard to the Year
2000 issue based on operating and performance criteria. Replacement costs will
be capitalized in accordance with generally accepted accounting principles and
amortized over the lives of the assets. Maintenance costs will be expensed as
incurred. The Partnership's management expects to install substantially all of
the new systems in 1998, with the remaining systems to be installed in the first
half of 1999. The total anticipated cost, including replacement software and
hardware, is expected to be approximately $1.5 million.
In addition to evaluating internal systems, the Partnership's management is
currently assessing its exposure to risks associated with its operating and
revenue generating equipment and has also initiated communications with its
significant third party vendors and service suppliers to determine the extent to
which the Partnership's interface systems are vulnerable should those third
parties fail to solve their own Year 2000 problems on a timely basis. The
Partnership's management 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 Partnership's systems
rely will be timely converted and that the failure to do so would not have an
adverse impact on the Partnership's systems. The Partnership continues to
closely monitor developments with its vendors and service suppliers.
11
<PAGE>
The following table sets forth, on a historical basis, for the periods
indicated, certain items from the Consolidated Statements of Cash Flows of the
Partnership:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities:
Net loss................................................... $ (25,235) $ (49,985) $ (60,838)
Payment-in-kind interest expense........................... 27,127 26,580 20,444
Depreciation and amortization.............................. 54,386 100,415 118,856
Gain on sale of securities................................. (13,267) (2,264) --
Other...................................................... 151 15,885 (1,075)
--------- --------- ---------
$ 43,162 $ 90,631 $ 79,537
--------- --------- ---------
--------- --------- ---------
Net cash used in investing activities:
Capital expenditures....................................... $ (37,149) $ (57,668) $ (76,323)
Sale of available-for-sale securities...................... 13,487 9,502 --
Acquisitions of cable television systems, net of cash...... 2,655 (247,397) --
Proceeds from sale of cable systems........................ -- 15,000 --
Other...................................................... (1,667) (3,684) 36
--------- --------- ---------
$ (22,674) $(284,247) $ (76,287)
--------- --------- ---------
--------- --------- ---------
Net cash provided by (used in) financing activities:
Net borrowings, (repayments)............................... $ (9,866) $ 191,022 $ (3,222)
Capital contributions...................................... -- 5,000 93
Deferred loan costs........................................ (6,320) (3,823) (29)
Other...................................................... 280 -- 192
--------- --------- ---------
$ (15,906) $ 192,199 $ (2,966)
--------- --------- ---------
--------- --------- ---------
</TABLE>
1997 COMPARED TO 1996 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) decreased from $90.6 million to $79.5 million, or by
12.3%, for the year ended December 31, 1997 compared to the corresponding period
in 1996. The $11.1 million decrease resulted primarily from a net decrease of $5
million in other operating items (changes in receivables, cable materials and
supplies, payables, accrued expenses and subscriber deposits and prepayments)
and a $6.1 million decrease in payment-in-kind interest expense related to the
Notes.
Cash used in investing activities decreased from $284.2 million to $76.3
million, or by 73.2%, for the year ended December 31, 1997 compared to the
corresponding period in 1996. The decrease was primarily due to the 1996
acquisition of FCSC's cable assets for $247.4 million, partially offset by an
increase in capital expenditures of $18.7 million. Additionally, 1996 included
cash proceeds from the sale of a system and net proceeds received by the
Partnership upon the 1996 sale of its shares in Comcast UK.
Cash from financing activities decreased from cash provided of $192.2
million for the year ended December 31, 1996 to a use of cash of $3 million in
1997. The change was due primarily to decreased borrowing activity in 1997.
1996 COMPARED TO 1995 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) increased from $43.2 million to $90.6 million or by
109.7%, for the year ended December 31, 1996 compared to the corresponding
period in 1995. The $47.4 million increase resulted primarily from a net
12
<PAGE>
increase of $47.9 million of cash provided or used by other operating items
(changes in receivables, cable materials and supplies, payables, accrued
expenses and subscriber deposits and prepayments).
Cash used in investing activities increased from $22.7 million to $284.2
million, or by 1,152.0%, for the year ended December 31, 1996 compared to the
corresponding period in 1995. The change was due primarily to the $247.4 million
acquisition on July 12, 1996 of the FCSC assets, and an increase in capital
expenditures of $20.5 million. These increases were partially offset by $15
million of cash provided in 1996 in connection with the sale of a system an by
$4 million less proceeds from the sale of securities.
Cash flows from financing activities increased from a use of cash of $15.9
million for the year ended December 31, 1995 to cash provided of $192.2 million
in 1996, or a change of $208.1 million. The change was due primarily to
increased borrowings in 1996.
INFLATION
Certain of the Partnership's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation. However, the Partnership does not believe that its financial
results have been, or will be, adversely affected by inflation in a material
way, provided that it is able to increase its service rates periodically, of
which there can be no assurance, due to the re-regulation of rates charged for
certain cable services. See "Legislation and Regulation."
RECENT ACCOUNTING PRONOUNCEMENTS
The Partnership 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
Partnership's management currently believes that the impact of such standards
will not have a material impact on the Partnership's financial position and
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and related financial information required to be
filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements and Schedules on page F-1.
2. Financial Statement Schedules
Reference is made to the Index to Financial Statements and Schedules on page F-1.
3. Exhibits
Reference is made to the Index to Exhibits on Page E-1.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated December 30, 1997 reporting under Item 5 its
execution of a Contribution and Purchase Agreement with Falcon Communications,
L.P., TCI Falcon Holdings, LLC, and certain other persons.
</TABLE>
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997................................................ F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1997................................................................................................... F-4
Consolidated Statements of Partners' Deficit for each of the three years in the period ended December 31,
1997................................................................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1997................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Schedule II--Valuation and Qualifying Accounts........................................................... F-33
</TABLE>
All other schedules have been omitted because they are either not required,
not applicable or the information has otherwise been supplied.
F-1
<PAGE>
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. Our audits also
included the financial statement schedule listed in the index at Item 14(a)2.
These consolidated financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
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 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>
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
F-10
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
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 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
F-11
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
period beginning on December 1, 1997 and ending ninety days after the earlier of
December 31, 1998 or the date that the Contribution Agreement is terminated in
accordance with its terms. As a result, assuming that the TCI Transaction has
not closed and the Contribution Agreement is not terminated prior to December
31, 1998, the tolling period will be approximately sixteen months and the
Partnership would not be required to purchase the partnership interests held by
the Group I, Group II and Group III partners until the period of January 2000 to
October 2000, with the Class C partnership interests held by the Group IV
partner not becoming mandatorily redeemable until July 2005. If the Contribution
Agreement is terminated prior to December 31, 1998, these new dates would be
pushed forward accordingly and FHGLP may be required to redeem certain
partnership interests earlier than the dates set forth above. Subject to certain
customary exceptions, the Contribution Agreement may not be terminated without
the consent of FHGLP prior to December 31, 1998.
Upon completion of the TCI Transaction, the existing liquidity rights will
be terminated and be replaced by certain new liquidity rights provided to the
non-management limited partners in the new FHGLP Partnership Agreement.
TCI TRANSACTION
On December 30, 1997 FHGLP entered into a Contribution and Purchase
Agreement (as it may be amended, the "Contribution Agreement") with Falcon
Communications, L.P., a California limited partnership ("New Falcon"), TCI
Falcon Holdings, LLC, a Delaware limited liability company ("TCI"), an affiliate
of Tele-Communications, Inc., the existing partners of FHGLP and certain other
persons (the transactions contemplated by the Contribution Agreement being
referred to collectively as the "TCI Transaction"). The parties to the
Contribution Agreement have agreed to consolidate under the ownership and
control of New Falcon substantially all of the Systems and all of the TCI
systems. The Systems to be contributed to New Falcon include the Systems owned
by Falcon Video Communications, L.P. ("Falcon Video"), an Affiliated
Partnership, which had revenues of $32.1 million for the year ended December 31,
1997. The contributed Systems will represent all of the Owned Systems and all of
the Affiliated Systems currently under the control of FHGLP except for the
Enstar Systems. The TCI systems will be contributed to New Falcon subject to
$429.7 million of existing debt, which will be refinanced. The TCI systems,
which had revenues of $119.5 million for the year ended December 31, 1997, are
located in California, Oregon, Washington, Missouri and Alabama. Following
completion of the TCI Transaction (the "Closing"), the TCI systems will be
consolidated into and operated by the Owned Subsidiaries of the Partnership.
New Falcon was organized as a California limited partnership in October
1997. Concurrently with the execution of the Contribution Agreement, FHGLP and
TCI entered into an Amended and Restated Agreement of Limited Partnership of New
Falcon (the "New Falcon Partnership Agreement"). FHGLP will own, subject to
possible adjustment pursuant to the Contribution Agreement, approximately 53% of
the equity of New Falcon and will serve as the managing general partner of New
Falcon. TCI will own, subject to possible adjustment pursuant to the
Contribution Agreement, approximately 47% of the equity of New Falcon (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.
F-12
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
As a result of the TCI Transaction, it is contemplated that New Falcon will
initially assume (subject to a subsequent assumption by New Falcon II, as
described below) the rights and obligations of FHGLP under the indenture (the
"Indenture") governing FHGLP's 11% Senior Subordinated Notes due 2003 (the
"Notes"). Accordingly, New Falcon will be substituted for FHGLP as an obligor
under the Notes (subject to such subsequent assumption by New Falcon II). As of
December 31, 1997, the aggregate principal amount of the Notes outstanding was
$282.2 million. In addition, New Falcon will assume certain other indebtedness
of FHGLP and TCI. The TCI Transaction is conditioned upon New Falcon's obtaining
new financing in an amount sufficient to refinance its then existing
indebtedness to be assumed by New Falcon as a result of the TCI Transaction.
The Contribution Agreement provides that immediately following the
consummation of the TCI Transaction, New Falcon will contribute substantially
all of its assets to Falcon Communications, LLC, a newly-formed limited
liability company wholly-owned by New Falcon ("New Falcon II"), subject to
certain indebtedness to be assumed by New Falcon II, including the Notes and the
indebtedness resulting from New Falcon's new financing. Thus, New Falcon II will
be substituted for New Falcon as the obligor under the Notes (which the
Partnership expects to repurchase or redeem prior to October 15, 1998--See Note
7) and the new financing. Any of the Notes then outstanding (see Note 7) will be
redeemed in full by FHGLP (or New Falcon II if the TCI Transaction has closed)
prior to October 15, 1998 in accordance with the redemption provisions of the
Indenture. Although there can be no assurances, the Partnership expects that it
will receive the necessary approvals from its senior lenders to effect such
redemption. The Notes are redeemable at the option of the obligor, in whole or
in part, at any time on or after September 15, 1998, at 105.5% of the
outstanding principal amount, plus accrued interest to the redemption date.
As part of the TCI Transaction, FHGLP will redeem a specified portion of the
partnership interests in FHGLP currently held by certain of the non-management
limited partners of FHGLP (the "Redeemed Partners") in exchange for a portion of
FHGLP's limited partnership interest in New Falcon (the "New Falcon Interests").
Following the redemption, TCI will purchase the New Falcon Interests from the
Redeemed Partners for cash in the approximate aggregate amount of $154.7
million.
The consummation of the TCI Transaction is also subject to, among other
things, the satisfaction of customary closing conditions and the receipt of
certain third-party or governmental approvals, including the consent of
franchising authorities. Although there can be no assurance that such closing
conditions will be satisfied, that the Partnership will be able to obtain new
financing on acceptable terms or that the TCI Transaction will be consummated,
management presently anticipates that the TCI Transaction will be completed in
the third quarter of 1998.
THE AMENDED PARTNERSHIP AGREEMENT OF FHGLP
Concurrently with the closing of the TCI Transaction, the existing partners
of the Partnership will enter into a Fourth Amended and Restated Agreement of
Limited Partnership of Falcon Holding Group, L.P. (the "New FHGLP Partnership
Agreement"), and two additional persons will be admitted to the Partnership as
limited partners (by virtue of their contribution to the Partnership at the
closing of their interests in Falcon Video). FHGI will remain the general
partner of the Partnership.
The New FHGLP Partnership Agreement will substantially alter the rights and
preferences of the partnership interests held by the Group I, Group II, Group
III and Group IV limited partners. Among other changes, the New FHGLP
Partnership Agreement will (1) provide for only one class of limited
F-13
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- PARTNERSHIP MATTERS (CONTINUED)
partnership interests; (2) eliminate the existing repurchase/put and conversion
rights that currently apply to the partnership interests held by the Group I,
Group II, Group III and Group IV limited partners and substitute a right of
certain partners under certain circumstances to require that the Partnership or
New Falcon purchase their interests and a right of the Partnership or New Falcon
to purchase those interests; and (3) substantially alter the existing
partnership governance provisions, including eliminating the Board of
Representatives and substantially reducing the scope of partnership matters that
require limited partnership approval and the percentage-in-interest required for
such approval.
The New FHGLP Partnership Agreement will also alter the allocation and
distribution preferences that currently exist. Profits and losses will be
allocated, and distributions will be made, in proportion to the partners'
percentage interests, except that following a dissolution of the Partnership,
distributions will be made first, to the two holders of certain interests which
are entitled to the Preferred Return (the "Preferred Interests") until such
partners have received the Preferred Return; second, to all other partners
(excluding the holders of the Preferred Interests) until all partners (including
the holders of the Preferred Interests) have received distributions in
proportion to their percentage interests; thereafter, to all partners (including
the holders of the Preferred Interests) in proportion to their percentage
interests. "Preferred Return" will equal $6 million, plus a 10% return from the
date of the closing of the TCI Transaction.
Prior to closing, the Partnership intends to amend its existing Incentive
Plan to provide for payments by the Partnership at closing to Participants (as
defined under the Plan) in an aggregate amount of approximately $6.6 million and
to reduce by such amount the Partnership's obligations to make future payments
to Participants under the Plan. At closing, New Falcon will assume the
obligations of the Partnership under the Incentive Plan, as so amended, other
than the obligation to make payments at closing. Other than additional
contributions by the General Partner in the amount of payments made by New
Falcon under the Incentive Plan, the partners will not be required to make any
additional capital contributions to the Partnership.
The Partnership is the managing general partner and a limited partner of New
Falcon, and TCI will be a general partner of New Falcon. Other than with respect
to certain partnership matters that require the approval of New Falcon's
Advisory Committee and certain additional partnership matters that require the
approval of TCI, the Partnership has the exclusive authority to manage the
business and operations of New Falcon.
The Amended and Restated Agreement of Limited Partnership of New Falcon
generally provides that profits and losses will be allocated, and distributions
will be made, in proportion to the partners' percentage interests. Other than
the contributions contemplated by the Contribution Agreement and certain
additional contributions that may be required by the Partnership in connection
with payments by New Falcon under the Incentive Plan, neither the Partnership
nor TCI will be required to make any additional capital contributions to New
Falcon.
NOTE 3 -- ACQUISITIONS AND SALES
FALCON FIRST
Falcon First, through wholly-owned subsidiaries, owns cable television
systems in Georgia, Alabama, Mississippi and New York. Prior to the acquisition
of Falcon First on December 28, 1995, the Partnership had managed the Falcon
First Systems for a fee and held an indirect, minority interest in its former
parent
F-14
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
company, Falcon First Communications, L.P. ("FFCLP"). As a result of the
acquisition, the Falcon First Systems became Owned Systems; previously they were
Affiliated Systems.
The holders of the direct and indirect partnership interests in FFCLP,
excluding the Partnership's affiliates, received newly issued partnership
interests (Class B partnership interests) in the Partnership. In addition,
certain holders of subordinated notes of FFCLP, through a newly-established
holding company, received Class C partnership interests in the Partnership. The
Class C partnership interests are entitled to a stated preference on liquidation
and are mandatorily redeemable in 2004, subject to certain liquidity sharing
rights. As of the closing of the Falcon First acquisition, the Class C
partnership interests were entitled to an aggregate liquidation preference of
approximately $51.4 million. See Note 2.
FALCON CABLE SYSTEMS COMPANY
The Systems of FCSC, acquired through a newly-formed subsidiary operating
partnership on July 12, 1996, serve customers in California and Oregon and were
previously managed by the Partnership as Affiliated Systems. As a result of the
acquisition, the FCSC Systems became Owned Systems.
The assets were acquired at a price determined by an appraisal process
defined in the FCSC partnership agreement. Various legal challenges have been
filed and are pending regarding the appraisal valuations. See Note 8.
The acquisitions of Falcon First and FCSC were accounted for by the purchase
method of accounting, whereby the purchase price of Falcon First was allocated
to the assets and liabilities assumed based on the estimated fair values at the
date of acquisition, and the purchase price of the FCSC assets was allocated
based on an appraisal, as follows:
<TABLE>
<CAPTION>
FALCON
FIRST FCSC
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PURCHASE PRICE:
Class B partnership interests issued................................. $ 9,895 $ --
Class C partnership interests issued................................. 51,373 --
Debt assumed......................................................... 120,621 --
Other liabilities assumed............................................ 3,274 --
Transaction costs.................................................... 5,278 5,625
Asset purchase price determined by appraisal......................... -- 247,397
----------- ----------
190,441 253,022
----------- ----------
FAIR MARKET VALUE OF ASSETS AND LIABILITIES ACQUIRED:
Property, plant and equipment........................................ 33,992 81,941
Franchise costs...................................................... 88,003 69,936
Customer lists and other intangible assets........................... 3,411 75,840
Other assets......................................................... 5,705 7,060
Deferred taxes related to step-up of intangible assets............... 9,048 --
----------- ----------
140,159 234,777
----------- ----------
Excess of Purchase Price over Fair Value of Assets and Liabilities
Acquired......................................................... $ 50,282 $ 18,245
----------- ----------
----------- ----------
</TABLE>
F-15
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
The excess of purchase price over the fair value of net assets acquired has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
The Class B partnership interests issued in the Falcon First transaction
were valued in proportion to the Partnership's estimated fair value, which was
agreed upon by all holders of Partnership interests in the Third Amended and
Restated Partnership Agreement, which became effective December 28, 1995. See
Note 2.
The Class C partnership interests were valued at current stated liquidation
value which was equivalent to the unpaid amounts due on the subordinated notes
of FCC.
In connection with the Falcon First transaction, the Partnership entered
into a $435 million Senior Secured Reducing Revolver (the "Bank Credit
Agreement") in order to refinance its existing indebtedness and Falcon First's
existing indebtedness, repay other notes, fund capital expenditures and provide
for general liquidity requirements. On July 12, 1996, in connection with the
acquisition of the FCSC assets, the Partnership further amended the terms of the
Bank Credit Agreement and increased the available borrowings to $775 million
(the "Amended and Restated Credit Agreement") in order to acquire the FCSC
assets, repay other notes, pay transaction and financing costs, and provide
future working capital. See Note 7.
Sources and uses of funds for each of the transactions were as follows:
<TABLE>
<CAPTION>
FALCON
FIRST FCSC
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SOURCES OF FUNDS
Cash in Owned Systems................................................ $ 5,325 $ 7,757
Advance under bank credit facilities................................. 379,000 616,500
----------- ----------
Total sources of funds............................................. $ 384,325 $ 624,257
----------- ----------
----------- ----------
USES OF FUNDS
Repay existing bank debt of the Partnership and of First, including
accrued interest................................................... $ 376,611 $ 370,285
Purchase price of FCSC assets........................................ -- 247,397
Transaction fees and expenses........................................ 5,278 5,625
Available funds...................................................... 2,436 950
----------- ----------
Total uses of funds................................................ $ 384,325 $ 624,257
----------- ----------
----------- ----------
</TABLE>
The following unaudited condensed consolidated pro forma statements of
operations present the consolidated results of operations of the Partnership as
if the acquisitions had occurred at the beginning of the
F-16
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES (CONTINUED)
periods presented and are not necessarily indicative of what would have occurred
had the acquisitions been made as of those dates or of results which may occur
in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues.............................................................. $ 231,498 $ 244,905
Expenses.............................................................. 230,913 237,956
---------- ----------
Operating income.................................................... 585 6,949
Other expenses........................................................ 74,554 82,728
---------- ----------
Loss before income tax benefits..................................... (73,969) (75,779)
Income tax benefit.................................................... 5,994 1,122
---------- ----------
Net loss.............................................................. $ (67,975) $ (74,657)
---------- ----------
---------- ----------
</TABLE>
On July 1, 1996, the Partnership sold certain of the Falcon First assets for
$15 million, the proceeds being used to temporarily repay outstanding debt under
the former Bank Credit Agreement. The cable assets sold 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:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short maturity of
those instruments.
NOTES PAYABLE
The fair value of the Partnership's subordinated notes payable is based on
quoted market prices for similar issues of debt with similar remaining
maturities. The carrying amount of the Partnership's remaining debt outstanding
approximates fair value due to its variable rate nature.
INTEREST RATE HEDGING AGREEMENTS
The fair value of interest rate hedging agreements is estimated by obtaining
quotes from brokers as to the amount either party would be required to pay or
receive in order to terminate the agreement.
F-17
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table depicts the fair value of each class of financial
instruments for which it is practicable to estimate that value as of December
31:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
CARRYING CARRYING
VALUE(1) FAIR VALUE VALUE(1) FAIR VALUE
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................................ $ 13,633 $ 13,633 $ 13,917 $ 13,917
Notes Payable (Note 7):
11% Senior subordinated notes(2)............................... 253,537 225,648 282,193 299,125
Amended and Restated Bank Credit Agreement(3).................. 616,000 616,000 606,000 606,000
Other subordinated notes(2).................................... 15,000 16,266 15,000 16,202
Capitalized lease obligations.................................. 141 141 10 10
Other.......................................................... 1,108 1,108 8,018 8,018
----------- ---------- ----------- ----------
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT(4) VALUE(5) AMOUNT(4) VALUE(5)
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Rate Hedging Agreements (Note 7):
Interest rate swaps............................................ $ 690,000 $ 79 $ 585,000 $ (371)
Interest rate caps............................................. 70,000 (305) 25,000 (148)
</TABLE>
The carrying value of interest rate swaps and caps was $865,000 and $402,000
at December 31, 1996 and 1997, respectively. See Note 7(e).
- ------------------------
(1) Carrying amounts represent cost basis.
(2) Determined based on quoted market prices of individual trades for those or
similar notes. Accordingly, no inference may be drawn that such valuation
would apply to the entire issue.
(3) Due to the variable rate nature of the indebtedness, the fair value is
assumed to approximate the carrying value.
(4) The amount of debt on which current interest expense has been affected is
$495 million and $520 million for swaps and $45 million and $25 million for
caps, respectively, at December 31, 1996 and 1997. The balance of the
contract totals presented above reflect contracts entered into as of
December 31 which do not become effective until 1998, at which time
effective contracts expire.
(5) The amount that the Partnership estimates it would receive (pay) to
terminate the hedging agreements. This amount is not recognized in the
consolidated financial statements.
NOTE 5 -- INVESTMENTS IN AFFILIATED PARTNERSHIPS
FHGLP is the general partner of the Affiliated Partnerships shown below.
FHGLP's effective ownership interest in the respective Affiliated Partnerships
is less than one percent. FHGLP's investment in net losses in excess of equity
of the Affiliated Partnerships was approximately $3.2 million at December 31,
1996 and 1997. FHGLP has the right, under certain circumstances, to acquire the
assets of certain of the Affiliated Partnerships. See Notes 2 and 12.
F-18
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INVESTMENTS IN AFFILIATED PARTNERSHIPS (CONTINUED)
Investments in affiliated partnerships include:
Falcon Classic Cable Investors, L.P., general partner of Falcon Classic
Cable Income Properties, L.P. ("Falcon Classic" or "Classic").
Falcon Video Communications Investors, L.P., general partner of Falcon
Video.
Enstar Partnerships, 15 limited partnerships of which ECC is the
corporate general partner.
Falcon Cable Investors Group, L.P., general partner of FCSC (through July
11, 1996 only. See Note 3).
Falcon First Investors, L.P., general partner of Falcon First
Communications, L.P. (through December 28, 1995 only. See Note 3).
Investments in these partnerships are accounted for on the equity method of
accounting. Equity in net losses are recorded to the extent of FHGLP's
obligations as the general partner of the partnerships, except when the
Partnership, as general partner or through subsidiaries, has guaranteed
obligations of the partnerships.
Summarized financial information of these partnerships is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT PERIOD END
Total assets............................................. $ 333,422 $ 216,352 $ 203,885
Total liabilities........................................ 367,383 178,448 171,607
Partners' equity (deficit)............................... (33,961) 37,904 32,278
FOR THE PERIOD
Revenues................................................. $ 164,671 $ 116,241 $ 92,613
Depreciation and amortization............................ 70,994 41,363 32,506
Operating income......................................... 4,460 13,117 9,266
Net loss................................................. (36,648) (7,658) (3,678)
</TABLE>
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cable television systems................................................................ $ 500,697 $ 555,253
Furniture and equipment................................................................. 17,915 19,067
Vehicles................................................................................ 10,861 12,067
Land, buildings and improvements........................................................ 10,575 10,723
----------- -----------
540,048 597,110
Less accumulated depreciation and amortization.......................................... (230,920) (272,551)
----------- -----------
$ 309,128 $ 324,559
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FHGLP Only:
11% Senior Subordinated Notes(a)........................................................ $ 253,537 $ 282,193
Capitalized lease obligations........................................................... 141 10
Owned Subsidiaries:
Amended and Restated Credit Agreement(b)................................................ 616,000 606,000
Other Subordinated Notes(c)............................................................. 15,000 15,000
Other(d)................................................................................ 1,108 8,018
---------- ----------
$ 885,786 $ 911,221
---------- ----------
---------- ----------
</TABLE>
(A) 11% SENIOR SUBORDINATED NOTES
On March 29, 1993, FHGLP issued $175 million aggregate principal amount of
11% Senior Subordinated Notes due 2003. Interest payment dates are semi-annual
on each March 15 and September 15 commencing September 15, 1993. Through
September 15, 2000 FHGLP, at its option, may pay all or any portion of accrued
interest on the Notes by delivering to the holders thereof, in lieu of cash,
additional Notes having an aggregate principal amount equal to the amount of
accrued interest not paid in cash. Through December 31, 1997, the Partnership
has elected to issue $107.2 million additional notes as payment-in kind for
interest. The Partnership has elected to pay the interest payment due March 15,
1998 in cash, and under the terms of the Notes is required to continue to make
cash payments. The Partnership obtained an amendment to the Amended and Restated
Credit Agreement to permit payment of interest on the Notes in cash. The Notes
represent unsecured general obligations of FHGLP, subordinated in right of
payment to all senior indebtedness of FHGLP in the manner and to the extent set
forth in the Indenture governing the Notes. In addition, the Notes are
effectively subordinated to the claims of creditors of FHGLP's subsidiaries,
including the Owned Partnerships. The Indenture contains, among others,
covenants with respect to: (i) the incurrence of additional indebtedness, (ii)
the making of investments, (iii) the making of restricted payments (as defined
therein), (iv) transactions with affiliates, (v) asset sales (as defined) and
(vi) mergers, consolidations and sales of substantially all assets. The
Indenture's limitation on the incurrence of additional indebtedness limits the
ratio of the total debt of the Partnership to Operating Cash Flow (as defined in
the Indenture) to 7.5 to 1 if such indebtedness is incurred through December 31,
1999 and to 6.5 to 1 thereafter. Management believes that the Partnership was in
compliance with such covenants as of December 31, 1997.
The Notes are redeemable at the option of the Partnership, in whole or in
part, at any time on or after September 15, 1998, initially at 105.5% of the
outstanding principal amount, plus accrued interest, to the redemption date.
The Partnership is presently pursuing a sale of $300 million of Senior
Debentures due 2010 and of $200 million gross proceeds of Senior Discount
Debentures due 2010 (collectively the "Senior Debentures"). If the Partnership
is successful in selling the Senior Debentures, of which there can be no
assurance, the net proceeds would be used to temporarily repay debt outstanding
under the Amended and Restated Credit Agreement, and the Partnership would
commence a tender offer for the Notes shortly thereafter.
F-20
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
(B) AMENDED AND RESTATED CREDIT AGREEMENT
The Partnership has a $775 million senior secured Amended and Restated
Credit Agreement that matures on July 11, 2005 (see Note 3). The Amended and
Restated Credit Agreement requires the Partnership to make annual reductions of
$1.0 million on the Term Loan commencing December 31, 1997 and requires the
Partnership to make quarterly reductions on the Reducing Revolver commencing
March 31, 1999. Maximum available borrowings under the Amended and Restated
Credit Agreement are $774 million at December 31, 1997 reducing to $185 million
at December 31, 2004. The Amended and Restated Credit Agreement also includes a
$75 million Acquisition Facility that the Partnership may, prior to December 31,
1998, request the Lenders to fund for the sole purpose of acquiring other
businesses or assets and paying the applicable costs of such transactions,
subject to certain terms and conditions. If any borrowings are advanced under
this facility, quarterly repayments shall commence March 31, 1999 or later,
(based on the amounts outstanding under the Reducing Revolver and Term Loan) and
will not have a maturity date earlier than July 11, 2005. The Amended and
Restated Credit Agreement requires interest on the amount outstanding under the
Reducing Revolver to be tied to the ratio of consolidated total debt (as
defined) to consolidated annualized cash flow (as defined). Interest rates are
based on LIBOR or prime rates at the option of the Partnership. The LIBOR margin
under the Reducing Revolver ranges from 0.75% to 1.625%, while interest on the
Term Loan will be the LIBOR rate plus 2.375%.
At December 31, 1997, the weighted average interest rate on borrowings
outstanding under the Amended and Restated Credit Agreement (including the
effects of the interest rate hedging agreements) was 7.69%. The Partnership is
also required to pay a commitment fee per annum on the unused portion. The
commitment fee is computed at 0.375% if the ratio of consolidated total debt to
consolidated annualized operating cash flow is greater than or equal to 4.75x;
if the ratio is less than 4.75x, the fee is computed at 0.25%. As of December
31, 1997, subject to covenant limitations, the Partnership had available
borrowings under the Amended and Restated Credit Agreement of $38.3 million.
Borrowings are collateralized by substantially all of the borrowers' assets
(i.e. substantially all of the operating assets of the Partnership). In
addition, FHGLP pledged certain of its assets to secure the borrowings,
including its stock and partnership interests in its subsidiaries. However, the
lending banks do not have recourse against the assets of FHGI or the limited
partners of FHGLP.
The Amended and Restated Credit Agreement contains various restrictions
relating to, among other items, mergers and acquisitions, investments,
indebtedness, contingent liabilities and sale of property and also contains
restrictions regarding distributions and a change of management or a change in
control (as defined). Additionally, the Amended and Restated Credit Agreement
contains financial covenants which may, among other things, limit the amount the
Partnership may borrow. The Amended and Restated Credit Agreement currently
contains, among others, the following covenants, which provide that (i)
consolidated cash flow to consolidated cash interest expense (as defined) shall
exceed 2.00x; (ii) consolidated total debt (as defined, which definition does
not include the Notes) to consolidated annualized cash flow (as defined) shall
not exceed 5.50 prior to June 29, 1999 reducing to 2.50 after June 30, 2002 and
thereafter; and (iii) consolidated annualized cash flow to consolidated pro
forma debt service (as defined) shall be greater than 110%. Management believes
that the Partnership was in compliance with all financial covenants as of
December 31, 1997.
F-21
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
Substantially all of the assets of the Partnership are held by the Owned
Subsidiaries. The Amended and Restated Credit Agreement contains restrictions
that prohibit the Owned Subsidiaries from transferring assets or making
distributions to FHGLP except for payments on account of management services
provided by FHGLP, which were limited by the former Bank Credit Agreement based
on the lesser of FHGLP's cash flow shortfall (as defined) or 3.75% of
consolidated cable revenues (as defined). The 3.75% limit was raised to 4.25%
under the Amended and Restated Credit Agreement, effective July 12, 1996. For
1996 and 1997 the permitted amount of distributions to FHGLP was $8.4 and $10.4
million; the actual amounts distributed were $3.5 and $6.8 million,
respectively. Accordingly, at December 31, 1997, FHGLP faces a liquidity risk if
it were to experience liquidity requirements in excess of the permitted
distributions.
The Partnership is presently negotiating a new Bank Credit Agreement which
would replace the Amended and Restated Credit Agreement and provide funds for
the Partnership's tender offer for the Notes and the closing of the TCI
Transaction. There can be no assurance that the Partnership will be able to
negotiate a new Bank Credit Facility on acceptable terms.
(C) OTHER SUBORDINATED NOTES
Other Subordinated Notes consist of 11.56% Subordinated Notes due March
2001. The subordinated note agreement contains certain covenants which are
substantially the same as the covenants under the Amended and Restated Credit
Agreement described in (b) above. At December 31, 1997, management believes that
the Partnership was in compliance with such covenants.
(D) OTHER
Other notes payable consist of $7.5 million owed by EFC. On September 30,
1997, EFC obtained a secured bank facility with $35 million of availability from
two agent banks in order to obtain funds that would be loaned to certain Enstar
limited partnerships. The lenders advanced $7.5 million to EFC, which in turn
advanced those funds to a number of Enstar limited partnerships at closing. The
notes bear interest at LIBOR or prime rates at the option of EFC, plus margin
add-ons as defined. The EFC bank facility is non-recourse to the Partnership and
matures on August 31, 2001 at which time all funds previously advanced will be
due in full. The Enstar partnerships utilized these funds to refinance existing
debt and pay deferred management fees due ECC.
(E) INTEREST RATE HEDGING AGREEMENTS
The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on a portion of its variable-rate debt. The
Amended and Restated Credit Agreement requires that the Partnership maintain
hedging arrangements with respect to at least 50% of its total outstanding
indebtedness, excluding the Notes, for a two year period at rates satisfactory
to the Administrative Agent in order to manage the interest rate sensitivity on
its borrowings. At December 31, 1997, the Partnership participated in interest
rate hedging contracts with an aggregate notional amount of $560 million under
which the Partnership pays interest at fixed rates ranging from 5.22% to 6.55%,
(weighted average rate of 5.79%), and receives interest at variable LIBOR rates.
$40 million of these contracts were not yet effective at December 31, 1997, but
are scheduled to go into effect during 1998 as certain of the existing contracts
mature. The Partnership has reduced this position by entering into an interest
rate hedging contract with a notional amount of $25 million under which it
receives a fixed interest payment at 5.49% and pays interest at a variable LIBOR
rate. The hedging contracts expire between January 1998 and July 2001. Certain
of
F-22
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
these contracts with an aggregate notional amount of $145 million provide the
counterparties with an option to extend the maturity of the contracts for one
year on substantially similar terms. The Partnership has also entered into one
LIBOR interest rate cap agreement aggregating $25 million as of December 31,
1997.
The hedging agreements resulted in additional interest expense of $729,000,
$1.0 million and $350,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. The Partnership does not believe that it has any significant risk
of exposure to non-performance by any of its counterparties.
In connection with the decision to make interest payments on the Notes in
cash, the Partnership entered into various interest rate swap agreements with
three banks on February 10, 1998 in order to reduce its interest cost. The
agreements call for the Partnership to receive payments at 11%; and to make
payments at 7.625% for the period September 16, 1997 through September 15, 1998
on a notional principal amount of approximately $282.2 million. The contracts
further call for the Partnership to pay at a fixed rate of 7.625% and receive
interest at variable LIBOR rates for the period September 16, 1998 through
September 15, 2003 on a notional principal amount of approximately $297.7
million. The interest rate benefit received by the Partnership will be
recognized over the life of the second interest rate swap agreement.
(F) DEBT MATURITIES
The Partnership's notes payable outstanding at December 31, 1997 mature as
follows:
<TABLE>
<CAPTION>
11% SENIOR OTHER
SUBORDINATED NOTES TO SUBORDINATED
YEAR NOTES BANKS NOTES OTHER TOTAL
- ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998 $ -- $ 1,000 $ -- $ 527 $ 1,527
1999 -- 1,000 -- 1 1,001
2000 -- 1,000 -- -- 1,000
2001 -- 67,000 15,000 7,500 89,500
2002 -- 96,000 -- -- 96,000
Thereafter 282,193 440,000 -- -- 722,193
------------ ------------ ------------ ------ ------------
$ 282,193 $ 606,000 $ 15,000 $ 8,028 $ 911,221
------------ ------------ ------------ ------ ------------
------------ ------------ ------------ ------ ------------
</TABLE>
The maturity date of notes payable may be accelerated upon the occurrence of
certain events. See Note 2.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Partnership leases land, office space and equipment under operating
leases expiring at various dates through the year 2039. See Note 10.
F-23
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rentals for operating leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------- TOTAL
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998...................................................... $ 1,954
1999...................................................... 1,798
2000...................................................... 1,651
2001...................................................... 1,488
2002...................................................... 1,386
Thereafter................................................ 2,841
------------
$ 11,118
------------
------------
</TABLE>
In most cases, management expects that, in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense amounted
to $1.8 million in 1995, $2.1 million in 1996 and $2.4 million in 1997.
In addition, the Partnership rents line space on utility poles in some of
the franchise areas it serves. These rentals amounted to $1.9 million for 1995,
$2.8 million for 1996 and $3.1 million for 1997. Generally, such pole rental
agreements are short-term; however, the Partnership anticipates such rentals
will continue in the future.
Beginning in August 1997, the General Partner elected to self-insure the
Partnership's cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to significant increases in the
cost of insurance coverage and decreases in the amount of insurance coverage
available. Management believes that the relatively small size of the
Partnership's markets in any one geographic area coupled with their geographic
separation will mitigate the risk that the Partnership could sustain losses due
to seasonal weather conditions or other events that, in the aggregate, could
have a material adverse effect on the Partnership's liquidity and cash flows.
There can be no assurance that future self-insured losses will not exceed prior
costs of maintaining insurance for these risks. The Partnership continues to
purchase insurance coverage in amounts management views as appropriate for all
other property, liability, automobile, workers' compensation and other types of
insurable risks.
FHGLP holds a general partnership interest in each of the limited
partnerships which are the general partners of the Affiliated Partnerships,
excluding the Enstar Partnerships. Although all the indebtedness for borrowed
money owed by these Affiliated Partnerships to third party institutions is
non-recourse, and each of their respective partnership agreements provide for
indemnification of its general partner, FHGLP may have liability, as a result of
its position as a general partner, with respect to all other obligations of the
Affiliated Partnerships. The Partnership believes, however, that based on
current values of the Affiliated Partnerships, the likelihood of any potential
loss from such obligations is remote.
Other commitments include approximately $29 million at December 31, 1997 to
rebuild certain existing cable systems.
The Partnership is regulated by various federal, state and local government
entities. The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), provides for among other things, federal and local
regulation of rates charged for basic cable service, cable programming
F-24
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
service tiers ("CPSTs") and equipment and installation services. Regulations
issued in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Partnership's cable services. The Partnership believes that compliance with the
1992 Cable Act has had a negative impact on its operations and cash flow. It
also presently believes that any potential future liabilities for refund claims
or other related actions would not be material. The Telecommunications Act of
1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it
pertains to cable television, the 1996 Telecom Act, among other things, (i) ends
the regulation of certain CPSTs in 1999; (ii) expands the definition of
effective competition, the existence of which displaces rate regulation; (iii)
eliminates the restriction against the ownership and operation of cable systems
by telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions. Because cable
service rate increases have continued to outpace inflation under the FCC's
existing regulations, the Partnership expects Congress and the FCC to explore
additional methods of regulating cable service rate increases, including
deferral or repeal of the March 31, 1999 sunset of CPST regulation.
The Partnership has various contracts to obtain basic and premium
programming for its Systems from program suppliers whose compensation is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership. The
Partnership's programming contracts are generally for a fixed period of time and
are subject to negotiated renewal. The Partnership does not have long-term
programming contracts for the supply of a substantial amount of its programming.
Accordingly, no assurances can be given that the Partnership's programming costs
will not continue to increase substantially or that other materially adverse
terms will not be added to the Partnership's programming contracts. Management
believes, however, that the Partnership's relations with its programming
suppliers generally are good.
The Partnership, 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
F-25
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
On December 30 1993, the Partnership assumed the obligations of FHGI for its
1993 Incentive Performance Plan (the "Incentive Plan"). The value of the
interests in the Incentive Plan is tied to the equity value of certain
partnership units in FHGLP held by FHGI. In connection with the assumption by
the Partnership, FHGI agreed to fund any benefits payable under the Incentive
Plan through additional capital contribution to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its partnership units to the Partnership.
The benefits which are payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
3,780.14 of the Class B units of the Partnership and 237.98 of the Class A units
of the Partnership held by FHGI and a portion of FHGI's interest in certain of
the general partners of the Affiliated Partnerships. Benefits are payable under
the Incentive Plan only when distributions would otherwise be paid to FHGI with
respect to the above-described units and interests. The Incentive Plan is
scheduled to terminate on January 5, 2003, at which time the Partnership is
required to distribute the units described above to the participants in the
Incentive Plan. At such time, FHGI is required to contribute the units to the
Partnership to fund such distributions. The participants in the Incentive Plan
are present and former employees of the Partnership and its operating
affiliates, all of whom are 100% vested. Prior to the closing of the TCI
Transaction, FHGLP expects to amend the Incentive Plan to provide for payments
by FHGLP at the closing of the TCI Transaction to participants in an aggregate
amount of approximately $6.6 million and to reduce by such amount FHGLP's
obligations to make future payments to participants under the Incentive Plan. At
the closing of the TCI Transaction, New Falcon will assume the obligations of
FHGLP under the Incentive Plan, as so amended, other than the obligation to make
the payments at closing of the TCI Transaction.
F-26
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS
The Partnership (I.E., FHGLP) is a separate, stand-alone holding company
which employs all of the management personnel. In addition, prior to October
1995, the Partnership conducted certain international investment and development
activities. In October 1995, the Partnership sold certain of its international
investments and loans to cable ventures in India and the Philippines to Falcon
International Communications, LLC ("FIC"), a newly-formed, separately
capitalized entity (or FIC's affiliates), for approximately $6.3 million in
cash. FHGLP was reimbursed approximately $1.9 and $1.1 million by FIC for 1995
and 1996 operating costs related to these investments. The Partnership expects
to incur no further liquidity obligations in respect of international
investments, although the amount of reimbursement FHGLP receives from FIC with
respect to the salaries of certain of its employees has been significantly
reduced for 1997. Certain members of the Partnership's management also are
officers of, and hold equity interests in, FIC.
FHGLP is financially dependent on the receipt of permitted payments from the
Owned Systems, management and consulting fees from domestic cable ventures, and
the reimbursement of specified expenses by certain of the Affiliated Systems to
fund its operations. Expected increases in the funding requirements of the
Partnership combined with limitations on its sources of cash may create
liquidity issues for the Partnership in the future. Specifically, the Amended
and Restated Credit Agreement permits the subsidiaries of the Partnership to
remit to FHGLP no more than 4.25% of their net cable revenues, as defined, in
any year, effective July 12, 1996. As a result of the 1998 acquisition by FHGLP
of the Falcon Classic Systems, FHGLP will no longer receive management fees and
reimbursed expenses from Classic.
The management and consulting fees and expense reimbursements earned from
the Affiliated Partnerships amounted to approximately $8.6 million and $5.5
million, $6.3 million and $3.7 million (including the $1.9 and $1.1 million
mentioned above related to international expenses) and $5.2 million and $2.1
million for the years ended December 31, 1995, 1996 and 1997, respectively. The
fees of $8.6 million earned in 1995 include $1.6 million from Falcon First
(based on 5% of its net cable revenues, as defined). The fees and expense
reimbursements of $6.3 million and $3.7 million earned in 1996 included $1.5
million and $1.0 million earned from FCSC from January 1, 1996 through July 11,
1996. Subsequent to these acquisitions, the amounts payable to FHGLP in respect
of its management of the former Falcon First and FCSC Systems became subject to
the 4.25% limitation contained in the Amended and Restated Credit Agreement.
Receivables from the Affiliated Partnerships for services and reimbursements
described above amounted to approximately $6.5 million and $11.3 million (which,
in 1997, includes $7.5 million of notes receivable from the Enstar Systems) at
December 31, 1996 and 1997. The amount due at December 31, 1996 includes
approximately $3.6 million related to fees and reimbursements deferred as a
result of the liquidity constraints experienced by the Affiliated Partnerships,
or decisions made by the Partnership.
Included in Commitments and Contingencies (Note 8) are two facility lease
agreements with the Partnership's Chief Executive Officer and his wife, or
entities owned by them, requiring annual future minimum rental payments
aggregating $2.1 million through 2001, one facility being assumed by an Owned
Subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That Owned
Subsidiary intends to acquire the property for $282,500, a price determined by
two independent appraisals. During the years ended December 31, 1995, 1996 and
1997 rent expense on the first facility amounted to $416,000, $397,000
F-27
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)
and $383,000, respectively. The rent paid for the second facility for the period
July 12, 1996 through December 31, 1996 amounted to approximately $18,000, and
the amount paid in 1997 was approximately $41,000.
In addition, the Partnership provides certain accounting, bookkeeping and
clerical services to the Partnership's Chief Executive Officer. The costs of
services provided were determined based on allocations of time plus overhead
costs (rent, parking, supplies, telephone, etc.). Such services amounted to
$180,000, $118,300 and $163,000 for the years ended December 31, 1995, 1996 and
1997, respectively. These costs were net of amounts reimbursed to the
Partnership by the Chief Executive Officer amounting to $66,000, $75,000 and
$55,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 11 -- OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of Available-for-Sale Securities................. $ 13,267 $ 2,264 $ --
Gain on insured casualty losses............................... -- -- 3,476
Write down of investment...................................... -- (1,000) --
Loss on sale of investment.................................... -- -- (1,360)
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.
F-28
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
INVESTING ACTIVITIES
See Note 3 regarding the non-cash investing activities related to the
acquisitions of Falcon First and the cable systems of FCSC.
FINANCING ACTIVITIES
See Note 3 regarding the non-cash financing activities relating to the
acquisitions of Falcon First and the cable systems of FCSC. See Note 2 regarding
the reclassification to redeemable partners' equity.
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY)
The following parent-only condensed financial information presents Falcon
Holding Group, L.P.'s balance sheets and related statements of operations and
cash flows by accounting for the investments in the Owned Subsidiaries on the
equity method of accounting. The accompanying condensed financial information
should be read in conjunction with the consolidated financial statements and
notes thereto.
F-29
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................. $ 6,706 $ 8,177
Receivables:
Intercompany notes and accrued interest receivable.................................. 203,827 226,437
Due from affiliates and other entities, of which $17,839,000 and $23,374,000 are
contractually restricted or otherwise deferred (see Note 10)...................... 20,944 25,340
Prepaid expenses and other............................................................ 202 711
Investments in affiliated partnerships................................................ 12,830 12,827
Other investments..................................................................... 3,580 1,519
Property, plant and equipment, less accumulated depreciation and amortization......... 1,180 1,323
Deferred loan costs, less accumulated amortization.................................... 5,721 4,846
----------- -----------
$ 254,990 $ 281,180
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable......................................................................... $ 141 $ 10
11% Senior Subordinated Notes......................................................... 253,537 282,193
Accounts payable...................................................................... 266 179
Accrued expenses...................................................................... 11,702 14,025
Equity in net losses of Owned Subsidiaries in excess of investment.................... 173,941 230,155
----------- -----------
TOTAL LIABILITIES....................................................................... 439,587 526,562
REDEEMABLE PARTNERS' EQUITY............................................................. 271,902 171,373
PARTNERS' DEFICIT....................................................................... (456,499) (416,755)
----------- -----------
$ 254,990 $ 281,180
----------- -----------
----------- -----------
</TABLE>
F-30
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Management fees:
Affiliated Partnerships................................................... $ 6,196 $ 3,962 $ 2,873
Owned Subsidiaries........................................................ 8,509 12,020 13,979
International and other................................................... 639 413 281
---------- ---------- ----------
Total revenues.......................................................... 15,344 16,395 17,133
---------- ---------- ----------
EXPENSES:
General and administrative expenses......................................... 10,309 9,096 11,328
Depreciation and amortization............................................... 608 375 274
---------- ---------- ----------
Total expenses.......................................................... 10,917 9,471 11,602
---------- ---------- ----------
Operating income........................................................ 4,427 6,924 5,531
OTHER INCOME (EXPENSE):
Interest income............................................................. 17,623 19,884 22,997
Interest expense............................................................ (24,796) (27,469) (30,485)
Equity in net losses of Owned Subsidiaries.................................. (16,392) (50,351) (56,422)
Equity in net losses of investee partnerships............................... (5,843) (73) (4)
Other, net.................................................................. (254) 1,100 (2,455)
---------- ---------- ----------
NET LOSS...................................................................... $ (25,235) $ (49,985) $ (60,838)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-31
<PAGE>
FALCON HOLDING GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities.............................................................. $ 1,427 $ (8,969) $ 1,478
--------- --------- ---------
Cash flows from investing activities:
Distributions from affiliated partnerships........................................ -- 773 --
Capital expenditures.............................................................. (444) (242) (417)
Investments in affiliated partnerships and other investments...................... (666) (9,000) (254)
Proceeds from sale of investments and other assets................................ 1,856 3 702
Proceeds from sale of available-for-sale securities............................... -- 9,502 --
--------- --------- ---------
Net cash provided by investing activities........................................... 746 1,036 31
--------- --------- ---------
Cash flows from financing activities:
Repayment of debt................................................................. (121) (120) (131)
Capital contributions............................................................. -- 5,000 93
--------- --------- ---------
Net cash provided by (used in) financing activities................................. (121) 4,880 (38)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................ 2,052 (3,053) 1,471
Cash and cash equivalents, at beginning of year..................................... 7,707 9,759 6,706
--------- --------- ---------
Cash and cash equivalents, at end of year........................................... $ 9,759 $ 6,706 $ 8,177
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
FALCON HOLDING GROUP, L.P.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) OTHER(B) END OF PERIOD
- ---------------------------------------------------- ------------- ----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on receivables........
Year ended December 31,
1995.............................................. $ 201 $ 2,499 $ (1,928) $ 58 $ 830
1996.............................................. $ 830 $ 2,817 $ (2,740) -- $ 907
1997.............................................. $ 907 $ 5,714 $ (5,796) -- $ 825
</TABLE>
- ------------------------
(a) Write-off uncollectible accounts.
(b) Allowance for losses on receivable acquired in connection with the
acquisition of Falcon First.
F-33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized this day of August,
1998.
<TABLE>
<S> <C> <C>
FALCON HOLDING GROUP, L.P.
by its general partner,
Falcon Holding Group, Inc.
By: /s/ MICHAEL K. MENEREY
-----------------------------------------
Michael K. Menerey
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the day of August, 1998.
SIGNATURE TITLE
- ------------------------------ --------------------------
Director of Falcon Holding
Group, Inc.
/s/ MARC B. NATHANSON and Chief Executive
- ------------------------------ Officer of the
Marc B. Nathanson Registrant
(Principal Executive
Officer)
Executive Vice President,
Chief Financial Officer
/s/ MICHAEL K. MENEREY and Secretary of the
- ------------------------------ Registrant
Michael K. Menerey (Principal Financial and
Accounting Officer)
Director of Falcon Holding
Group, Inc.
/s/ STANLEY S. ITSKOWITCH and Executive Vice
- ------------------------------ President and General
Stanley S. Itskowitch Counsel of the
Registrant
S-1
