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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 Numbers: 33-60776 AND 333-55755
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
FALCON FUNDING CORPORATION*
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(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-4654565
CALIFORNIA 95-4681480
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD-15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrants (1) have 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) have been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' 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
Registrants: There is no public trading market for the equity securities of the
Registrants and, accordingly, the Registrants are not presently able to
determine the market value of the equity securities held by non-affiliates.
Number of shares of common stock of Falcon Funding Corporation outstanding as of
March 12, 1999: 1,000.
* Falcon Funding Corporation meets the conditions set forth in General
Instruction I(1)(a) and (b) to the Form 10-K and is therefore filing with
the reduced disclosure format.
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The Exhibit Index is located at Page E-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Falcon Communications, L.P., a California limited partnership
("FCLP" or the "Partnership") and successor to Falcon Holding Group, L.P., a
Delaware limited partnership ("FHGLP"), owns and operates cable television
systems in 25 states (the "Falcon Systems"), principally Oregon, California,
Washington, Missouri, North Carolina, Alabama, Georgia, Texas, and Kentucky. As
of December 31, 1998, the Falcon Systems served approximately 991,000 basic
subscribers. The Partnership also manages certain other cable television systems
of which Enstar Communications Corporation, a wholly-owned subsidiary of FHGLP,
is the corporate general partner (the "Enstar Systems"). As of December 31,
1998, the Enstar Systems served approximately 93,000 basic subscribers in 10
states, including Missouri, Illinois, Kentucky and Tennessee. All of the Falcon
Systems operate under the name "Falcon Cable TV." See "Overview of the Systems."
In March and July 1998, FHGLP paid to Falcon Classic Cable Income
Properties, L.P. $83.4 million to purchase its cable television systems. On
September 30, 1998, pursuant to a Contribution and Purchase Agreement dated as
of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired
the assets and liabilities of Falcon Video Communications, L.P. in exchange for
ownership interests in FHGLP. Simultaneously with the closing of that
transaction, in accordance with the Contribution Agreement, FHGLP contributed
substantially all of the existing cable television system operations owned by
FHGLP and its subsidiaries (including the Falcon Video Systems) to the
Partnership and TCI Falcon Holdings, LLC contributed certain cable television
systems owned and operated by affiliates of TCI to the Partnership (the "TCI
Transaction"). As a result, TCI holds approximately 46% of the equity interests
of the Partnership and FHGLP holds the remaining 54% and serves as the managing
general partner of the Partnership. See Note 2 to consolidated financial
statements.
A cable television system receives television, radio and data
signals at the system's "headend" site by means of over the air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The Falcon Systems offer customers various levels (or "tiers") of
cable services consisting of broadcast television signals of local network,
independent and educational stations, a limited number of television signals
from so-called "super stations" originating from distant cities (such as WGN),
various satellite-delivered, non-broadcast channels (such as CNN, MTV, the USA
Network, ESPN, TNT, WTBS and The Disney Channel), programming originated locally
by the cable television system (such as public, educational and governmental
access programs) and informational displays featuring news, weather, stock
market and financial reports, and public service announcements. A number of the
satellite services are also offered in certain packages. For an extra monthly
charge, the Falcon Systems offer "premium" television services to their
customers. These services (such as HBO and Showtime) are satellite channels that
consist principally of feature films, live sporting events, concerts and other
special entertainment features, usually presented without commercial
interruption.
A customer generally pays an initial installation charge and fixed
monthly fees for basic, expanded basic, other tiers of satellite services and
premium programming services. Such monthly service fees constitute the primary
source of revenues for the Falcon Systems. In addition to customer revenues, the
Falcon Systems receive revenue from additional fees paid by customers for
pay-per-view programming of movies and special events and from the sale of
available advertising spots on advertiser-supported programming. The Falcon
Systems also offer to their customers home shopping services, which pay the
Partnership a share of revenues from
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sales of products in the system's service areas, in addition to paying the
Falcon System a separate fee in return for carrying their shopping service.
Certain other channels have also offered the Falcon Systems fees in return
for carrying their service. Due to a general lack of channel capacity
available for adding new channels, management cannot predict the impact of
such potential payments on the Partnership's business. See Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Led by Chairman of the Board and Chief Executive Officer, Marc B.
Nathanson, and President and Chief Operating Officer, Frank J. Intiso, the
Partnership's senior management has on average over nineteen years of experience
in the cable industry and has worked together for over a decade. Mr. Nathanson,
a 30-year veteran of the cable business, is a member of the Board of Directors
of the National Cable Television Association and a past winner of its
prestigious Vanguard Award for outstanding contributions to the growth and
development of the cable television industry. Mr. Intiso is a 20-year veteran of
the cable industry. He is also Immediate Past Chair of the California Cable
Television Association and is active on various industry boards. The principal
executive offices of the Partnership and its general partner, Falcon Holding
Group, Inc. ("FHGI"), are located at 10900 Wilshire Boulevard, 15th Floor, Los
Angeles, California 90024, and their telephone number is (310) 824-9990.
RECENT DEVELOPMENTS
AT&T AND TCI MERGER
In March 1999, AT&T and Tele-Communications, Inc. completed a
merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T
Broadband & Internet Services. The unit will continue to be headquartered in the
Denver area. Leo J. Hindery, Jr., who had been president of Tele-Communications,
Inc. since January 1997, was named President and Chief Executive Officer of AT&T
Broadband & Internet Services, which became the owner of TCI Falcon Holdings,
LLC as a result of the merger.
PROPOSED JOINT VENTURE WITH AT&T
In December 1998, the Partnership entered into a letter of intent
with AT&T to form a joint venture. This joint venture would provide local or
any-distance communications services, other than mobile wireless services, video
entertainment services and high speed Internet access services, to residential
and certain small business customers under the AT&T brand name over the
Partnership's infrastructure. The joint venture would have the exclusive right
to use the Partnership's cable infrastructure for such services and would have
access to wholesale bulk long distance services and certain other network
services from AT&T. This exclusive right would have a 15-year term and one
five-year extension at AT&T's sole election.
The Partnership expects to own up to 49% of the equity of the
joint venture on terms to be negotiated. AT&T would have majority representation
on the Board of Directors of the joint venture, appoint all officers of the
joint venture and manage the day-to-day operations of the joint venture.
The Partnership would be required to fund all capital expenditures
to upgrade its infrastructure and operational support services to meet AT&T's
certification standards for telephony. The Partnership currently anticipates
that the majority of such costs, excluding customer premise equipment, are
already included in its projected rebuild costs and to the extent there are
incremental expenditures required, they will not be material. Should the joint
venture's cash flow be insufficient to meet its operating and capital
expenditure requirements, the Partnership and AT&T would be required to provide
funds for the insufficiency on a pro rata basis in proportion to their
respective ownership interests in the joint venture.
The Partnership would be entitled to receive an initial
connectivity payment when any cable television system passing a certain number
of households is upgraded to meet specified standards. Additionally, the
Partnership would be entitled to payments if specified subscriber penetration
levels are not met and if certain revenue targets are met.
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Formation of the joint venture is subject to certain conditions.
The Partnership is unable to predict if or when such conditions will be met.
BUSINESS STRATEGY
Historically, the Partnership has followed a systematic approach
to acquiring, consolidating, operating and developing cable television systems
based on the primary goal of increasing operating cash flow while maintaining
the quality of its services. The Partnership's business strategy has focused on
serving small to medium-sized communities and the suburbs of certain cities,
including Boise, Corpus Christi, Eugene, Huntsville, Little Rock, Los Angeles,
Norfolk, Portland (Oregon), San Luis Obispo, Salem, San Jose, Seattle and St.
Louis. Because the Falcon Systems are located in geographically and economically
diverse markets across the United States, the Partnership believes that the
Falcon Systems, taken as a whole, are not dependent on any single local economy,
are resistant to regional economic fluctuations and provide the Partnership with
a stable revenue and operating cash flow stream.
The Partnership also believes that given a similar technical and
channel capacity/utilization profile, its cable television systems generally
involve less risk of increased competition than systems in large urban cities.
In many of the Partnership's markets, consumers have access to only a limited
number of over-the-air broadcast television signals. In addition, these markets
typically offer fewer competing entertainment alternatives than large cities.
Nonetheless, the Partnership believes that all cable operators will face
increased competition in the future from alternative providers of multi-channel
video programming services. See "Competition."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 by the FCC has had a
negative impact on the Partnership's revenues and cash flow. These rules are
subject to further amendment to give effect to the Telecommunications Act of
1996. Among other changes, the Telecommunications Act of 1996 provides that the
regulation of certain cable programming service tier rates will terminate on
March 31, 1999. There can be no assurance as to what, if any, further action may
be taken by the FCC, Congress or any other regulatory authority or court, or the
effect thereof on the Partnership's business. See "Legislation and Regulation"
and Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CLUSTERING
The Partnership has sought to acquire cable television systems in
communities that are proximate to other Falcon Systems in order to achieve the
economies of scale and operating efficiencies associated with regional
"clusters." The Partnership believes clustering can reduce marketing and
personnel costs and can also reduce capital expenditures in cases where cable
service can be delivered through a central headend reception facility. In
determining whether the Partnership should acquire a particular system, the
Partnership evaluates, among other things, the capital expenditure requirements
of the system and the demographics of the region.
ACQUISITIONS
Management believes that the cable television industry has entered
a period of further consolidation. Subject to the availability of adequate
capital on terms satisfactory to the Partnership, of which there can be no
assurance, the Partnership plans to continue its acquisition strategy by
pursuing opportunities to purchase cable television systems in its existing
geographic service areas as well as by entering new geographic markets, if and
when attractive acquisition opportunities become available. Any such
acquisitions, which could be substantial in size, may involve the Enstar
Systems. In addition to opportunities to purchase additional cable systems,
management expects to pursue opportunities to exchange its systems for other
cable television properties to further its clustering strategy. In the ordinary
course of its business, the Partnership regularly investigates and otherwise
considers investment and acquisition opportunities. See Item 7., "Management's
Discussion and
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Analysis of Financial Condition and Results of Operations" and Item 13.,
"Certain Relationships and Related Transactions."
CAPITAL EXPENDITURES
The Partnership has invested in the rebuilding and upgrading of
its cable television systems to the extent financing and regulatory conditions
have permitted. These rebuilds and upgrades have consisted primarily of
replacing low capacity cable plant with new higher capacity fiber-optic trunk
and feeder lines, adding headend electronics to increase channel capacity and
addressable set top devices to permit system addressability, and reducing the
number of headends in various regions through microwave network transmission
links, fiber optic super trunk and improved reception equipment. However, as
noted in "Overview of the Systems--The Falcon Systems," many of the Falcon
Systems have almost no available channel capacity with which to add new channels
or to further expand pay-per-view offerings to customers. As a result,
significant amounts of capital for future upgrades will be required in order to
increase available channel capacity, improve quality of service and facilitate
the expansion of new services such as advertising, pay-per-view, new unregulated
tiers of satellite-delivered services and home shopping, so that the Falcon
Systems remain competitive within the industry. For the three year period ended
December 31, 1998, capital expenditures for line extensions, rebuilds and
upgrades, and new equipment for the Partnership totaled approximately $230.4
million. Approximately $131.5 million of these capital expenditures related to
upgrading and rebuilding existing distribution plant.
As discussed in prior reports, the Partnership postponed a number
of rebuild and upgrade projects that were planned for 1994 and 1995 because of
the uncertainty related to implementation of the 1992 Cable Act and the impact
thereof on the Partnership's business and access to capital. As a result, even
after giving effect to certain upgrades and rebuilds that were started or
completed in 1996, 1997 and 1998, 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. Currently, the Falcon Systems have an average
capacity of 49 channels (substantially all of which is presently utilized). The
Partnership's management has selected a technical standard that incorporates a
fiber to the feeder architecture for the majority of its systems that are to be
rebuilt. A system built with this type of architecture can provide for future
channels of analog video service. Such a system will also permit the
introduction of high speed data transmission/Internet access 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
beginning to implement digital compression technology in its Systems. See
"Technological Developments" and "Digital Compression."
The Partnership's future capital expenditure plans are, however,
all subject to the availability of adequate capital on terms satisfactory to the
Partnership, of which there can be no assurance. Subject to the Partnership's
ability to remain in compliance with certain requirements of its debt and
partnership agreements, the Partnership presently intends to spend approximately
$190 million for capital expenditures in 1999, including $111 million for
rebuild and upgrade projects. See "Legislation and Regulation" and Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
DECENTRALIZED MANAGEMENT
The Partnership manages the Falcon Systems and the Enstar Systems
through separate regional service centers. In some circumstances, both Falcon
Systems and Enstar Systems are operated through the same regional service center
to take advantage of cost efficiencies. The Partnership believes that its
decentralized management structure, by enhancing management presence at the
system level, increases its sensitivity to the needs of its customers, enhances
the effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
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MARKETING
The Partnership's marketing strategy is to provide added value to
increasing levels of subscription services through "packaging." In addition to
the basic service package, customers in substantially all of the Falcon Systems
may purchase an expanded group of regulated services, additional unregulated
packages of satellite-delivered services, and premium services. The Partnership
has employed a variety of targeted marketing techniques to attract new customers
by focusing on delivering value, choice, convenience and quality. The
Partnership employs direct mail, radio and local newspaper advertising,
telemarketing and door-to-door selling utilizing demographic "cluster codes" to
target specific messages to target audiences. In many Falcon Systems, the
Partnership offers discounts to customers who purchase premium services on a
limited trial basis in order to encourage a higher level of service
subscription. Additionally, the Partnership offers households with addressable
set top devices the option to receive all of their optional addressable services
(premium services and new product tier services) on all of their cable
television outlets for one low price, plus set top device rental fees for each
outlet. This "whole house" service option enhances the value of subscribing to
optional addressable services, provides greater customer satisfaction and
ultimately improves retention on optional addressable services. The Partnership
also has a coordinated strategy for retaining customers that includes televised
retention advertising to reinforce the initial decision to subscribe and
encourage customers to purchase higher service levels.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
The Partnership places a strong emphasis on customer service and
community relations and believes that success in these areas is critical to its
business. The Partnership has developed and implemented a wide range of monthly
internal training programs for its employees, including its regional managers,
that focus on the Partnership's operations and employee interaction with
customers. The effectiveness of the Partnership's training program as it relates
to the employees' interaction with customers is monitored on an ongoing basis,
and a portion of the regional managers' compensation is tied to achieving
customer service targets. The Partnership conducts an extensive customer survey
on a periodic basis and uses the information in its efforts to enhance service
and better address the needs of its customers. A quarterly newsletter keeps
customers up to date on new service offerings, special events and company
information. In addition, the Partnership is participating in the industry's
Customer Service Initiative which emphasizes an on-time guarantee program for
service and installation appointments. The Partnership's corporate executives
and regional managers lead the Partnership's involvement in a number of programs
benefiting the communities the Partnership serves, including, among others,
Cable in the Classroom, Drug Awareness, Holiday Toy Drive and the Cystic
Fibrosis Foundation. Cable in the Classroom is the cable television industry's
public service initiative to enrich education through the use of commercial-free
cable programming. In addition, a monthly publication, Cable in the Classroom
magazine, provides educational program listings by curriculum area, as well as
feature articles on how teachers across the country use the programs.
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OVERVIEW OF THE SYSTEMS
Historically, the Partnership has managed affiliated cable
television systems for a fee. The Partnership has selectively acquired certain
of these affiliated systems since 1995. The following table sets forth certain
operating statistics for the Falcon, Affiliated and Enstar Systems as of the
dates indicated. As of December 31, 1997, the Affiliated Systems consisted of
the cable systems owned by Falcon Classic and Falcon Video. Substantially all of
the Falcon Classic systems became Falcon Systems in March 1998. The remaining
Falcon Classic system became a Falcon System in July 1998 and the Falcon Video
systems became Falcon Systems as part of the TCI Transaction on September 30,
1998. As a result, comparisons of 1998 to prior years must take these changes
into account.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
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1994 1995(1) 1996(2) 1997 1998*
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<S> <C> <C> <C> <C> <C>
HOMES PASSED(3)
Falcon Systems.................... 596,226 725,661 960,231 973,987 1,621,902
Affiliated Systems*............... 516,703 410,345 178,452 180,981 -
Enstar Systems.................... 143,009 144,777 151,762 153,174 154,371
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Total............................. 1,255,938 1,280,783 1,290,445 1,308,142 1,776,273
BASIC SUBSCRIBERS(4)
Falcon Systems.................... 360,835 442,166 570,708 562,984 991,228
Affiliated Systems*............... 330,179 260,005 118,603 118,829 -
Enstar Systems.................... 95,311 96,972 96,384 94,898 92,812
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Total............................. 786,325 799,143 785,695 776,711 1,084,040
BASIC PENETRATION(5)
Falcon Systems.................... 60.5% 60.9% 59.4% 57.8% 61.1%
Affiliated Systems*............... 63.9 63.4 66.5 65.7 -
Enstar Systems.................... 66.6 67.0 63.5 62.0 60.1
Combined.......................... 62.6% 62.4% 60.9% 59.4% 61.0%
PREMIUM SERVICE UNITS(6)
Falcon Systems.................... 165,137 186,477 203,679 165,960 275,666
Affiliated Systems*............... 158,326 108,225 45,909 40,548 -
Enstar Systems.................... 36,632 35,585 31,750 26,504 24,060
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Total............................. 360,095 330,287 281,338 233,012 299,726
PREMIUM PENETRATION(7)
Falcon Systems.................... 45.8% 42.2% 35.7% 29.5% 27.8%
Affiliated Systems*............... 48.0 41.6 38.7 34.1 -
Enstar Systems.................... 38.4 36.7 32.9 27.9 -
Combined.......................... 45.8% 41.3% 35.8% 30.0% 27.6%
AVERAGE MONTHLY REVENUE PER BASIC
SUBSCRIBER(8)
Falcon Systems.................... $32.43 $32.77 $34.22 $36.67 $37.00
Affiliated Systems*............... 32.50 31.75 34.50 36.81 -
Enstar Systems.................... 29.69 30.41 32.71 35.00 34.87
Combined.......................... $32.13 $32.15 $34.08 $36.49 $36.80
</TABLE>
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* At December 31, 1998 and 1997, respectively, the Falcon Classic systems
had approximately 76,557 and 75,965 homes passed, 48,544 and 48,984
basic subscribers and 14,136 and 15,609 premium service units. At
December 31, 1998 and 1997, the corresponding totals for the Falcon
Video systems were 106,910 and 105,016 homes passed, 69,731 and 69,845
basic subscribers and 23,588 and 24,939 premium service units. At
December 31, 1998, the TCI systems had approximately 455,332 homes
passed, 278,775 basic subscribers and 89,134 premium service units.
Effective October 1, 1998, the affiliated systems consisted solely of
the Enstar Systems.
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(1) On December 28, 1995, the Partnership acquired all of the direct and
indirect ownership interests in Falcon First Communications, L.P.
("Falcon First") that it did not previously own. As a result, the
Partnership began including Falcon First systems as Falcon Systems,
rather than Affiliated Systems. On July 1, 1996, the Partnership sold
certain of the Falcon First systems. As a result, comparisons of 1996
and 1995 to prior years must take these changes into account. At
December 31, 1997, 1996 and 1995, respectively, Falcon First had
approximately 97,549, 96,318 and 114,682 homes passed, 67,601, 68,212
and 77,258 basic subscribers and 22,230, 29,571 and 36,413 premium
service units, respectively. At December 31, 1994, the corresponding
totals for Falcon First were 113,403, 75,688 and 38,756, respectively.
At July 1, 1996, the Falcon Systems that were sold had approximately
18,957 homes passed, 9,547 basic subscribers and 3,932 premium service
units.
(2) On July 12, 1996, the Partnership acquired the assets of Falcon Cable
Systems Company, L.P. ("FCSC") and began including them as Falcon
Systems. As a result, comparisons of 1996 to prior years must take this
change into account. At December 31, 1997 and 1996, respectively, the
FCSC systems had approximately 245,807 and 239,431 homes passed,
127,315 and 140,599 basic subscribers and 33,844 and 44,199 premium
service units. At December 31, 1995 and 1994, the corresponding totals
for the FCSC systems were 233,304 and 228,522 homes passed, 140,642 and
138,196 basic subscribers and 52,694 and 59,732 premium service units.
(3) Homes passed refers to estimates by the Partnership of the approximate
number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of
principal transmission lines. Such estimates are based upon a variety
of sources, including billing records, house counts, city directories
and other local sources.
(4) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Historically, bulk accounts (such as
apartment buildings) were included on a "basic customer equivalent"
basis in which the total monthly bill for the account was divided by
the basic monthly charge for a single outlet in the area. In 1998, in
order to report its basic subscribers in a manner consistent with that
of TCI, the Partnership changed its method of computing the number of
subscribers for certain types of bulk accounts. Under the new
definition, apartments, condominiums and mobile homes are counted as
basic subscribers rather than as bulk accounts whose subscriber numbers
are computed on an equivalent basis. The impact of this change in 1998
was an increase in basic subscribers for the Falcon Systems of
approximately 38,000.
(5) Basic subscribers as a percentage of homes passed.
(6) Premium service units include only single channel services offered for
a monthly fee per channel and do not include tiers of channels offered
as a package for a single monthly fee. Prior to July 1, 1996, The
Disney Channel was offered as a premium service. Effective July 1,
1996, it was offered as part of tiered services. As a result, the
number of reported premium service units was artificially reduced by
this service offering change. The number of Disney Channel premium
service units at June 30, 1996, December 31, 1995 and at December 31,
1994 were: Falcon Systems 19,124, Affiliated Systems 7,060; Falcon
Systems 22,613, Affiliated Systems 18,970; and Falcon Systems 21,309,
Affiliated Systems 29,641, respectively.
The "whole house" service option introduced in 1998 reduced the number
of premium service units in 1998 as compared with prior years. See
"Business - Marketing." The household that subscribes to premium
services under the whole house option is counted as one premium service
unit. By contrast, if the household subscribes to premium services on a
channel-by-channel basis, each premium channel is counted as one
premium service unit. The impact of the whole house plan was to
decrease the number of premium service units by approximately 49,000 in
1998.
(7) Premium service units as a percentage of basic subscribers. A customer
may purchase more than one premium service, each of which is counted as
a separate premium service unit. This ratio may be greater than 100% if
the average customer subscribes for more than one premium service.
(8) Average monthly revenue per basic subscriber for the one-year period
ending on the respective dates indicated, except for 1994 data which
reflects the fourth quarter of 1994 only. Management believes that the
fourth quarter is more relevant for 1994 because the FCC's amended rate
regulation rules became effective during the third quarter of 1994. See
"Legislation and Regulation."
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THE FALCON SYSTEMS
The Falcon Systems are divided into 53 separate operating regions.
The following is a brief description of the operating regions located in states
that include at least 5% of the basic subscribers of the Falcon Systems. In
certain cases, operating regions serve customers in more than one state and,
thus, totals by operating region may exceed basic subscriber totals for a given
state.
The following is a summary of certain operating data, as of
December 31, 1998, for the Falcon Systems:
<TABLE>
<CAPTION>
Average
Monthly
Premium Revenue
Homes Basic Basic % of Service Premium Per Basic
State Passed Subscribers Penetration Total Units Penetration Subscriber(1)
- ----- -------------- -------------- --------------- ---------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama........... 61,571 46,388 75.3% 4.7% 20,234 43.6% $ 40.10
Arkansas.......... 46,882 21,013 44.8% 2.1% 4,955 23.6% $ 38.05
California........ 302,954 176,102 58.1% 17.8% 46,022 26.1% $ 37.64
Florida........... 15,846 10,441 65.9% 1.1% 1,884 18.0% $ 34.90
Georgia........... 55,454 44,694 80.6% 4.5% 10,450 23.4% $ 40.05
Idaho............. 9,192 5,522 60.1% 0.6% 1,839 33.3% $ 32.49
Illinois.......... 3,424 1,751 51.1% 0.2% 611 34.9% $ 34.96
Indiana........... 7,280 4,628 63.6% 0.5% 964 20.8% $ 37.37
Kansas............ 3,512 2,631 74.9% 0.3% 577 21.9% $ 34.15
Kentucky.......... 41,439 34,050 82.2% 3.4% 6,553 19.2% $ 33.73
Louisiana......... 5,494 2,658 48.4% 0.3% 1,366 51.4% $ 41.36
Maryland.......... 27,830 15,393 55.3% 1.6% 7,059 45.9% $ 39.15
Michigan.......... 7,573 3,740 49.4% 0.4% 820 21.9% $ 32.31
Missouri.......... 151,631 102,965 67.9% 10.4% 25,669 24.9% $ 35.59
Mississippi....... 1,911 1,168 61.1% 0.1% 234 20.0% $ 36.60
No. Carolina...... 110,456 62,683 56.7% 6.3% 15,922 25.4% $ 38.43
Nevada............ 6,413 1,872 29.2% 0.2% 1,246 66.6% $ 27.38
New York.......... 26,359 15,833 60.1% 1.6% 4,182 26.4% $ 35.58
Oklahoma.......... 19,807 10,531 53.2% 1.1% 4,598 43.7% $ 42.57
Oregon............ 307,005 195,297 63.6% 19.7% 45,205 23.1% $ 36.37
So. Carolina...... 15,767 10,643 67.5% 1.1% 7,414 69.7% $ 49.10
Texas............. 60,643 38,685 63.8% 3.9% 12,681 32.8% $ 36.28
Utah.............. 32,003 15,828 49.5% 1.6% 6,556 41.4% $ 25.71
Virginia.......... 48,391 16,486 34.1% 1.7% 7,089 43.0% $ 42.16
Washington........ 253,065 150,226 59.4% 15.2% 41,536 27.6% $ 35.75
-------------- -------------- ---------- --------------
1,621,902 991,228 61.1% 100.0% 275,666 27.8% $ 37.00
-------------- -------------- ---------- --------------
-------------- -------------- ---------- --------------
</TABLE>
- -----------
(1) Average monthly revenue per basic subscriber has been computed based
on revenue for the year ended December 31, 1998.
9
<PAGE>
OREGON. As of December 31, 1998, the Partnership's 12 Oregon operating regions
had 195,297 basic subscribers, which comprised approximately 20% of the basic
subscribers of the Falcon Systems. The systems in the Oregon operating regions
have an average channel capacity of 50, approximately 94% of which are currently
utilized. Over 93% of the customers in these operating regions are served by
systems that utilize addressable technology.
CALIFORNIA. As of December 31, 1998, the Partnership's eight operating regions
in California had 176,102 basic subscribers, which comprised approximately 18%
of the basic subscribers of the Falcon Systems. The systems in the California
regions have an average channel capacity of 49, approximately 95% of which are
currently utilized. Approximately 95% of the customers in the California regions
are served by systems that utilize addressable technology.
WASHINGTON. As of December 31, 1998, the Partnership's Washington systems had
150,226 basic subscribers, which comprised 15% of the basic subscribers of the
Falcon Systems. The Washington systems have an average channel capacity of 47,
approximately 96% of which are currently utilized. Approximately 86% of the
customers in the Washington regions are served by systems that utilize
addressable technology.
MISSOURI. As of December 31, 1998, the Partnership's six operating regions in
Missouri had 102,965 basic subscribers, which comprised approximately 10% of the
basic subscribers of the Falcon Systems. The Missouri systems have an average
channel capacity of 45, approximately 96% of which are currently utilized.
Approximately 96% of the customers in the Missouri regions are served by systems
that utilize addressable technology.
NORTH CAROLINA. As of December 31, 1998, the Partnership's two North Carolina
operating regions had 62,683 basic subscribers, which comprised approximately 6%
of the basic subscribers of the Falcon Systems. These systems have an average
channel capacity of 59, approximately 91% of which are utilized. Approximately
68% of the customers are served by systems that utilize addressable technology.
ALABAMA. As of December 31, 1998, the Partnership's Alabama systems had 46,388
basic subscribers which comprised approximately 5% of the basic subscribers of
the Falcon Systems. The Alabama systems have an average channel capacity of 48,
approximately 96% of which are currently utilized. Approximately 69% of the
customers are served by systems that utilize addressable technology.
GEORGIA. As of December 31, 1998, the Partnership's Georgia systems had 44,694
basic subscribers, which comprised approximately 5% of the basic subscribers of
the Falcon Systems. The systems had average channel capacity of 54, of which 98%
are utilized. Approximately 87% of the customers are served by addressable
technology.
OTHER OPERATING REGIONS. The Partnership also owns and operates systems through
13 additional regional centers in Benton, Arkansas; Plattsburgh, New York;
Suffolk, Virginia; Somerset, Kentucky; Weiser, Idaho; Beaufort, South Carolina;
Shawnee, Oklahoma; Portland and Marshall, Texas; Sebastian, Florida; St. George,
Utah; Scottsburg, Indiana; and Au Gres, Michigan. None of these regions are in
states that have basic subscribers that are in excess of 5% of the total basic
subscribers of the Falcon Systems.
THE AFFILIATED SYSTEMS
As discussed elsewhere in this report, the Partnership acquired
substantially all of the assets of Falcon Classic in March 1998 and acquired all
of the Falcon Video systems in September 1998.
Through the Enstar partnerships, the Partnership manages cable
television systems which at December 31, 1998 served approximately 93,000 basic
subscribers in 10 states, including Missouri, Illinois, Kentucky and Tennessee.
10
<PAGE>
In 1996, 1997 and 1998, the Partnership recognized aggregate
revenues of $6.3 million, $5.2 million and $3.7 million, respectively, from
management agreements with the Affiliated Systems and various consulting
agreements. The partnership agreements of the partnerships of which Enstar
Communications Corporation is the general partner are scheduled to terminate at
various times from 2033 to 2037. See Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Item 13., "Certain Relationships and Related
Transactions."
Enstar Communications Corporation was an indirect wholly-owned
subsidiary of the Partnership until September 30, 1998. Concurrent with the TCI
Transaction, FHGLP retained ownership of Enstar Communications Corporation,
which controls and holds varying equity interests of 0.5% to 5% in 15 limited
partnerships. The Partnership's financial statements as of December 31, 1998
included a net loss of $289,000 representing nine months of Enstar's operating
results.
FHGLP also retained its interest in Enstar Finance Company, LLC on
September 30, 1998 rather than contributing it to the Partnership. Enstar
Finance Company obtained a secured bank facility with $35 million of
availability from two agent banks in order to provide funds that would be loaned
to certain of the 15 Enstar limited partnerships. The lenders had advanced $4.1
million to Enstar Finance Company as of December 31, 1998, which in turn
advanced those funds to a number of the Enstar limited partnerships.
Based on its belief that the market for cable systems has
generally improved, Enstar Communications Corporation is evaluating strategies
for liquidating the Enstar limited partnerships. These strategies include the
sale of substantially all of the partnerships' assets to third parties and/or
affiliates of Enstar Communications Corporation, which may include the
Partnership, and the subsequent liquidation of the partnerships. Enstar
Communications Corporation expects to complete its evaluation within the next
several months and intends to advise the partnerships' unitholders promptly if
it believes that commencing a liquidating transaction would be in the best
interests of unitholders.
OTHER INVESTMENTS
LAKE LAS VEGAS PROJECT. The Partnership is an equity owner in,
and the general partner of, Falcon Lake Las Vegas Cablevision, L.P. This
limited partnership was formed in September 1993 to design, construct and
operate an advanced fiber optic cable network in Lake Las Vegas, a master
planned community being developed around a man-made lake southeast of Las Vegas,
Nevada. The Partnership's partner in this project is an affiliate of
Transcontinental Properties, Inc., which is controlled by Ronald Boeddeker of
Las Vegas, Nevada and the Bass Family interests of Fort Worth, Texas. Upon its
completion, Lake Las Vegas is targeted to have 5,000 dwelling units and up to
11,000 hotel units, although there are presently fewer than 50 homes occupied in
the development. The Partnership is nearing completion of the first phase of a
project to build a fiber-to-the-curb cable television system, and a portion of
the system is now operational. Aggregate capital expenditures on this project to
date are approximately $1 million.
FALCON/CAPITAL CABLE. During 1988, one of the Partnership's
subsidiaries made a $1.3 million investment in, and became co-general partner
of, Falcon/Capital Cable, the general partner of an operating partnership which
has approximately 29,000 basic subscribers in six midwestern states. The
Partnership does not manage these systems and has not included the subscribers
of these systems in the number of basic subscribers of the Falcon Systems. The
terms of Falcon/Capital Cable's operating partnership's senior bank debt and
subordinated debt were refinanced on February 11, 1998, and resulted in a
decrease in the percentage of equity of Falcon/Capital Cable owned by the
Partnership from 11% to 8%.
CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offer customers
packages of services that include the local network, independent and educational
television stations, a limited number of television signals from distant cities,
numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA
Network, ESPN, TNT and
11
<PAGE>
The Disney Channel) and certain information and public access channels. For
an extra monthly charge, the Falcon Systems provide certain premium
television services, such as HBO and Showtime. The Partnership also offers
other cable television services to its customers, including pay-per-view
programming. For additional charges, in most of the Falcon Systems, the
Partnership also rents remote control devices and VCR compatible devices
(devices that make it easier for a customer to tape a program from one
channel while watching a program on another).
The service options offered by the Partnership vary from system to
system, depending upon a system's channel capacity and viewer interests. Rates
for services also vary from market to market and according to the type of
services selected.
Pursuant to the 1992 Cable Act, most cable television systems
are subject to rate regulation of the basic service tier, the non-basic service
tiers other than premium (per channel or program) services, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as set top devices and remote control devices. These rate
regulation provisions affect all of the Partnership's systems not deemed to be
subject to effective competition under the FCC's definition. See "Legislation
and Regulation."
At December 31, 1998, the Partnership's monthly rates for basic
cable service for residential customers of the Falcon Systems, including certain
discounted rates, ranged from $8.63 to $25.67 and premium service rates ranged
from $5.00 to $14.75, excluding special promotions offered periodically in
conjunction with the Partnership's marketing programs. A one-time installation
fee, which the Partnership may wholly or partially waive during a promotional
period, is usually charged to new customers. Commercial customers, such as
hotels, motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. Most multi-unit dwellings are offered a negotiated bulk rate in
exchange for single-point billing and basic service to all units. These rates
are also subject to regulation.
For the years ended December 31, 1996, 1997 and 1998, subscriber
fees accounted for 86.9%, 87.4% and 87.9%, respectively, of the Partnership's
revenues. Management fees accounted for 2.9%, 2% and 1.2%, respectively, of
the Partnership's revenues, with other services, comprised of, among other
things, installation fees, franchise fees and other charges, advertising and
home shopping revenues, accounting for 10.2%, 10.6% and 10.9%, respectively.
EMPLOYEES
As of February 12, 1999, the Partnership had approximately 1,486
full-time employees and 45 part-time employees. The Partnership considers its
relations with its employees to be good. There are no collective bargaining
agreements relating to any of such employees.
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership
emphasizes high technical standards and prudently seeks to apply technological
advances in the cable television industry to the Falcon Systems on the basis of
cost effectiveness, capital availability, enhancement of product quality,
service delivery and industry-wide acceptance. Currently, the Falcon Systems
have an average channel capacity of 49, substantially all of which is presently
utilized. The Partnership believes that system upgrades would enable it to
provide customers with greater programming diversity, better picture quality and
alternative communications delivery systems made possible by the introduction of
fiber optic technology and by the possible future application of digital
compression. The implementation of the Partnership's capital expenditure plans
is, however, dependent in part on the availability of adequate capital on terms
satisfactory to the Partnership, of which there can be no assurance. See
"Business Strategy - Capital Expenditures," "Legislation and Regulation" and
Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
12
<PAGE>
The use of fiber optic cable as an alternative to coaxial cable is
playing a major role in expanding channel capacity and improving the performance
of cable television systems. Fiber optic cable is capable of carrying hundreds
of video, data and voice channels and, accordingly, its utilization is essential
to the enhancement of a cable television system's technical capabilities. The
Partnership's current policy is to utilize fiber optic technology in
substantially all rebuild projects which it undertakes. The benefits of fiber
optic technology over traditional coaxial cable distribution plant include lower
ongoing maintenance and power costs and improved picture quality and
reliability.
As of December 31, 1998, approximately 83% of the customers of the
Falcon Systems were served by systems that utilize addressable technology.
Addressable technology permits the cable operator to activate from a central
control point the cable television services to be delivered to a customer if
that customer has also been supplied with an addressable set top device. To
date, the Partnership has supplied addressable set top devices to customers of
the Falcon Systems utilizing addressable technology who subscribe to one or more
premium services and, in selected regions, to customers who subscribe to certain
new product tiers. As a result, if the system utilizes addressable technology
and the customer has been supplied with an addressable set top device, the
Partnership can upgrade or downgrade services immediately, without the delay or
expense associated with dispatching a technician to the home. Addressable
technology also reduces pay service theft, is an effective enforcement tool in
collecting delinquent payments and allows the Partnership to offer pay-per-view
services.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the
area of digital compression, a technology that will enable cable operators to
increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. Depending on the technical characteristics of the
existing system, the Partnership believes that the utilization of digital
compression technology will enable its systems to increase channel capacity in
certain systems in a manner that could, in the short term, be more cost
efficient than rebuilding such systems with higher capacity distribution plant.
However, the Partnership believes that unless the system has sufficient unused
channel capacity and bandwidth, the use of digital compression to increase
channel offerings is not a substitute for the rebuild of the system, which will
improve picture quality, system reliability and quality of service. The use of
digital compression will expand the number and types of services these systems
offer and enhance the development of current and future revenue sources.
As of December 31, 1998, approximately 26% of the customers of
the Falcon Systems were served by systems that offered digital services. The
Partnership is expanding its use of digital technology in 1999, and expects the
number of customers with digital services available to increase to approximately
50% of its total customers by the end of the year. This technology is under
frequent management review.
PROGRAMMING
The Partnership has various contracts to obtain basic and premium
programming for its systems from program suppliers whose compensation is
generally based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures or offer marketing support to the Partnership.
Certain other new channels have also recently offered the Falcon Systems fees in
return for carrying their service. Due to a lack of channel capacity currently
available for adding new channels, the Partnership's management cannot predict
the impact of such potential payments on its business. In addition, the FCC may
require that certain such payments from programmers be offset against the
programming fee increases which can be passed through to subscribers under the
FCC's rate regulations. The Partnership's programming contracts are generally
for a fixed period of time and are subject to negotiated renewal. The
Partnership does not have long-term programming contracts for the supply of a
substantial amount of its programming. Accordingly, no assurance can be given
that the Partnership's programming costs will not continue to increase
substantially, or that other materially adverse terms will not be added to the
Partnership's programming
13
<PAGE>
contracts. Management believes, however, that the Partnership's relations
with its programming suppliers generally are good.
Effective December 1, 1998, the Partnership elected to obtain
certain of its programming services through an affiliate of TCI. This election
resulted in a reduction in the Partnership's programming costs, the majority of
which will be passed on to its customers in the form of reduced rates in
compliance with FCC rules. The Partnership has elected to continue to acquire
its remaining programming services under its existing programming contracts, but
may elect to acquire additional programming services through the TCI affiliate
in the future.
The Partnership's cable programming costs have increased in
recent years and, except for the initial benefit from the TCI affiliation, are
expected to continue to increase due to additional programming being provided to
basic customers, the requirements to carry channels under retransmission
carriage agreements entered into with certain programming sources, increased
costs to produce or purchase cable programming generally (including sports
programming), inflationary increases and other factors. The 1996 retransmission
carriage agreement negotiations resulted in the Partnership agreeing to carry
one new service in certain of its Systems (serving approximately 80,000 basic
subscribers), for which it will receive reimbursement of certain costs related
to launching the service. All other negotiations were completed with essentially
no change to the previous agreements. Under the FCC's rate regulations,
increases in programming costs for regulated cable services occurring after the
earlier of March 1, 1994, or the date a system's basic cable service became
regulated, may be passed through to customers. See "Legislation and Regulation -
Federal Regulation - Carriage of Broadcast Television Signals."
FRANCHISES
Cable television systems are generally constructed and operated
under non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984, the 1992 Cable Act
and the 1996 Telecom Act. See "Legislation and Regulation."
As of December 31, 1998, the Falcon Systems held 630 franchises.
These franchises, all of which are non-exclusive, provide for the payment of
fees to the issuing authority. Annual franchise fees imposed on the Falcon
Systems range up to 5% of the gross revenues generated by a system. For the past
three years, franchise fee payments made by the Falcon Systems have averaged
approximately 3.3% of total gross system revenues. The 1984 Cable Act prohibits
franchising authorities from imposing franchise fees in excess of 5% of gross
revenues and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
The following table groups the franchises of the Falcon Systems by
date of expiration and presents the number of franchises for each group of
franchises and the approximate number and percentage of basic subscribers for
each group as of December 31, 1998.
<TABLE>
<CAPTION>
Year of Franchise Number of Percentage of Basic
Expiration Franchises Basic Subscribers Subscribers
- ----------------------- ------------------- --------------------- -------------------------
<S> <C> <C> <C>
Prior to 2000 185 267,917 27.0%
2000-2004 192 294,809 29.7%
2005 and after 253 390,932 39.4%
------------------- --------------------- -------------------------
Total 630 953,658 96.1%
------------------- --------------------- -------------------------
------------------- --------------------- -------------------------
</TABLE>
14
<PAGE>
The Partnership operates numerous cable television systems which
serve multiple communities and, in some circumstances, portions of such systems
extend into jurisdictions for which it believes no franchise is necessary. In
the aggregate, approximately 37,570 basic subscribers, comprising approximately
3.9% of the Falcon Systems' basic subscribers, are served by such portions of
such systems. In general, the Partnership does not believe that the loss of any
single franchise would cause a substantial reduction in the economies of scale
discussed above. In certain instances, however, where a single franchise
comprises a large percentage of the customers in an operating region, the loss
of such franchise could decrease the economies of scale achieved by the
Partnership's clustering strategy. The Partnership has never had a franchise
revoked for any of its systems and believes that it has satisfactory
relationships with substantially all of its franchising authorities.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise, but no value may be attributed to the franchise
itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act,
establishes comprehensive renewal procedures which require that an incumbent
franchisee's renewal application be assessed on its own merit and not as part of
a comparative process with competing applications. See "Legislation and
Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over-the-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. Cable systems
also face competition from alternative methods of distributing and receiving
television signals and from other sources of entertainment such as live sporting
events, movie theaters and home video products, including videotape recorders
and videodisc players. In recent years, the FCC has adopted policies providing
for authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources.
Individuals presently have the option to purchase home satellite
dishes, which allow the direct reception of satellite-delivered broadcast and
nonbroadcast program services formerly available only to cable television
subscribers. Most satellite-distributed program signals are being electronically
scrambled to permit reception only with authorized decoding equipment for which
the consumer must pay a fee. The 1992 Cable Act enhances the right of cable
competitors to purchase nonbroadcast satellite-delivered programming. See
"Legislation and Regulation-Federal Regulation."
Television programming is now also being delivered to individuals
by high-powered direct broadcast satellites utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over single high-powered satellites with significantly
higher capacity available if, as is the case with DIRECTV, multiple satellites
are placed in the same orbital position. Unlike cable television systems,
however, direct broadcast satellites are limited by law in their ability to
deliver local broadcast signals. One direct broadcast satellite provider,
EchoStar, has announced plans to deliver a limited number of local broadcast
signals in a limited number of markets and has initiated efforts to have the
practice legalized. Legislation has been introduced in Congress which would
permit direct broadcast satellite operators to elect to provide local broadcast
signals to their customers under the Copyright Act. If direct broadcast
satellite providers are ultimately permitted to deliver local broadcast signals,
cable television systems would lose a significant competitive advantage. Direct
broadcast satellite service can be received virtually anywhere in the
continental United States through the installation of a small rooftop or
side-mounted antenna, and it is
15
<PAGE>
more accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. Direct broadcast satellite service is being heavily marketed on a
nationwide basis by several service providers. In addition, medium-power
fixed-service satellites can be used to deliver direct-to-home satellite
services over small home satellite dishes, and one provider, PrimeStar,
currently provides service to subscribers using such a satellite. DIRECTV has
recently agreed to purchase PrimeStar.
Multichannel multipoint distribution systems deliver programming
services over microwave channels licensed by the FCC and received by subscribers
with special antennas. These wireless cable systems are less capital intensive,
are not required to obtain local franchises or to pay franchise fees, and are
subject to fewer regulatory requirements than cable television systems. To date,
the ability of wireless cable services to compete with cable television systems
has been limited by channel capacity (35-channel maximum) and the need for
unobstructed line-of-sight over-the-air transmission. Although relatively few
wireless cable systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The use of digital compression technology, and the FCC's recent amendment to its
rules, which permits reverse path or two-way transmission over wireless
facilities, may enable wireless cable systems to deliver more channels and
additional services.
Private cable television systems compete to service condominiums,
apartment complexes and certain other multiple unit residential developments.
The operators of these private systems, known as satellite master antenna
television systems, often enter into exclusive agreements with apartment
building owners or homeowners' associations which preclude franchised cable
television operators from serving residents of such private complexes. However,
the 1984 Cable Act gives franchised cable operators the right to use existing
compatible easements within their franchise areas upon nondiscriminatory terms
and conditions. Accordingly, where there are preexisting compatible easements,
cable operators may not be unfairly denied access or discriminated against with
respect to the terms and conditions of access to those easements. There have
been conflicting judicial decisions interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property. Under the 1996 Telecom Act, satellite master
antenna television systems can interconnect non-commonly owned buildings without
having to comply with local, state and federal regulatory requirements that are
imposed upon cable systems providing similar services, as long as they do not
use public rights of way.
The FCC has initiated a new interactive television service which
will permit non-video transmission of information between an individual's home
and entertainment and information service providers. This service, which can be
used by direct broadcast satellite systems, television stations and other video
programming distributors (including cable television systems), is an alternative
technology for the delivery of interactive video services. It does not appear at
the present time that this service will have a material impact on the operations
of cable television systems.
The FCC has allocated spectrum in the 28 GHz range for a new
multichannel wireless service that can be used to provide video and
telecommunications services. The FCC recently completed the process of awarding
licenses to use this spectrum via a market-by-market auction. It cannot be
predicted at this time whether such a service will have a material impact on the
operations of cable television systems.
Cable systems generally operate pursuant to franchises granted on
a non-exclusive basis. In addition, the 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to build and operate their own cable systems.
Municipally-owned cable systems enjoy certain competitive advantages such as
lower-cost financing and exemption from the payment of franchise fees. One of
the Partnership's franchise authorities in Oregon has given approval for a
municipally-owned utility company to obtain funding to build and operate its own
cable system. The franchise area included 4,975 basic subscribers, or less than
1% of the Partnership's total basic subscribers, as of December 31, 1998.
Should the municipality proceed with the project, any loss of the Partnership's
subscribers would not have a material adverse impact on its operating results.
16
<PAGE>
The 1996 Telecom Act eliminates the restriction against ownership
(subject to certain exceptions) and operation of cable systems by local
telephone companies within their local exchange service areas. Telephone
companies are now free to enter the retail video distribution business through
any means, such as direct broadcast satellite, wireless cable, satellite master
antenna television or as traditional franchised cable system operators.
Alternatively, the 1996 Telecom Act authorizes local telephone companies to
operate "open video systems" (a facilities-based distribution system, like a
cable system, but which is "open," i.e., also available for use by programmers
other than the owner of the facility) without obtaining a local cable franchise,
although telephone companies operating such systems can be required to make
payments to local governmental bodies in lieu of cable franchise fees. Up to
two-thirds of the channel capacity on an "open video system" must be available
to programmers unaffiliated with the local telephone company. As a result of the
foregoing changes, well financed businesses from outside the cable television
industry (such as public utilities that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. The 1996 Telecom Act, however, also includes numerous provisions
designed to make it easier for cable operators and others to compete directly
with local exchange telephone carriers in the provision of traditional telephone
service and other telecommunications services.
Other new technologies, including Internet-based services, may
become competitive with services that cable television systems can offer. The
1996 Telecom Act directed the FCC to establish, and the FCC has adopted,
regulations and policies for the issuance of licenses for digital television to
incumbent television broadcast licensees. Digital television is expected to
deliver high definition television pictures, multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide
nonbroadcast services including data transmission. The cable television industry
competes with radio, television, print media and the Internet for advertising
revenues. As the cable television industry continues to offer more of its own
programming channels, e.g., Discovery and USA Network, income from advertising
revenues can be expected to increase.
Certain of the Partnership's cable systems plan to offer
interactive online computer services to subscribers. These cable systems will
compete with a number of other companies, many of whom have substantial
resources, such as existing Internet service providers and local and long
distance telephone companies. Recently a number of Internet service providers
have requested local authorities and the FCC to provide rights of access to
cable television systems' broadband infrastructure in order that they be
permitted to deliver their services directly to cable television systems'
customers. In a recent report, the FCC declined to institute a proceeding to
examine this issue, and concluded that alternative means of access are or soon
will be made to a broad range of Internet service providers. The FCC declined to
take action on ISP access to broadband cable facilities, and the FCC indicated
that it would continue to monitor this issue. Several local jurisdictions also
are reviewing this issue.
Telephone companies are accelerating the deployment of Asymmetric
Digital Subscriber Line technology, known as ADSL. These companies report that
ADSL technology will allow Internet access to subscribers at peak data
transmission speeds equal or greater than that of modems over conventional
telephone lines. Several of the Regional Bell Operating Companies have requested
the FCC to fully deregulate packet-switched networks (a type of data
communication in which small blocks of data are independently transmitted and
reassembled at their destination) to allow them to provide high-speed broadband
services, including interactive online services, without regard to present
service boundaries and other regulatory restrictions. The Partnership cannot
predict the likelihood of success of the online services offered by these
competitors, (Internet service provider attempts to gain access to the cable
industry's broadband facilities), or the impact on the Partnership's business.
17
<PAGE>
Premium programming provided by cable systems is subject to the
same competitive factors which exist for other programming discussed above. The
continued profitability of premium services may depend largely upon the
continued availability of attractive programming at competitive prices.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry. See
"Legislation and Regulation."
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected, and
may in the future materially affect, the Partnership and the cable television
industry. The following is a summary of federal laws and regulations affecting
the growth and operation of the cable television industry and a description of
certain state and local laws. The Partnership believes that the regulation of
its industry remains a matter of interest to Congress, the FCC and other
regulatory authorities. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the effect
thereof on the Partnership.
FEDERAL REGULATION
The primary federal statute dealing with the regulation of the
cable television industry is the Communications Act of 1934, as amended. The
three principal amendments to the Communications Act that shaped the existing
regulatory framework for the cable television industry were the 1984 Cable Act,
the 1992 Cable Act and the 1996 Telecom Act.
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
The 1992 Cable Act replaced the FCC's previous standard for
determining "effective competition," under which most cable systems were not
subject to local rate regulation, with a statutory provision that resulted in
nearly all cable television systems becoming subject to local rate regulation of
basic service. The 1996 Telecom Act, however, expanded the definition of
effective competition to include situations where a local telephone company or
an affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except direct broadcast
satellite. A finding of effective competition exempts both basic and nonbasic
tiers from regulation. Additionally, the 1992 Cable Act required the FCC to
adopt a formula, enforceable by franchising authorities, to assure that basic
cable rates are reasonable; allowed the FCC to review rates for nonbasic service
tiers (other than per-channel or per-program services) in response to complaints
filed by franchising authorities and/or cable customers; prohibited cable
television systems from requiring subscribers to purchase service tiers above
basic service in order to purchase premium services if the system is technically
capable of doing so; required the FCC to adopt regulations to establish, on the
basis of actual costs, the price for installation of cable service, remote
controls, set top devices and additional outlets; and allowed the FCC to impose
restrictions on the retiering and rearrangement of cable services under certain
limited circumstances. The 1996 Telecom Act limits the class of complainants
regarding nonbasic tier rates to franchising authorities only and ends FCC
regulation of nonbasic tier rates on March 31, 1999.
The FCC's regulations contain standards for the regulation of
basic and nonbasic cable service rates (other than per-channel or per-program
services). Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required. The rate regulations adopt a benchmark price cap system for
measuring the reasonableness of existing basic and nonbasic service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(E.G., set top devices and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases
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<PAGE>
may not exceed an inflation-indexed amount, plus increases in certain costs
beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels. In
addition, new product tiers consisting of services new to the cable system
can be created free of rate regulation as long as certain conditions are met,
such as not moving services from existing tiers to the new tier. These
provisions currently provide limited benefit to the Partnership's systems due
to the lack of channel capacity previously discussed. There is also a
streamlined cost-of-service methodology available to justify a rate increase
on basic and regulated nonbasic tiers for "significant" system rebuilds or
upgrades.
Numerous franchising authorities have become certified by the FCC
to regulate the rates charged by the Partnership for basic cable service and for
installation charges and equipment rental. The Partnership has had to bring its
rates and charges into compliance with the applicable benchmark or equipment and
installation cost levels in substantially all of its systems. This has had a
negative impact on the Partnership's revenues and cash flow. In addition, a
number of the customers and/or franchising authorities have filed complaints
with the FCC regarding the rates charged for nonbasic cable service. During
1998, the FCC dismissed or denied four such complaints but granted eight others.
In such cases, the systems have had to adjust certain nonbasic rates.
FCC regulations adopted pursuant to the 1992 Cable Act require
cable systems to permit customers to purchase video programming on a per channel
or a per program basis without the necessity of subscribing to any tier of
service, other than the basic service tier, unless the cable system is
technically incapable of doing so. Generally, an exemption from compliance with
this requirement for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002. At the present time, a number of the Partnership's systems are
unable to comply with this requirement.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act adopted new television station carriage
requirements. These rules allow commercial television broadcast stations which
are "local" to a cable system, I.E., the system is located in the station's Area
of Dominant Influence, to elect every three years whether to require the cable
system to carry the station, subject to certain exceptions, or whether the cable
system will have to negotiate for "retransmission consent" to carry the station.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50-mile
radius from the station's city of license; or (ii) the station's Grade B contour
(a measure of signal strength). Unlike commercial stations, noncommercial
stations are not given the option to negotiate retransmission consent for the
carriage of their signal. In addition, cable systems must obtain retransmission
consent for the carriage of all "distant" commercial broadcast stations, except
for certain "superstations," I.E., commercial satellite-delivered independent
stations, such as WGN. The Partnership has thus far not been required to pay
cash compensation to broadcasters for retransmission consent or been required by
broadcasters to remove broadcast stations from the cable television channel
line-ups. The Partnership has, however, agreed to carry some services in
specified markets pursuant to retransmission consent arrangements which it
believes are comparable to those entered into by most other large cable
operators, and for which it pays monthly fees to the service providers, as it
does with other satellite providers. The second election between must-carry and
retransmission consent for local commercial television broadcast stations was
October 1, 1996, and the Partnership has agreed to carry one new service in
specified markets pursuant to these retransmission consent arrangements. The
next election between must-carry and retransmission consent for local commercial
television broadcast stations will be October 1, 1999.
The FCC is currently conducting a rulemaking proceeding regarding
the carriage responsibilities of cable television systems during the transition
of broadcast television from analog to digital transmission. Specifically, the
FCC is exploring whether to amend the signal carriage rules to accommodate the
carriage of digital broadcast television signals. The Partnership is unable to
predict the ultimate outcome of this proceeding or the impact of new carriage
requirements on the operations of its cable systems.
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NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must,
upon the appropriate request of a local television station, delete the
simultaneous or nonsimultaneous network programming of certain lower priority
distant stations affiliated with the same network as the local station.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable system to delete or "black out" such programming from
certain other television stations which are carried by the cable system. The
extent of such deletions will vary from market to market and cannot be predicted
with certainty. However, it is possible that such deletions could be substantial
and could lead the cable operator to drop a distant signal in its entirety.
PROGRAM ACCESS
The 1992 Cable Act contains provisions that are intended to foster
the development of competition to traditional cable systems by regulating the
access of competing multichannel video providers to vertically integrated,
satellite-distributed cable programming services. Consequently, with certain
limitations, the federal law generally precludes any satellite distributed
programming service affiliated with a cable company from favoring an affiliated
company over competitors; requires such programmers to sell their programming to
other multichannel video providers; and limits the ability of such satellite
program services to offer exclusive programming arrangements to their
affiliates.
FRANCHISE FEES
Franchising authorities may impose franchise fees, but such
payments cannot exceed 5% of a cable system's annual gross revenues. Under the
1996 Telecom Act, franchising authorities may not exact franchise fees from
revenues derived from telecommunications services.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act makes several changes to the process under
which a cable operator seeks to enforce his renewal rights, which could make
it easier in some cases for a franchising authority to deny renewal. While a
cable operator must still submit its request to commence renewal proceedings
within thirty to thirty-six months prior to franchise expiration to invoke
the formal renewal process, the request must be in writing and the
franchising authority must commence renewal proceedings not later than six
months after receipt of such notice. The four-month period for the
franchising authority to grant or deny the renewal now runs from the
submission of the renewal proposal, not the completion of the public
proceeding. Franchising authorities may consider the "level" of programming
service provided by a cable operator in deciding whether to renew. For
alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written
notice from the cable
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<PAGE>
operator of its failure or inability to cure. Courts may not reverse a denial
of renewal based on procedural violations found to be "harmless error."
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
COMPETING FRANCHISES
The 1992 Cable Act prohibits franchising authorities from
unreasonably refusing to grant franchises to competing cable television systems
and permits franchising authorities to operate their own cable television
systems without franchises.
OWNERSHIP
The 1996 Telecom Act repealed the 1984 Cable Act's prohibition
against local exchange telephone companies providing video programming
directly to customers within their local telephone exchange service areas.
However, with certain limited exceptions, a local exchange telephone company
may not acquire more than a 10% equity interest in an existing cable system
operating within the local exchange telephone company's service area. The
1996 Telecom Act also authorized local exchange telephone companies and
others to operate "open video systems." A recent judicial decision overturned
various parts of the FCC's open video rules, including the FCC's restriction
preventing local governmental authorities from requiring open video system
operators to obtain a franchise. The Partnership expects the FCC to modify
its open video rules to comply with the federal court's decision, but is
unable to predict the impact any rule modifications may have on the
Partnership's business and operations. See "Business-Competition."
The 1984 Cable Act and the FCC's rules prohibit the common
ownership, operation, control or interest in a cable system and a local
television broadcast station whose predicted Grade B contour (a measure of a
television station's signal strength as defined by the FCC's rules) covers
any portion of the community served by the cable system. The 1996 Telecom Act
eliminates the statutory ban and directs the FCC to review its rule within
two years. Such a review is presently pending. Finally, in order to encourage
competition in the provision of video programming, the FCC adopted a rule
prohibiting the common ownership, affiliation, control or interest in cable
television systems and wireless cable facilities having overlapping service
areas, except in very limited circumstances. The 1992 Cable Act codified this
restriction and extended it to co-located satellite master antenna television
systems. Permitted arrangements in effect as of October 5, 1992 are
grandfathered. The 1996 Telecom Act exempts cable systems facing effective
competition from the wireless cable and satellite master antenna television
restriction. In addition, a cable operator can purchase a satellite master
antenna television system serving the same area and technically integrate it
into the cable system. The 1992 Cable Act permits states or local franchising
authorities to adopt certain additional restrictions on the ownership of
cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on
the number of cable systems which a single cable operator can own. In
general, no cable operator can have an attributable interest in cable systems
which pass more than 30% of all homes nationwide. Attributable interests for
these purposes include voting interests of 5% or more (unless there is
another single holder of more than 50% of the voting stock), officerships,
directorships, general partnership interests and limited partnership
interests (unless the limited partners have no material involvement in the
limited partnership's business). These rules are under review by the FCC. The
FCC has stayed the effectiveness of these rules pending the outcome of the
appeal from a U.S. District Court decision holding the multiple ownership
limit provision of the 1992 Cable Act unconstitutional.
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<PAGE>
The FCC has also adopted rules which limit the number of
channels on a cable system which can be occupied by programming in which the
entity which owns the cable system has an attributable interest. The limit is
40% of the first 75 activated channels.
The FCC also recently commenced a rulemaking proceeding to
examine, among other issues, whether any limitations on cable-direct
broadcast satellite cross-ownership are warranted in order to prevent
anticompetitive conduct in the video services market.
FRANCHISE TRANSFERS
The 1992 Cable Act requires franchising authorities to act on
any franchise transfer request submitted after December 4, 1992 within 120
days after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
TECHNICAL REQUIREMENTS
The FCC has imposed technical standards applicable to the cable
channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which are in conflict with or
more restrictive than those established by the FCC. Those standards are
applicable to all classes of channels which carry downstream National
Television System Committee video programming. The FCC also has adopted
additional standards applicable to cable television systems using frequencies
in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful
interference with aeronautical navigation and safety radio services and has
also established limits on cable system signal leakage. Periodic testing by
cable operators for compliance with the technical standards and signal
leakage limits is required and an annual filing of the results of these
measurements is required. The 1992 Cable Act requires the FCC to periodically
update its technical standards to take into account changes in technology.
Under the 1996 Telecom Act, local franchising authorities may not prohibit,
condition or restrict a cable system's use of any type of subscriber
equipment or transmission technology.
The FCC has adopted regulations to implement the requirements
of the 1992 Cable Act designed to improve the compatibility of cable systems
and consumer electronics equipment. Among other things, these regulations
generally prohibit cable operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable systems, and to rely on
marketplace competition to best determine which features, functions,
protocols, and product and service options meet the needs of consumers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules to
assure the competitive availability to consumers of customers premises
equipment, such as set top devices, used to access the services offered by
cable television systems and other multichannel video programming
distributions. Pursuant to those rules, consumers are given the right to
attach compatible equipment to the facilities of their multichannel video
programming distribution so long as the equipment does not harm the network,
does not interfere with the services purchased by other customers, and is not
used to receive unauthorized services. As of July 1, 2000, multichannel video
programming distributions (other than direct broadcast satellite operators)
are required to separate security from non-security functions in the customer
premises equipment which they sell or lease to their customers and offer
their customers the option of using component security modules obtained from
the multichannel video programming distribution with set-top units purchased
or leased from retail outlets. As of January 1, 2005, multichannel video
programming distributions will be prohibited from distributing new set -top
equipment integrating both security and non-security functions to their
customers.
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POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they regulate the rates, terms and
conditions of cable television pole attachments. The states of California,
Illinois, Kentucky, Louisiana, Michigan, New York, Oregon, Utah, Washington
and Idaho, in which the Partnership operates cable systems, have certified to
the FCC that they regulate the rates, terms and conditions for pole
attachments. In the absence of state regulation, the FCC administers such
pole attachment rates through use of a formula which it has devised. The 1996
amendments to the Communications Act modified the FCC's pole attachment
regulatory scheme by requiring the FCC to adopt new regulations. These
regulations become effective in 2001 and govern the charges for pole
attachments used by companies, including cable operators, that provide
telecommunications services by immediately permitting certain providers of
telecommunications services to rely upon the protections of the current law
until the new rate formula becomes effective in 2001, and by requiring that
utilities provide cable systems and telecommunications carriers with
nondiscriminatory access to any pole, conduit or right-of-way controlled by
the utility. In adopting its new attachment regulations, the FCC concluded,
in part, that a cable operator providing Internet service on its cable system
is not providing a telecommunications service for purposes of the new rules.
The new rate formula adopted by the FCC and which is applicable
for any party, including cable systems which offer telecommunications
services, will result in significantly higher attachment rates for cable
systems which choose to offer such services. Any resulting increase in
attachment rates as a result of the FCC's new rate formula will be phased in
over a five-year period in equal annual increments, beginning in February
2001. Several parties have requested the FCC to reconsider its new
regulations and several parties have challenged the new rules in court. A
federal district court recently upheld the constitutionality of the new
statutory provision, and the utilities involved in that litigation have
appealed the lower court's decision. The FCC also has initiated a proceeding
to determine whether it should adjust certain elements of the current rate
formula. If adopted, these adjustments could increase rates for pole
attachments and conduit space. The Partnership is unable to predict the
outcome of this current litigation or the ultimate impact of any revised FCC
rate formula or of any new pole attachment rate regulations on its business
and operations.
OTHER MATTERS
Other matters subject to FCC regulation include certain
restrictions on a cable system's carriage of local sports programming; rules
governing political broadcasts; customer service standards; obscenity and
indecency; home wiring; equal employment opportunity; privacy; closed
captioning; sponsorship identification; system registration; and limitations
on advertising contained in nonbroadcast children's programming.
COPYRIGHT
Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on
the amount of system revenues from certain sources, the number of distant
signals carried, and the location of the cable system with respect to
over-the-air television stations. Any future adjustment to the copyright
royalty rates will be done through an arbitration process supervised by the
U.S. Copyright Office.
Cable operators are liable for interest on underpaid and unpaid
royalty fees, but are not entitled to collect interest on refunds received
for overpayment of copyright fees.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks (such as HBO) and basic cable
networks (such as USA Network) is licensed by the networks through private
agreements with the American Society of Composers and Publishers and BMI,
Inc., the two major
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performing rights organizations in the United States. As a result of
extensive litigation, both American Society of Composers and Publishers and
BMI, Inc. now offer "through to the viewer" licenses to the cable networks
which cover the retransmission of the cable networks' programming by cable
systems to their customers. Payment for music performed in programming
offered on a per program basis remains unsettled. The Partnership recently
participated in a settlement with BMI for payment of fees in connection with
the Request pay-per-view network. Industry litigation of this issue with
American Society of Composers and Publishers is likely.
Copyrighted music transmitted by cable systems themselves,
E.G., on local origination channels or in advertisements inserted locally on
cable networks, must also be licensed. Cable industry negotiations with
American Society of Composers and Publishers, BMI and SESAC, Inc. (a third
and smaller performing rights organization) are in progress.
LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails
to comply with material provisions. Although the 1984 Cable Act provides for
certain procedural protections, there can be no assurance that renewals will
be granted or that renewals will be made on similar terms and conditions.
Upon receipt of a franchise, the cable system owner usually is subject to a
broad range of obligations to the issuing authority directly affecting the
business of the system. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction, and even from city to city
within the same state, historically ranging from reasonable to highly
restrictive or burdensome. The specific terms and conditions of a franchise
and the laws and regulations under which it was granted directly affect the
profitability of the cable television system. Cable franchises generally
contain provisions governing charges for basic cable television services,
fees to be paid to the franchising authority, length of the franchise term,
renewal, sale or transfer of the franchise, territory of the franchise,
design and technical performance of the system, use and occupancy of public
streets and the number and types of cable services provided. The 1996 Telecom
Act prohibits a franchising authority from either requiring or limiting a
cable operator's provision of telecommunications services.
The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system operator, and
the courts have from time to time reviewed the constitutionality of several
general franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992
Cable Act prohibits exclusive franchises, and allows franchising authorities
to exercise greater control over the operation of franchised cable television
systems, especially in the area of customer service and rate regulation.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.
Existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
ITEM 2. PROPERTIES
The Partnership owns substantially all of the assets related to
the Falcon Systems' cable television operations, including program production
equipment, headend equipment (towers, antennas, electronic equipment and
satellite earth stations), cable plant (distribution equipment, amplifiers,
customer drops and hardware), set top devices, test equipment, tools and
maintenance equipment and vehicles. The Partnership owns or leases parcels of
real property for signal reception sites (antenna towers and headends),
microwave facilities and business offices.
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The Partnership believes that its properties, both owned and leased, are in
good condition and are suitable and adequate for the Partnership's business
operations.
The Partnership leases office space for both its corporate
headquarters (located in Los Angeles, California) and its corporate financial
center (located in Pasadena, California). The office building in which the
Partnership leases space for the corporate financial center is owned by a
partnership owned by Marc B. Nathanson and his wife. The Partnership has
increased the amount of space it leases from such partnership. The terms of
the current lease for the corporate financial center have been negotiated on
an arm's length basis. The Partnership also assumed a lease for office space
in a building owned by Marc B. Nathanson and his wife in connection with the
acquisition of the assets of Falcon Cable Systems Company. The property was
purchased by the Partnership in February, 1999 for a purchase price
determined by two independent appraisals. See Item 13., "Certain
Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Partnership is periodically a party to various legal
proceedings. Such legal proceedings are ordinary and routine litigation
proceedings that are incidental to the Partnership's business and management
presently believes that the outcome of all pending legal proceedings will
not, in the aggregate, have a material adverse effect on the financial
condition of the Partnership.
The Partnership, certain of its affiliates, and certain third
parties have been named as defendants in an action entitled FRANK O'SHEA
I.R.A. ET AL. v. FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386,
pending in the Superior Court of the State of California, County of Los
Angeles. Plaintiffs in this 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 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 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. A settlement of the action has been agreed to and will be
presented to the Court for approval on April 22, 1999. The terms of the
settlement, if approved, are not expected to have a material adverse effect
on the financial condition of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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. As of March 1, 1999, the two partners in the
Partnership were FHGLP and TCI Falcon Holdings, LLC.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership for
the five years ended December 31, 1998. This data should be read in conjunction
with the Partnership's financial statements included in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1994 1995(1) 1996(1) 1997 1998(9)
----------- ----------- ------------ ----------- ------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Revenues $ 147,229 $ 151,208 $ 217,320 $ 255,886 $ 307,558
Costs and expenses (67,711) (71,652) (97,180) (122,080) (161,233)
Depreciation and amortization (60,935) (54,386) (100,415) (118,856) (152,585)
----------- ----------- ------------ ----------- ------------
Operating income (loss) 18,583 25,170 19,725 14,950 (6,260)
Interest expense, net(2) (49,859) (57,777) (71,602) (79,137) (102,591)
Equity in net income (loss) of investee
partnerships (1,782) (5,705) (44) 443 (176)
Other income (expense), net(3) (455) 13,077 814 885 (2,917)
Income tax benefit (expense) - - 1,122 2,021 (1,897)
=========== =========== ============ =========== ============
Loss before extraordinary item $ (33,513) $ (25,235) $ (49,985) $ (60,838) $ (113,841)
=========== =========== ============ =========== ============
OTHER OPERATING DATA
EBITDA(4) $ 79,518 $ 79,556 $ 120,140 $ 133,806 $ 146,325
EBITDA margin 54.0% 52.6% 55.3% 52.3% 47.6%
Total debt to EBITDA 6.8x 7.0x(5) 6.6x(5) 6.8x 7.9x(6)
Net cash provided by operating activities $ 49,076 $ 43,162 $ 90,631 $ 79,537 $ 71,611
Net cash used in investing activities (36,065) (22,674) (284,247) (76,287) (188,328)
Net cash provided by (used in) financing
activities (18,169) (15,906) 192,199 (2,966) 117,084
Capital expenditures(7) 28,232 37,149 57,668 76,323 96,367
Deficiency of earnings to cover fixed
charges(8) (33,513) (25,254) (51,252) (63,302) (111,768)
<CAPTION>
As of December 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 10,468 $ 15,050 $ 13,633 $ 13,917 $ 14,284
Total assets 425,402 585,258 774,323 740,358 1,445,422
Total debt 538,626 669,019 885,786 911,221 1,611,353
Redeemable partners' equity 93,964 271,902 271,902 171,373 133,023
Partners' deficit (256,758) (411,681) (456,499) (416,755) (403,696)
</TABLE>
FOOTNOTES ON THE FOLLOWING PAGE
27
<PAGE>
FOOTNOTES TO ITEM 6 - "SELECTED FINANCIAL DATA"
(1) The December 31, 1995 consolidated balance sheet data include the
assets and liabilities of Falcon First, which were acquired on December
28, 1995. The consolidated statement of operations data for the year
ended December 31, 1995 exclude the operations of Falcon First due to
the proximity of the acquisition date to the end of the year, except
that management fees from Falcon First of $1.6 million are included in
the consolidated statement of operations data. On July 12, 1996, FHGLP
acquired the assets of FCSC and, accordingly, the results of the FCSC
systems have been included from July 12, 1996. Management fees and
reimbursed expenses received in 1996 by FHGLP from FCSC prior to July
12, 1996 amounted to $1.5 million and $1 million, respectively, and
are included in the 1996 consolidated statement of operations data. The
amounts attributable to management fees and reimbursed expenses
received by FHGLP from FCSC in 1995 were $2.6 million and $2 million,
respectively.
(2) Interest expense, net includes payment-in-kind interest expense
amounting to $24.5 million, $27.1 million, $26.6 million, and $20.4
million for the years ended December 31, 1994, 1995, 1996 and 1997,
respectively, and amortization of debt discount of $19.3 million at
December 31, 1998. See Note 6 to the Partnership's 1998 consolidated
financial statements.
(3) Other income (expense), net in 1995 includes a gain on sale of
marketable securities of $13.3 million.
(4) EBITDA is calculated as operating income before depreciation and
amortization. Based on its experience in the cable television industry,
the Partnership believes that EBITDA and related measures of cash flow
serve as important financial analysis tools for measuring and comparing
cable television companies in several areas, such as liquidity,
operating performance and leverage. In addition, the covenants in the
primary debt instruments of the Partnership use EBITDA-derived
calculations as a measure of financial performance. EBITDA 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 the Partnership'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 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.
(6) Total debt to EBITDA has been computed on a pro forma basis for 1998 to
include the EBITDA of Falcon Classic of $1.8 million, Falcon Video of
$12.2 million and TCI of $44.3 million, making the combined 1998 EBITDA
$204.6 million. Without these pro forma adjustments, 1998 data would
include the debt incurred to acquire Falcon Classic, Falcon Video and
TCI, but would exclude the respective EBITDA for the periods January 1,
1998 through March 8, 1998 (Falcon Classic), January 1, 1998 though
July 16, 1998 (Falcon Classic's Somerset, Kentucky cable television
system), January 1, 1998 though September 30, 1998 (Falcon Video and
TCI) resulting in a total debt to EBITDA historical ratio of 11.01x
compared to a pro forma ratio of 7.88x.
(7) Excluding acquisitions of cable television systems.
(8) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges, as adjusted for earnings and
distributions of less than 50% owned companies accounted for under the
equity method. Fixed charges are defined as the sum of (i) total
interest costs (including an estimated interest component of rental
expenses) and (ii) amortization of debt discount and expense.
(9) In March 1998, FHGLP acquired substantially all of the assets of Falcon
Classic and, accordingly, the results of these acquired systems have
been included from the date of their acquisition. Management fees and
reimbursed expenses received in 1998 by the Partnership from Falcon
Classic amounted to $191,000 and $115,000, respectively, and are
included in the consolidated statement of operations data. The amounts
attributable to management fees and reimbursed expenses received by the
Partnership from Falcon Classic in 1997 were $1.3 million and $519,000,
respectively. On September 30, 1998 the Partnership acquired the assets
of Falcon Video and, accordingly, the results of these acquired systems
have been included from the date of their acquisition. Management fees
received by the Partnership in 1998 and 1997 from Falcon Video amounted
to $1.2 million and $1.6 million, respectively, and are included in the
consolidated statement of operations data.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of
1992 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 Telecommunications Act of 1996
substantially changed the competitive and regulatory environment for cable
television and telecommunications service providers. Among other changes, the
Telecommunications Act of 1996 provides that the regulation of cable
programming service tier rates will terminate on March 31, 1999. 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.
29
<PAGE>
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Partnership's revenues increased from $255.9 million to
$307.6 million, or by 20.2%, during 1998 compared to 1997. Of the $51.7
million net increase in revenues, $29.5 million was due to the acquisition in
September 1998 of the TCI systems, $8.1 million was due to the acquisition in
September 1998 of the Falcon Video systems and $16.1 million was due to the
acquisition in March and July 1998 of the Falcon Classic systems. These
increases were partially offset by decreases of $1.5 million in management
fees and $482,000 in cable service revenues. The $482,000 decrease in cable
service revenues was caused principally by decreases of $4 million due to
reductions in the number of regulated subscriptions for cable service and
$3.9 million due to reductions in the number of premium subscriptions for
cable service. These decreases were partially offset by increases of $4.4
million related to increases in regulated service rates implemented primarily
during 1997, $2.3 million related to increases in unregulated service rates
implemented during 1997 and $718,000 related to increases in other revenues,
primarily advertising sales. As of December 31, 1998, the Falcon Systems had
approximately 991,000 basic subscribers and 276,000 premium service units.
Management and consulting fees earned by the Partnership
decreased from $5.2 million to $3.7 million during 1998 primarily due to a
$336,000 reduction related to the acquisition of the Falcon Video systems by
the Partnership and $1.1 million reduction in the amounts received from
Falcon Classic. Of the $1.1 million reduction from Falcon Classic, $813,000
was due to the March and July 1998 acquisition of the Falcon Classic systems
by the Partnership; the balance was due to the one-time receipt by the
Partnership during 1997 of previously deferred fees from Falcon Classic.
Service costs increased from $75.6 million to $97.8 million, or
by 29.3%, during 1998 compared to 1997. Service costs represent costs
directly attributable to providing cable services to customers. Of the $22.2
million increase in service costs, $20.1 million related to the acquisitions
of the TCI systems, Falcon Video systems and the Falcon Classic systems
($11.9 million, $3 million and $5.2 million, respectively); and $3.3 million
related to increases in programming fees paid to program suppliers (including
primary satellite fees). These increases were partially offset by decreases
in copyright fees of approximately $1.8 million.
General and administrative expenses increased from $46.4
million to $63.4 million, or by 36.5%, during 1998 compared to the
corresponding period in 1997. Of the $17 million increase, approximately $7.7
million resulted from non-recurring compensation expenses related to the TCI
Transaction, including approximately $6.5 million representing payments in
September 1998 to certain FHGLP employees of amounts due under FHGLP's 1993
Incentive Performance Plan, as required by the Contribution Agreement.
General and administrative costs also increased $4.6 million during 1998
related to the acquisition of the TCI systems, $1.1 million related to the
acquisition of the Falcon Video systems and $2.4 million related to the
acquisition of the Falcon Classic systems. These increases were partially
offset by a $1.2 million decrease in bad debt expense.
Depreciation and amortization expense increased from $118.8
million to $152.5 million, or by 28.4%, during 1998 compared to 1997. Of the
$33.7 million increase in depreciation and amortization expense, $17.4
million was due to the acquisition of the TCI systems, $4.8 million was due
the acquisition of the Falcon Video systems and $11.7 million was due to the
acquisition of the Falcon Classic systems.
Operating income decreased from $14.9 million of income in 1997
to $6.3 million of loss in 1998, or by 141.9%. The $21.2 million decrease was
principally due to the depreciation and amortization expense associated with
the acquisition of the TCI systems, the Falcon Video systems and the Falcon
Classic systems (which had a combined operating loss of $11 million) and to
non-recurring compensation expense and increases in programming fees, as
discussed above.
Interest expense, net, including the effects of interest rate
hedging agreements, increased from $79.1 million to $102.6 million, or by
29.6%, during 1998 compared to 1997. The $23.5 million increase in
30
<PAGE>
interest expense related primarily to higher average debt balances
outstanding (as discussed in Note 6 to the consolidated financial
statements). The increase was partially offset by the effect of slightly
lower average interest rates (8.7% during 1998 compared to 8.9% during 1997).
Due to the Partnership electing to pay interest expense on the 11% senior
subordinated notes due 2003 in cash on March 15, 1998, there was no non-cash
interest expense associated with the notes for 1998 compared to $20.4 million
of non-cash interest expense in 1997. Non-cash interest expense associated
with the senior discount debentures issued on April 3, 1998 amounted to $19.3
million during 1998. Interest rate hedging agreements resulted in additional
interest expense of $1.2 million during 1998 and $350,000 in 1997.
Due to the factors described above, the Partnership's net loss
increased from $60.8 million to $144.6 million, or by 137.6%, during 1998
compared to 1997.
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 52.3% during 1997 to 47.6% in 1998. The
decrease was primarily caused by the non-recurring compensation costs and
increases in programming fees described above and to the acquisition of the
TCI systems, the Falcon Video systems and the Falcon Classic systems (which
had a combined EBITDA as a percentage of revenues of 42.8%). EBITDA increased
from $133.8 million in 1997 to $146.3 million for 1998, or by 9.4%.
1997 COMPARED TO 1996
The Partnership'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 Falcon Systems had approximately 563,000
basic subscribers and 166,000 premium service units.
Management and consulting fees earned by the Partnership
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 the Partnership prior to July 12,
1996, partially offset by increased fees related to recording in 1997 the
balance of previously deferred 1995 management fees from Falcon Classic.
Service costs increased from $60.3 million to $75.6 million, or
by 25.4%, during 1997 compared to 1996. Service costs represent costs
directly attributable to providing cable services to customers. Of the $15.3
million increase in service costs, $9.8 million related to the acquisition of
FCSC assets, $4.2 million related to increases in programming fees paid to
program suppliers (including primary satellite fees) and $1.2 million related
to increases in property taxes, franchise fees and personnel costs. The
increase in programming costs included $279,000 related to the July 1, 1996
restructuring of The Disney Channel discussed above.
General and administrative expenses increased from $36.9
million to $46.4 million, or by 25.9%, during 1997 compared to 1996. Of the
$9.5 million increase, $6 million related to the acquisition of FCSC assets,
$2.8 million related to increases in bad debt expense, $1 million related to
the absence in 1997 of reimbursed expenses from FCSC, which was managed by
the Partnership prior to July 12, 1996 and $677,000 related to a reduction in
reimbursement from Falcon International Communications, an affiliated entity
of expenses incurred in connection with international investments. These
increases were partially offset by a decrease of $849,000
31
<PAGE>
related primarily to reduced insurance premiums as a result of self-insuring
the Company's cable distribution plant and subscriber connections during 1997
and a $345,000 decrease in costs associated with reregulation by the FCC.
Depreciation and amortization expense increased from $100.4
million to $118.8 million, or by 18.4%, during 1997 compared with 1996. The
$18.4 million increase in depreciation and amortization expense was primarily
due to the acquisition of the FCSC assets partially offset by accelerated
1996 depreciation related to asset retirements and to intangible assets
becoming fully amortized.
Operating income decreased from $19.7 million to $14.9 million,
or by 24.2%, during 1997 compared to 1996. The $4.8 million decrease was
principally due to increases in operating expenses in excess of revenues and
to an increase in depreciation and amortization expense as discussed above.
Interest expense, net, including the effects of interest rate
hedging agreements, increased from $71.6 million to $79.1 million, or by
10.5%, during 1997 compared to 1996. The $7.5 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 (8.9% during 1997 compared to 9% during 1996). Payment-in-kind
interest expense associated with the 11% 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 in 1996 to $133.8
million for 1997, or by 11.4%.
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 set top devices to certain of its cable
systems. The Partnership spent $96.4 million during 1998 on capital
expenditures, including approximately $58.4 million to rebuild and upgrade
certain cable systems. Management's current plan calls for the expenditure of
approximately $190 million in capital expenditures in 1999, including $111
million for rebuild and upgrade projects. The Partnership plans to finance
capital expenditures with cash flow from operations and borrowings under its
bank credit facility, subject to its ability to remain in compliance with
certain covenants of the bank credit facility, the indenture for the
Partnership's outstanding debentures and the partnership agreement. The
Partnership's proposed spending plans are frequently reviewed and revised
with respect to changes in technology, acceptable leverage parameters
(including those specified in its debt and partnership agreements), franchise
requirements, competitive circumstances and other factors.
The bank credit facility entered into on June 30, 1998 provides
for maximum committed available borrowings of $1.15 billion, reducing to
$827.5 million at December 31, 2004 (see Note 6 to the consolidated financial
statements). As of December 31, 1998, the amount outstanding under the bank
credit facility was $926 million and, subject to complying with covenants,
the Partnership had available to it additional committed borrowing capacity
thereunder (excluding the supplemental credit facility) of approximately $224
million. However, limitations imposed by the Partnership's partnership
agreement would limit available borrowings at December 31, 1998 to $23.1
million. The bank credit facility 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
32
<PAGE>
that the Partnership maintain hedging arrangements with respect to at least
50% of the outstanding borrowings thereunder plus any additional borrowings
of the Partnership, including the debentures, for a two year period. As of
December 31, 1998, borrowings under the bank credit facility bore interest at
an average rate of 7.55% (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, 1998 of $1.485
billion, including contracts of $160 million assumed from Falcon Video in
connection with the TCI Transaction. Agreements in effect at December 31,
1998 totaled $910 million, with the remaining $575 million to become
effective as certain of the existing contracts mature during 1999 through
October of 2004. The agreements serve as a hedge against interest rate
fluctuations associated with the Partnership's variable rate debt. These
agreements expire at various times through October, 2006. 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.
The Partnership's earnings are affected by changes in
short-term interest rates applied to the portion of its debt that is not
protected by hedging agreements. Due to the significance of the Partnership's
derivative financial instruments which serve as hedges of the Partnership's
variable rate indebtedness, a 1% change in average interest rates would have
an immaterial impact on the Partnership's reported interest expense for the
year ended December 31, 1998.
The bank credit facility 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, 1998. Management believes that borrowings under the bank credit facility
together with cash flow from operations, will be adequate to meet the
Partnership's liquidity needs for the foreseeable future.
On April 3, 1998, as discussed in Note 6 to the consolidated
financial statements, the Partnership and Falcon Funding Corporation
consummated offerings of $375 million aggregate principal amount of 8.375%
senior debentures and $435.2 million aggregate principal amount at maturity
of 9.285% senior discount debentures due 2010. The net proceeds of
approximately $631 million from the sale of the debentures were used
primarily to repay outstanding indebtedness under the then existing bank
credit agreement. Semiannual interest payments with respect to the senior
debentures are approximately $15.7 million in the aggregate. No interest on
the senior discount debentures will be payable prior to April 15, 2003,
unless the Partnership elects to pay cash interest. After April 15, 2003,
semiannual interest payments will be approximately $35.9 million in the
aggregate. The Partnership anticipates that cash flow from operations and, if
necessary, borrowings under the bank credit facility (or a successor credit
facility) will be adequate to meet its interest payment obligations under the
debentures.
In September 1998, as discussed in Note 6 to the consolidated
financial statements, the Partnership completed a registered exchange offer
for the debentures. In connection with consummation of the TCI Transaction,
the Partnership was substituted for FHGLP as an obligor under the debentures
and the indenture governing the debentures and thereupon FHGLP was released
and discharged from any further obligation with respect to the debentures and
the indenture.
On May 19, 1998, the Partnership repurchased approximately
$247.8 million aggregate principal amount of its 11% notes for an aggregate
purchase price of $270.3 million pursuant to a fixed spread tender offer for
all outstanding notes. The notes tendered represented approximately 88% of
the notes outstanding. The repurchase was funded with borrowings under the
then existing bank credit agreement.
The approximate $34.4 million principal amount of the 11% notes
not validly tendered and repurchased in the tender offer were redeemed at a
premium on September 15, 1998 in accordance with the terms of the indenture
governing the notes. The $38.2 million aggregate redemption price was funded
with borrowings under the bank credit facility.
33
<PAGE>
The Partnership is a separate, stand-alone holding company
which employs all of the management personnel for the Falcon Systems. All of
the Falcon Systems are owned by subsidiaries of the Partnership. Accordingly,
to fund its operations and to pay its expenses, including interest expense,
the Partnership is financially dependent on the receipt of funds from its
subsidiaries, management and consulting fees from domestic cable ventures,
and on the reimbursement of specified expenses by the remaining Affiliated
Systems. 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. The bank credit facility permitted the
Partnership's subsidiaries to remit to the Partnership no more than 4.25% of
their net cable revenues in 1998. For the year ended December 31, 1998, the
Partnership's credit agreements permitted its subsidiaries to remit
approximately $12.7 million to the Partnership, and $12.4 million was
actually remitted. Beginning on January 1, 1999, this limitation was
increased to 4.5% of net cable revenues in any year. Additionally, the
Partnership's subsidiaries were permitted to pay approximately $23.4 million
of previously deferred management fees in May 1998 that had not been paid due
to restrictions in the Partnership's credit facility. As a result of the 1998
acquisition of the Falcon Video and Falcon Classic systems, the Partnership
will no longer receive management fees and reimbursed expenses from Falcon
Classic or receive management fees from Falcon Video. To the extent that the
Enstar limited partnerships are liquidated and not acquired by the
Partnership (see Item 1., "Business - The Affiliated Systems"), the
Partnership's current revenues and reimbursement of expenses will be reduced.
For the year ended December 31, 1998, the amount recorded from the Enstar
partnerships for management fees and reimbursement of expenses was $1.9
million and $1.3 million, respectively. Commencing October 1, 1998,
subsidiaries of FHGLP will retain 20% of the management fees paid by the
Enstar partnerships. Receivables from the Affiliated Systems for services and
reimbursements described above amounted to approximately $2.3 million at
December 31, 1998.
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
its affiliated systems due to its familiarity with these assets and because,
in many cases, these assets were already operationally integrated with Falcon
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.
Beginning in August 1997, the Partnership elected to
self-insure its 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. In October 1998, the Partnership reinstated third party
insurance coverage against damage to its cable distribution plant and
subscriber connections and against business interruptions resulting from such
damage. This coverage is subject to a significant annual deductible and is
intended to limit the Partnership's exposure to catastrophic losses, if any,
in future periods. 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. 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.
YEAR 2000
During the fourth quarter of 1998, the Partnership's management
continued its identification and evaluation of the Partnership's 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. The evaluation has focused on identification and
assessment of systems and equipment that may fail to distinguish between the
year 1900 and the year 2000 and, as a result, may cease to operate or may
operate improperly when dates after December 31, 1999 are introduced.
34
<PAGE>
Based on a study conducted in 1997, the Partnership's
management concluded that certain of the Partnership's information systems
were not Year 2000 compliant and elected to replace such software and
hardware with applications and equipment certified by the vendors as Year
2000 compliant. Replacement costs are capitalized in accordance with
generally accepted accounting principles and amortized over the lives of the
assets. Maintenance costs are expensed as incurred. The Partnership's
management installed a number of the new systems in January 1999. The
remaining systems are expected to be to be installed by mid-1999. The
Partnership is utilizing internal and external resources to install the new
systems. The total anticipated cost, including replacement software and
hardware, is expected to be approximately $2 million and is being funded
through operating cash flow. As of December 31, 1998, the Partnership had
spent approximately $1.6 million. The Partnership does not believe that any
other significant information technology projects affecting the Partnership
have been delayed due to efforts to identify or address Year 2000 issues.
Additionally, the Partnership has continued to inventory its
operating and revenue generating equipment to identify items that need to be
upgraded or replaced and has surveyed cable equipment manufacturers to
determine which of their models require upgrade or replacement to become Year
2000 compliant. Identification and evaluation, while ongoing, are
substantially completed and a plan is being developed to remediate or replace
non-compliant equipment prior to January 1, 2000. The Partnership expects to
complete its planning process by the end of May 1999. Upgrade or replacement,
testing and implementation will be performed thereafter. The cost of such
replacement or remediation is currently estimated to be $3.5 million, none of
which had been incurred as of December 31, 1998. The Partnership plans to
inventory, assess, replace and test equipment with embedded computer chips in
a separate segment of its project, presently scheduled for the second half of
1999.
The Partnership has continued to survey 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. Among the most
significant service providers upon which the Partnership relies are
programming suppliers, power and telephone companies, various banking
institutions and the Partnership's customer billing service. A majority of
these service suppliers either have not responded to the Partnership's
inquiries regarding their Year 2000 compliance programs or have responded
that they are unsure if they will become compliant on a timely basis.
Consequently, there can be no assurance that the systems of other companies
on which the Partnership must rely will be Year 2000 compliant on a timely
basis.
The Partnership expects to develop a contingency plan in 1999
to address possible situations in which various systems of the Partnership,
or of third parties with which the Partnership does business, are not
compliant prior to January 1, 2000. Considerable effort will be directed
toward distinguishing between those contingencies with a greater probability
of occurring from those whose occurrence is considered remote. Moreover, such
a plan will necessarily focus on systems whose failure poses a material risk
to the Partnership's results of operations and financial condition.
The Partnership's most significant Year 2000 risk is an
interruption of service to subscribers, resulting in a potentially material
loss of revenues. Other risks include impairment of the Partnership's ability
to bill and/or collect payment from its customers, which could negatively
impact its liquidity and cash flows. Such risks exist primarily due to
technological operations dependent upon third parties and to a much lesser
extent to those under the control of the Partnership. Failure to achieve Year
2000 readiness in either area could have a material adverse impact on the
Partnership. The Partnership is unable to estimate the possible effect on its
results of operations, liquidity and financial condition should the
Partnership or its significant service suppliers fail to complete their
readiness programs prior to the Year 2000. Depending on the supplier,
equipment malfunction or type of service provided, as well as the location
and duration of the problem, the effect could be material. For example, if a
cable programming supplier encounters an interruption of its signal due to a
Year 2000 satellite malfunction, the Partnership will be unable to provide
the signal to its cable subscribers, which could result in a loss of
revenues, although the Partnership would attempt to provide its customers
with alternative program services for the period during which it could not
provide the original signal. Due to the number of individually owned and
operated channels the Partnership carries for its subscribers, and the
packaging of those channels, the Partnership is unable to estimate any
reasonable dollar impact of such interruption.
35
<PAGE>
CASH FLOWS
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,
------------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Net cash provided by operating activities:
Net loss $ (49,985) $ (60,838) $ (144,483)
Non-cash interest expense 26,580 20,444 -
Amortization of debt discount - - 19,342
Depreciation and amortization 100,415 118,856 152,585
Write-off of deferred loan costs - - 10,961
Gain on sale of securities (2,264) - -
Other 15,885 1,075 33,206
---------------- ---------------- ----------------
$ 90,631 $ 79,537 $ 71,611
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net cash used in investing activities:
Capital expenditures $ (57,668) $ (76,323) $ (96,367)
Sale of available-for-sale securities 9,502 - -
Acquisitions of cable television systems, net of cash (247,397) - (83,391)
Proceeds from sale of cable systems 15,000 - -
Other (3,684) 36 (8,570)
---------------- ---------------- ----------------
$ (284,247) $ (76,287) $ (188,328)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities:
Net borrowings, (repayments) $ 191,022 $ (3,222) $ 143,855
Capital contributions 5,000 93 -
Deferred loan costs (3,823) (29) (25,684)
Other - 192 (1,087)
---------------- ---------------- ----------------
$ 192,199 $ (2,966) $ 117,084
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
1998 COMPARED TO 1997
Cash provided by operating activities (including interest
expense and management fee income) decreased from $79.5 million to $71.6
million, or by 10%, for the year ended December 31, 1998 compared to the
corresponding period in 1997. The $7.9 million decrease resulted primarily
from a net decrease of $6.8 million in other operating items (changes in
receivables, cable materials and supplies, payables, accrued expenses and
subscriber deposits and prepayments) and to a $1.1 million reduction in
non-cash interest expense.
Cash used in investing activities increased from $76.3 million
to $188.3 million, or by 146.9%, for the year ended December 31, 1998
compared to the corresponding period in 1997. The increase was primarily due
to the acquisition of the Falcon Classic systems for $83.4 million, to an
increase in capital expenditures of $20 million, to an increase in intangible
assets of $5.4 million and to $3.7 million in assets retained by the managing
general partner.
36
<PAGE>
Cash from financing activities changed from a $3 million use of
cash for the year ended December 31, 1997 to $117.1 million of cash provided
in 1998. The change was due primarily to additional borrowings in 1998, the
acquisition of the Falcon Classic systems, the discharge of Falcon Video
indebtedness and to the increase in capital expenditures. (See Note 6 to the
consolidated financial statements.)
1997 COMPARED TO 1996
Cash provided by operating activities (including interest
expense and management fee income) decreased from $90.6 million to $79.5
million, or by 12.3%, for the year ended December 31, 1997 compared to the
corresponding period in 1996. The $11.1 million decrease resulted primarily
from a net decrease of $5 million 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 11% 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.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Partnership on
January 1, 1999, requires costs of start-up activities to be expensed as
incurred. Previously capitalized start-up costs are to be written off as a
cumulative effect of a change in accounting principle. The Partnership
believes that adoption of this standard will not have a material impact on
the Partnership's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which established standards for the
reporting and display of comprehensive income and its components in a full
set of comparative general-purpose financial statements. Comprehensive income
is defined in this statement as net income plus other comprehensive income,
which, under existing accounting standards includes unrealized gains and
losses on certain investments in debt and equity securities. The statement
became effective for the Partnership as of January 1, 1998. The Partnership
does not currently have items of comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 1999. The Partnership expects to
adopt the new statement on January 1, 2000. SFAS No. 133 will require the
Partnership to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change
in fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Partnership does not
currently expect the adoption of SFAS No. 133 to have a material impact on
the Partnership's financial position or results of operations.
37
<PAGE>
INFLATION
Certain of the Partnership's expenses, such as those for wages
and benefits, equipment repair and replacement, and billing and marketing
generally increase with inflation. However, the Partnership does not believe
that its financial results have been, or will be, adversely affected by
inflation in a material way, provided that it is able to increase its service
rates periodically, of which there can be no assurance, due to the
re-regulation of rates charged for certain cable services. See "Legislation
and Regulation."
ITEM 7(A). QUALITATIVE AND QUANTITATIVE MARKET RISK
See Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and related financial information
required to be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
FCLP's partnership agreement provides for an Advisory Committee
consisting of six individual representatives of the partners, three of whom
are to be appointed by FHGLP, two of whom are to be appointed by TCI and one
of whom is to be appointed by joint designation of FHGLP and TCI. FHGLP has
appointed Marc B. Nathanson (Chairman), Frank J. Intiso and Stanley S.
Itskowitch as its initial representatives; TCI has appointed Leo J. Hindery,
Jr. and William R. Fitzgerald as its initial representatives; and FHGLP and
TCI have designated John S. Evans as their initial joint representative.
FHGLP is the managing partner of the Partnership. FHGI is the
general partner of FHGLP. The directors and executive officers of FHGI are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- -------------------- -------------------------------------------------------------------
<S> <C> <C>
Marc B. Nathanson 53 Chairman of the Board, Chief Executive Officer and Director of
FHGI
Frank J. Intiso 52 President and Chief Operating Officer
Stanley S. Itskowitch 60 Executive Vice President, General Counsel and Director of FHGI
Michael K. Menerey 47 Executive Vice President, Chief Financial Officer and Secretary
Joe A. Johnson 54 Executive Vice President - Operations
Thomas J. Hatchell 49 Executive Vice President - Operations
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF FALCON FUNDING CORPORATION
The following persons are the sole directors and officers of
Falcon Funding Corporation:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- -------------------- -------------------------------------------------
<S> <C> <C>
Marc B. Nathanson 53 Chief Executive Officer and Director
Frank J. Intiso 52 President and Director
Stanley S. Itskowitch 60 General Counsel and Director
Michael K. Menerey 47 Chief Financial Officer, Secretary and Director
</TABLE>
The following sets forth certain biographical information with
respect to the directors and executive officers of FHGI who are also members
of Falcon management.
MARC B. NATHANSON, 53, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19,
1995 also served as President. Prior to 1975, Mr. Nathanson was Vice
President of Marketing for Teleprompter Corporation, then the largest cable
operator in the United States. He also held executive positions with Warner
Cable and Cypress Communications Corporation. He is a former President of the
California Cable Television Association and a member of Cable Pioneers. He is
currently a director of the National Cable Television Association and will
Chair its 1999 National Convention. At the 1986 National Cable Television
Association convention, Mr. Nathanson was honored by being named the
recipient of the Vanguard Award for outstanding contributions to the growth
and development of the cable television industry. Mr. Nathanson is a 30-year
veteran of the cable television industry. He is a founder of the Cable
Television Administration and Marketing Society and the Southern California
Cable Television Association. Mr. Nathanson has served as Chairman of the
Board, Chief Executive Officer and President of Enstar Communications
39
<PAGE>
Corporation since October 1988. Mr. Nathanson is an Advisory Board member of
TVA, (Brazil) and also Chairman of the Board and Chief Executive Officer of
Falcon International Communications, LLC. Mr. Nathanson was appointed by
President Clinton on November 1, 1998 as Chair of the Board of Governors for
the International Bureau of Broadcasting, which oversees Voice of America,
Radio/TV Marti, Radio Free Asia, Radio Free Europe and Radio Liberty. Mr.
Nathanson is a trustee of the Annenburg School of Communications at the
University of Southern California and a member of the Board of Visitors of
the Anderson School of Management at UCLA. In addition, he serves on the
Board of the UCLA Foundation and the UCLA Center for Communications Policy
and is on the Board of Governors of AIDS Project Los Angeles and Cable
Positive.
FRANK J. INTISO, 52, was appointed President and Chief Operating Officer of
FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso held the
positions of Executive Vice President and Chief Operating Officer, with
responsibility for the day-to-day operations of all cable television systems
under the management of Falcon. Mr. Intiso has also served as Executive Vice
President and as a Director of Enstar Communications Corporation since
October 1988. Mr. Intiso has a Masters Degree in Business Administration from
UCLA and is a Certified Public Accountant. He currently serves as Immediate
Past Chair of the California Cable Television Association and is on the
boards of the Cable Advertising Bureau, Cable in the Classroom and the
California Cable Television Association. He is a member of the American
Institute of Certified Public Accountants, the American Marketing
Association, the American Management Association and the Southern California
Cable Television Association.
STANLEY S. ITSKOWITCH, 60, has been a Director of FHGI and its predecessors
since 1975. He served as Senior Vice President and General Counsel of FHGI
from 1987 to 1990 and has been Executive Vice President and General Counsel
since February 1990. He has been President and Chief Executive Officer of
F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a marketer of
chemical products, since 1980. He is a Certified Public Accountant and a
former tax partner in the New York office of Touche Ross & Co. (now Deloitte
& Touche LLP). He has a J.D. Degree and an L.L.M. Degree in Tax from New York
University School of Law. Mr. Itskowitch has also served as Senior Vice
President or Executive Vice President and as a director of Enstar
Communications Corporation since October 1988. Mr. Itskowitch is also
Executive Vice President and General Counsel of Falcon International
Communications, LLC.
MICHAEL K. MENEREY, 47, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI since February 1998 and was Chief Financial
Officer and Secretary of its predecessors between 1984 and 1998. Mr. Menerey
is a Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants, and he was formerly associated with BDO Seidman. Mr. Menerey has
also served as Chief Financial Officer, Secretary and as a director of Enstar
Communications Corporation since October 1988.
JOE A. JOHNSON, 54, has been Executive Vice President of Operations of FHGI
since September 1995, and was a Divisional Vice President of Falcon between
1989 and 1992. From 1982 to 1989, he held the positions of Vice President and
Director of Operations for Sacramento Cable Television, Group W Cable of
Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and
Regional Manager positions with Warner Amex and Teleprompter. Mr. Johnson is
also a member of the Cable Pioneers.
THOMAS J. HATCHELL, 49, has been Executive Vice President of Operations of
FHGI since February 1998. From October 1995 to February 1998, he was Senior
Vice President of Operations of Falcon International Communications, L.P. and
its predecessor company and was a Senior Vice President of FHGI from January
1992 to September 1995. Mr. Hatchell was a Divisional Vice President of FHGI
between 1989 and 1992. From 1981 to 1989, he served as Vice President and
Regional Manager for Falcon's San Luis Obispo, California region. He was Vice
President of Construction of an affiliate of Falcon from June 1980 to June
1981. In addition, he served as a General Manager of the cable system in
Tulare County, California from 1977 to 1980. Prior to that time, Mr. Hatchell
served as a cable executive with the Continental Telephone Company.
40
<PAGE>
OTHER OFFICERS OF FALCON
The following sets forth certain biographical information with
respect to certain additional members of FHGI management.
LYNNE A. BUENING, 45, has been Vice President of Programming of FHGI since
November 1993. From 1989 to 1993, she served as Director of Programming for
Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening
held programming and marketing positions in the cable, broadcast and newspaper
industries.
OVANDO COWLES, 45, has been Vice President of Advertising Sales and Production
of FHGI since January 1992. From 1988 to 1991, he served as Director of
Advertising Sales and Production at Cencom Cable Television in Pasadena,
California. From 1985 to 1988, he was an Advertising Sales Account Executive at
Choice TV, an affiliate of FHGI.
ABEL C. CRESPO, 39, has been Vice President, Corporate Controller of FHGI since
March 1999. He previously had served as Controller since January 1997. Mr.
Crespo joined Falcon in December 1984, and has held various accounting positions
during that time. Mr. Crespo holds a Bachelor of Science degree in Business
Administration from California State University, Los Angeles.
HOWARD J. GAN, 52, has been Vice President of Regulatory Affairs of FHGI and its
predecessors since 1988. Prior to joining FHGI, he was General Counsel at
Malarkey-Taylor Associates, a Washington, D.C.-based telecommunications
consulting firm, from 1986 to 1988, and was Vice President and General Counsel
at CTIC Associates from 1978 to 1983. In addition, he was an attorney and an
acting Branch Chief of the Federal Communications Commission's Cable Television
Bureau from 1973 to 1978.
R.W. ("SKIP") HARRIS, 51, has been Vice President of Marketing of FHGI since
June 1991. Mr. Harris was National Director of Affiliate Marketing for The
Disney Channel from 1985 to 1991. He was also a sales manager, regional
marketing manager and director of marketing for Cox Cable Communications from
1978 to 1985.
MARTIN B. SCHWARTZ, 39, has been Vice President of Corporate Development of FHGI
since March 1999. Mr. Schwartz joined Falcon in November 1989 and has held
various finance, planning and corporate development positions during that time,
most recently that of Director of Corporate Development. Mr. Schwartz has a
Masters Degree in Business Administration from UCLA.
JOAN SCULLY, 63, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. From 1987 to May 1988, she was self-employed as a
management consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles-based cable company from 1985
through 1987. Prior to that time, she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.
RAYMOND J. TYNDALL, 51, has been Vice President of Engineering of FHGI since
October 1989. From 1975 to September 1989, he held various technical positions
with Choice TV and its predecessors. From 1967 to 1975, he held various
technical positions with Sammons Communications. He is a certified National
Association of Radio and Television Engineering engineer in lightwave,
microwave, satellite and broadband and is a member of the Cable Pioneers.
In addition, FHGI has six Divisional Vice Presidents who are based
in the field. They are G. William Booher, Daniel H. DeLaney, Ron L. Hall, Ronald
S. Hren, Michael E. Kemph and Michael D. Singpiel.
The following sets forth certain biographical information with
respect to the members of the Advisory Committee of the Partnership who are not
members of Falcon management.
41
<PAGE>
LEO J. HINDERY, JR., 51, was named President and Chief Executive Officer of AT&T
Broadband and Internet Services in March 1999. Mr. Hindery had previously served
as President of Tele-Communications, Inc. (TCI) since March 1, 1997. He had also
served as a Chairman and President of TCI Communications, Inc. Prior to joining
TCI, Mr. Hindery was the Managing General Partner and Chief Executive Officer of
InterMedia Partners and its related entities since 1988. He is a Director of TCI
and of @Home Network, Cablevision, Inc., Knowledge Enterprises, Inc., Lenfest
Group, TCI Music, Inc. and USA Networks, Inc.; Chairman of the Executive
Committee of the National Cable Television Association and the Executive
Committee of C-SPAN; Vice Chairman of the Executive Committee of Cable in the
Classroom; and an Honorary Chair of Cable Positive.
WILLIAM R. FITZGERALD, 41, is Executive Vice President and Chief Operating
Officer of TCI Communications, Inc. Previously, Mr. Fitzgerald was Executive
Vice President of Corporate Development and Partnership Relations for TCI
Communications, Inc. Prior to joining TCI Communications, Inc. in March 1996 as
Senior Vice President of Corporate Development, he was a Senior Vice President
and Partner with Daniels & Associates, a leading brokerage and investment
banking firm to the communications industry. Before joining Daniels &
Associates, Mr. Fitzgerald was Vice President at The First National Bank of
Chicago.
JOHN D. EVANS, 54, is Chairman and Chief Executive Officer of Evans
Telecommunications Company, an investment, consulting and operating company in
the cable television and telecommunications industry. From 1983 to 1994 he was
President and Chief Operating Officer of Hauser Communications and was
co-founder of C-SPAN. He serves as a director of C-SPAN, the National Cable
Television Association, the Virginia Cable Television Association, the
Eisenhower World Affairs Institute and Sierraware Inc. He currently is a Trustee
of the C-SPAN Educational Foundation and serves on the advisory committee of the
Institute of Human Virology, University of Maryland at Baltimore and the
Visiting Committee of the College of LSA at the University of Michigan, Ann
Arbor. He has been a U.S. Delegate to the Asia-Pacific Conference of Science and
Technology Leaders in Beijing and UNESCO's conference on Science and Technology
in Trinidad. He also serves as Chairman and CEO of the John D. Evans Foundation,
a private foundation that provides grants for medical research, educational and
environmental initiatives.
42
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by
the Partnership to the Chief Executive Officer of FHGI and to each of the four
other most highly compensated executive officers of FHGI for services rendered
during the three years ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation All Other
----------------------------------
Name and Principal Position Salary Bonus Compensation
--------------------------- --------------- --------------- -------------------
<S> <C> <C> <C>
Marc B. Nathanson, Chairman and Chief Executive
Officer
1998 $ 844,106 $ 548,170 $ 1,975,628(2)
1997 615,424(1) 122,460(1) 2,400(3)
1996 291,020(1) 56,998(1) 2,610(3)
Frank J. Intiso, President and Chief Operating
Officer
1998 628,582 344,404 526,868(2)
1997 588,432 111,072 2,400(3)
1996 587,923 106,800 2,610(3)
Stanley S. Itskowitch, Executive Vice President and
General Counsel
1998 378,260(1) 148,757(1) 463,339(2)
1997 309,976(1) 52,530(1) 2,047(3)
1996 191,962(1) 32,845(1) 2,140(3)
Michael K. Menerey, Executive Vice President, Chief
Financial Officer and Secretary
1998 265,761 149,275 539,407(2)
1997 255,548(1) 47,754(1) 1,721(3)
1996 247,023(1) 45,806(1) 1,725(3)
Joe A. Johnson, Executive Vice President -
Operations
1998 227,184 172,848 203,428(2)
1997 219,744 41,600 1,373(3)
1996 218,711 40,000 1,500(3)
</TABLE>
(1) Net of reimbursement for salary and bonus FHGLP and FCLP received from
Falcon International Communications, LLC related to the time of Mr.
Nathanson ($204,000 and $41,000 and $500,000 and $100,002 in 1997 and
1996, respectively), Mr. Itskowitch ($16,000 and $4,000, $71,000 and
$18,000 and $175,000 and $35,000 in 1998, 1997 and in 1996,
respectively) and Mr. Menerey ($431 and $86 and $968 and $194 in 1997
and 1996, respectively), spent on international activities.
43
<PAGE>
(2) The amounts reported as "All Other Compensation" for 1998 consist of
term life insurance premiums paid by the Partnership and certain
payments made under the 1993 Incentive Performance Plan in connection
with the closing of the TCI Transaction. The premium paid for, and
incentive plan payout received by, each named officer was as follows:
<TABLE>
<CAPTION>
Term Life Incentive
Premium Plan Payout
------------- ----------------
<S> <C> <C>
Nathanson $ 2,400 $ 1,973,228
Intiso 2,400 524,468
Itskowitch 2,071 461,268
Menerey 1,773 537,634
Johnson 1,541 201,887
</TABLE>
(3) These amounts relate to term life insurance premiums paid by the
Partnership.
PROFIT SHARING PLAN
The Partnership maintains a cash or deferred profit sharing plan
referred to as the Smart 401K Plan, which covers substantially all of its
employees. This plan allows participants to elect to make a contribution in an
amount up to 20% of their annual compensation, which otherwise would have been
payable to the participant as salary. Additionally, subject to certain
limitations, the Partnership can contribute to the plan on a discretionary
basis, as determined by management, an amount that does not exceed 15% of the
annual aggregate compensation, as defined, paid to participating employees. In
general, participants in the plan vest in any Partnership contributions
according to the following schedule:
<TABLE>
<CAPTION>
Years of Service Percentage Vested
-----------------
<S> <C>
Less than 3 years 0%
3 20
4 40
5 60
6 80
7 100
</TABLE>
All of the executive officers named in the Summary Compensation
Table are participants in the Smart 401K Plan and, as of December 31, 1998 were
100% vested.
There were no contributions charged against operations for the
plan in 1996, 1997 or 1998, but the Partnership intends to make contributions to
the plan in 1999.
1993 INCENTIVE PERFORMANCE PLAN
On September 30, 1998, the Partnership assumed the obligations of
FHGLP for its Amended and Restated 1993 Incentive Performance 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, FHGLP agreed to fund any benefits payable under the incentive
plan through additional capital contributions to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its Partnership units to the Partnership.
The benefits which are payable under the incentive plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in
certain of the partnerships that are the general partners of the Partnership's
operating subsidiaries. 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, FHGLP is required to cause the units to be contributed to the
Partnership to fund such distributions. The participants in the incentive plan
44
<PAGE>
are present and former employees of the Partnership, FHGLP and its operating
affiliates, all of whom are 100% vested. Prior to the closing of the TCI
Transaction, FHGLP amended the incentive plan to provide for payments by FHGLP
at the closing of the TCI Transaction to participants in an aggregate amount of
approximately $6.5 million and to reduce by such amount FHGLP's obligations to
make future payments to participants under the incentive plan.
NEW FCLP INCENTIVE PLAN
In 1999 the Partnership adopted a Restricted Unit Plan for the
benefit of certain employees. Grants of restricted units are provided at the
discretion of the Advisory Committee. The value of the units in the new
restricted unit plan is tied to the equity value of the Partnership above a base
equity as determined initially in 1999 by the partners, and for grants in
subsequent years by an appraisal. Benefits are payable under the new restricted
unit plan only when distributions would otherwise be payable to equity holders
of the Partnership. An initial grant of 100,000 units representing 2.75% of the
equity of the Partnership in excess of the equity base was approved and will be
allocated to the participants in this plan. There is a five-year vesting
requirement for all participants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1998, Marc B. Nathanson,
Chairman of the Board and Chief Executive Officer, Frank J. Intiso, President
and Chief Operating Officer, Stanley S. Itskowitch, Executive Vice President and
General Counsel, and Michael K. Menerey, Executive Vice President, Chief
Financial Officer and Secretary, participated in deliberations with the Board of
Representatives of the Partnership with respect to executive officer
compensation.
The Partnership leases certain office space for its corporate
financial center (located in Pasadena, California) from a partnership owned by
Marc B. Nathanson and his wife. The Pasadena lease commenced on October 1, 1990
and was for a term of five years. The Partnership has negotiated a new lease
expiring September 30, 2005. The base rent is currently approximately $35,000
per month and will increase to approximately $38,000 per month in 1999 due to
additional space required in connection with the TCI Transaction. The
Partnership believes that the terms of the Pasadena lease are consistent with
leases between unaffiliated parties involving similarly situated properties. The
Partnership also assumed a lease for office space in a building owned by Marc B.
Nathanson and his wife in connection with the acquisition of the assets of
Falcon Cable Systems Company. The rent on this property was less than $60,000
per year. This property was purchased by the Partnership in February 1999 for
$282,500, a purchase price determined by two independent appraisals.
In addition, the Partnership provides certain accounting,
bookkeeping and clerical services to Marc B. Nathanson. Mr. Nathanson pays for a
portion of the costs relating to these services, and the Partnership pays the
balance. The net amount paid by the Partnership in 1998 was approximately
$212,000. See Note 10 to the consolidated financial statements.
COMPENSATION OF DIRECTORS
The directors of FHGI and Falcon Funding Corporation receive no
compensation for their services as directors. The members of the Advisory
Committee of the Partnership receive no compensation for their service on the
board other than reimbursement of expenses, except that the Partnership has
agreed to make a $10,000 annual contribution to the John D. Evans Foundation.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth, as of December 31, 1998, the
beneficial ownership of partnership interests of the Partnership by each person
who is known to the Partnership to own beneficially more than 5% of such
Partnership interests.
<TABLE>
<CAPTION>
Name and Address of Percent of
Beneficial Owners Ownership
------------------------------------ -------------
<S> <C>
FHGLP 54%
10900 Wilshire Boulevard, 15th Floor
Los Angeles, CA 90024
TCI Falcon Holdings, LLC 46%
5619 DTC Parkway
Englewood, CO 80111
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership manages the Enstar systems. The Partnership
receives management fees and reimbursement of certain expenses from the general
partner of the Enstar partnerships.
The partnership agreement provides that (a) FHGLP, as the managing
general partner of the Partnership, (b) individuals acting on FHGLP's behalf,
(c) the members of the Partnership's advisory committee, and (d) either partner
of the Partnership which has designated a member of the Partnership's advisory
committee (but only to the extent of any damage resulting from the actions of
such member), will be indemnified by the Partnership for acts performed (or
failures to act) within the scope of such indemnified party's authority under
the Partnership Agreement if such party (i) acted in good faith and in a manner
that it reasonably believed to be in, or not opposed to, the best interests of
the Partnership, (ii) did not intend any inaction to be harmful or opposed the
best interests of the Partnership, and (iii) did not commit the act (or fail to
act) in a manner which constituted fraud, gross negligence, breach of fiduciary
duty, or willful misconduct. Therefore, the partner not being indemnified for
such an act or failure to act will have a more limited right of action than it
would have absent such provisions. In addition, the Partnership maintains, at
its expense and in such reasonable amounts as its management shall determine,
insurance on behalf of FHGLP and such other person(s) as FHGLP shall determine,
against any liability that may be asserted against or expense that may be
incurred by FHGLP and/or such person(s) and against which the Partnership would
be entitled or required to indemnify such person(s) for certain wrongful or
allegedly wrongful acts, including certain errors, misstatements, misleading
statements, omissions, neglect or breaches of duty. To the extent that the
exculpatory provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, it is the opinion of the Securities
and Exchange Commission that such indemnification is contrary to public policy
and therefore unenforceable.
For a description of certain other transactions involving
management, see "Compensation Committee Interlocks and Insider Participation."
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements and
Schedules on page F-1.
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
Falcon Communications, L.P. and Falcon Funding Corporation filed a
Form 8-K on October 9, 1998 in which they announced under Item 2
that Falcon Holding Group, L.P. and TCI Falcon Holdings, LLC had
contributed cable television systems to Falcon Communications,
L.P. on September 30, 1998, pursuant to a Contribution and
Purchase Agreement dated as of December 30, 1997, as amended.
On December 11, 1998, Falcon Communications, L.P. and Falcon
Funding Corporation filed a Form 8-K/A reporting, under Item 7.,
interim financial statements and pro forma statements of
operations for the cable television systems contributed to Falcon
Communications, L.P. by TCI Falcon Holdings, LLC.
47
<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 31st
day of March, 1999.
FALCON COMMUNICATIONS, L.P.
By: Falcon Holding Group, L.P.
as general partner,
By: Falcon Holding Group, Inc.,
its general partner
By /s/ Michael K. Menerey
-----------------------------
Michael K. Menerey
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 31st day of March 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director of Falcon Holding Group, Inc.
and Chief Executive Officer of the Registrant
/s/ Marc B. Nathanson (Principal Executive Officer)
- --------------------------
Marc B. Nathanson
Executive Vice President,
Chief Financial Officer and
Secretary of the Registrant
/s/ Michael K. Menerey (Principal Financial and Accounting Officer)
- --------------------------
Michael K. Menerey
Director of Falcon Holding Group, Inc.
and Executive Vice President and General
/s/ Stanley S. Itskowitch Counsel of the Registrant
- --------------------------
Stanley S. Itskowitch
</TABLE>
48
<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 31st
day of March, 1999.
FALCON FUNDING CORPORATION
By /s/ Michael K. Menerey
---------------------------------
Michael K. Menerey
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 31st day of March 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director and Chief Executive Officer of
the Registrant (Principal Executive
/s/ Marc B. Nathanson Officer)
- ----------------------------
Marc B. Nathanson
Director and President and Chief
/s/ Frank J. Intiso Operating Officer
- ----------------------------
Frank J. Intiso
Director and Executive Vice President and
/s/ Stanley S. Itskowitch General Counsel
- ----------------------------
Stanley S. Itskowitch
Director and Chief Financial Officer and
Secretary of the Registrant (Principal
/s/ Michael K. Menerey Financial and Accounting Officer)
- ----------------------------
Michael K. Menerey
</TABLE>
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
FALCON COMMUNICATIONS, L.P. PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 F-4
Consolidated Statements of Partners' Deficit for each of the three
years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
FALCON FUNDING CORPORATION
Report of Ernst & Young LLP, Independent Auditors F-31
Balance Sheets at March 27, 1998 and December 31, 1998 F-32
Statement of Cash Flows F-33
Note to Financial Statements F-34
Schedule II - Valuation and Qualifying Accounts F-35
</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 Communications, L.P.
We have audited the accompanying consolidated balance sheets of Falcon
Communications, L.P. (successor to Falcon Holding Group, L.P.) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1998. 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
Communications, L.P. (successor to Falcon Holding Group, L.P.) at December 31,
1997 and 1998 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, 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.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 5, 1999
F-2
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 13,917 $ 14,284
Receivables:
Trade, less allowance of $825,000 and $670,000 for
possible losses 13,174 15,760
Affiliates 11,254 2,322
Other assets 16,352 16,779
Property, plant and equipment, less accumulated
depreciation and amortization 324,559 505,894
Franchise cost, less accumulated amortization of
$203,700,000 and $226,526,000 222,281 397,727
Goodwill, less accumulated amortization of
$18,531,000 and $25,646,000 66,879 135,308
Customer lists and other intangible costs, less accumulated
amortization of $25,517,000 and $59,422,000 59,808 333,017
Deferred loan costs, less accumulated amortization of
$7,144,000 and $2,014,000 12,134 24,331
---------------- --------------
$ 740,358 $ 1,445,422
---------------- --------------
---------------- --------------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 911,221 $ 1,611,353
Accounts payable 9,169 10,341
Accrued expenses 52,789 83,077
Customer deposits and prepayments 1,452 2,257
Deferred income taxes 7,553 8,664
Minority interest 354 403
Equity in losses of affiliated partnerships in excess
of investment 3,202 -
---------------- --------------
TOTAL LIABILITIES 985,740 1,716,095
---------------- --------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 171,373 133,023
---------------- --------------
PARTNERS' DEFICIT:
General partners (13,200) (408,369)
Limited partners (403,555) 4,673
---------------- --------------
TOTAL PARTNERS' DEFICIT (416,755) (403,696)
---------------- --------------
$ 740,358 $ 1,445,422
---------------- --------------
---------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
REVENUES $ 217,320 $ 255,886 $ 307,558
----------------- ----------------- ----------------
EXPENSES:
Service costs 60,302 75,643 97,832
General and administrative expenses 36,878 46,437 63,401
Depreciation and amortization 100,415 118,856 152,585
----------------- ----------------- ----------------
Total expenses 197,595 240,936 313,818
----------------- ----------------- ----------------
Operating income (loss) 19,725 14,950 (6,260)
----------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense, net (71,602) (79,137) (102,591)
Equity in net income (loss) of investee partnerships (44) 443 (176)
Other income (expense), net 814 885 (2,917)
Income tax benefit (expense) 1,122 2,021 (1,897)
----------------- ----------------- ----------------
Net loss before extraordinary item (49,985) (60,838) (113,841)
Extraordinary item, retirement of debt - - (30,642)
----------------- ----------------- ----------------
NET LOSS $ (49,985) $ (60,838) $ (144,483)
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
-----------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain on
Available-
General Limited for-Sale
Partners Partners Securities Total
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
PARTNERS' DEFICIT,
January 1, 1996 $ (12,091) $ (399,423) $ (167) $ (411,681)
Sale of marketable securities - - 167 167
Capital contribution - 5,000 - 5,000
Net loss for year (500) (49,485) - (49,985)
--------------- --------------- --------------- ---------------
PARTNERS' DEFICIT,
December 31, 1996 (12,591) (443,908) - (456,499)
Reclassification from redeemable
partners' equity - 100,529 - 100,529
Capital contribution - 53 - 53
Net loss for year (609) (60,229) - (60,838)
--------------- --------------- --------------- ---------------
PARTNERS' DEFICIT,
December 31, 1997 (13,200) (403,555) - (416,755)
Reclassification of partners' deficit (408,603) 408,603 - -
Redemption of partners' interests (155,908) - - (155,908)
Net assets retained by the managing
general partner (5,392) - - (5,392)
Reclassification from redeemable
partners' equity 38,350 - - 38,350
Acquisition of Falcon Video and TCI net assets 280,409 - - 280,409
Capital contributions 83 - - 83
Net loss for year (144,108) (375) - (144,483)
--------------- --------------- --------------- ---------------
PARTNERS' DEFICIT,
December 31, 1998 $ (408,369) $ 4,673 $ - $ (403,696)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
(Dollars in Thousands)
Cash flows from operating activities:
Net loss $ (49,985) $ (60,838) $ (144,483)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Payment-in-kind interest expense 26,580 20,444 -
Amortization of debt discount - - 19,342
Depreciation and amortization 100,415 118,856 152,585
Amortization of deferred loan costs 2,473 2,192 2,526
Write-off deferred loan costs - - 10,961
Gain on sale of securities (2,264) - -
Gain on casualty losses - (3,476) (314)
Equity in net (income) loss of investee partnerships 44 (443) 176
Provision for losses on receivables, net of recoveries 2,417 5,714 4,775
Deferred income taxes (2,684) (2,748) 1,111
Other 764 1,319 278
Increase (decrease) from changes in:
Receivables (2,420) (9,703) (1,524)
Other assets (274) (4,021) 906
Accounts payable 4,750 (1,357) 337
Accrued expenses 10,246 13,773 24,302
Customer deposits and prepayments 569 (175) 633
---------------- --------------- ---------------
Net cash provided by operating activities 90,631 79,537 71,611
---------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures (57,668) (76,323) (96,367)
Proceeds from sale of available-for-sale securities 9,502 - -
Increase in intangible assets (4,847) (1,770) (7,124)
Acquisitions of cable television systems (247,397) - (83,391)
Cash acquired in connection with the acquisition of TCI and
Falcon Video Communications, L.P. - - 317
Proceeds from sale of cable system 15,000 - -
Assets retained by the Managing General Partner - - (3,656)
Other 1,163 1,806 1,893
---------------- --------------- ---------------
Net cash used in investing activities (284,247) (76,287) (188,328)
---------------- --------------- ---------------
Cash flows from financing activities:
Borrowings from notes payable 700,533 37,500 2,388,607
Repayment of debt (509,511) (40,722) (2,244,752)
Deferred loan costs (3,823) (29) (25,684)
Capital contributions 5,000 93 -
Redemption of partners' interests - - (1,170)
Minority interest capital contributions - 192 83
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 192,199 (2,966) 117,084
---------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (1,417) 284 367
Cash and cash equivalents, at beginning of year 15,050 13,633 13,917
---------------- --------------- ---------------
Cash and cash equivalents, at end of year $ 13,633 $ 13,917 $ 14,284
---------------- --------------- ---------------
---------------- --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Falcon Communications, L.P., a California limited partnership
(the "Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"),
owns and operates cable television systems serving small to medium-sized
communities and the suburbs of certain cities in 25 states. On September 30,
1998, pursuant to a Contribution and Purchase Agreement dated as of December
30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the
assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video"
or the "Falcon Video Systems"), in exchange for ownership interests in FHGLP.
Simultaneously with the closing of that transaction, in accordance with the
Contribution Agreement, FHGLP contributed substantially all of the existing
cable television system operations owned by FHGLP and its subsidiaries
(including the Falcon Video Systems) to the Partnership and TCI Falcon
Holdings, LLC ("TCI") contributed certain cable television systems owned and
operated by affiliates of TCI (the "TCI Systems") to the Partnership (the
"TCI Transaction"). As a result, TCI holds approximately 46% of the equity
interests of the Partnership and FHGLP holds the remaining 54% and serves as
the managing general partner of the Partnership. The TCI Transaction is being
accounted for as a recapitalization of FHGLP into the Partnership and the
concurrent acquisition by the Partnership of the TCI Systems.
The consolidated financial statements include the accounts of
the Partnership and its subsidiary holding companies and cable television
operating partnerships and corporations, which include Falcon Cable
Communications LLC ("Falcon LLC"), a Delaware limited liability company that
serves as the general manager of the cable television subsidiaries. The
assets contributed by FHGLP to the Partnership excluded certain immaterial
investments, principally FHGLP's ownership of 100% of the outstanding stock
of Enstar Communications Corporation ("ECC"), which is the general partner
and manager of fifteen limited partnerships operating under the name
"Enstar." ECC's ownership interest in the Enstar partnerships ranges from
0.5% to 5%. Upon the consummation of the TCI Transaction, the management of
the Enstar partnerships was assigned to the Partnership by FHGLP. The
consolidated statements of operations and statements of cash flows for the
year ended December 31, 1998 include FHGLP's interest in ECC for the nine
months ended September 30, 1998. The effects of ECC's operations on all
previous periods presented are immaterial.
Prior to closing the TCI Transaction, FHGLP owned and operated
cable television systems in 23 states. FHGLP also controlled, held varying
equity interests in and managed certain other cable television partnerships
(the "Affiliated Partnerships") for a fee. FHGLP is a limited partnership,
the sole general partner of which is Falcon Holding Group, Inc., a California
corporation ("FHGI"). FHGI also holds a 1% interest in certain of the
subsidiaries of the Partnership. At the beginning of 1998, the Affiliated
Partnerships were comprised of Falcon Classic Cable Income Properties, L.P.
("Falcon Classic") whose cable television systems are referred to as the
"Falcon Classic Systems," Falcon Video and the Enstar partnerships. As
discussed in Note 3, the Falcon Classic Systems were acquired by FHGLP during
1998. The Falcon Video Systems were acquired on September 30, 1998 in
connection with the TCI Transaction. As a result of these transactions, the
Affiliated Partnerships consist solely of the Enstar partnerships from
October 1, 1998 forward.
All significant intercompany 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.
F-7
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FORM OF PRESENTATION (CONTINUED)
On July 12, 1996, the Partnership acquired the assets of Falcon
Cable Systems Company ("FCSC"), an Affiliated Partnership. The results of
operations of these cable systems have been included in the consolidated
financial statements 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, 1997 and 1998 included $4.1 million, $4.5
million and $345,000 of investments in commercial paper and short-term
investment funds of major financial institutions.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
Prior to closing the TCI Transaction, the Partnership was the
general partner of certain entities, which in turn acted as general partner
of the Affiliated Partnerships. The Partnership's effective ownership
interests in the Affiliated Partnerships were less than one percent. The
Affiliated Partnerships were accounted for using the equity method of
accounting. Equity in net losses were recorded to the extent of the
investments in and advances to the partnerships plus obligations for which
the Partnership, as general partner, was responsible. The liabilities of the
Affiliated Partnerships, other than amounts due the Partnership, principally
consisted of debt for borrowed money and related accrued interest. The
Partnership's ownership interests in the Affiliated Partnerships were
eliminated in 1998 with the acquisition of Falcon Video and Falcon Classic
and the retention by FHGLP of its interests in the Enstar partnerships.
F-8
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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>
<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 28 years (composite 15 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.
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities." The new standard, which becomes effective for the Partnership on
January 1, 1999, requires costs of start-up activities, including certain
organization costs, to be expensed as incurred. Previously capitalized
start-up costs are to be written off as a cumulative effect of a change in
accounting principle. The Partnership believes that adoption of this standard
will not have a material impact on the Partnership's financial position or
results of operations.
F-9
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to
interest expense over the life of the related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an 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 customer fees, equipment rental and advertising
are recognized in the period that services are delivered. Installation
revenue is recognized in the period the installation services are provided to
the extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the cable television system. Management fees are
recognized on the accrual basis based on a percentage of gross revenues of
the respective cable television systems managed. Effective October 1, 1998,
20% of the management fees from the Enstar partnerships is retained by FHGLP.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market
risk and as required by certain covenants in its New Credit Agreement, the
Partnership enters into various transactions that involve contracts and
financial instruments with off-balance-sheet risk, principally 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.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The
Partnership expects to adopt the new statement effective January 1, 2000.
SFAS 133 will require the Partnership to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either
offset against the changes in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The
F-10
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Partnership believes that adoption of SFAS 133 will
not have a material impact on the Partnership's financial position or results of
operations.
INCOME TAXES
The Partnership and its subsidiaries, except for Falcon First, are
limited partnerships or limited liability companies and pay no income taxes as
entities except for nominal taxes assessed by certain state jurisdictions. All
of the income, gains, losses, deductions and credits of the Partnership are
passed through to its partners. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. At December 31,
1998, the book basis of the Partnership's net assets exceeded its tax basis by
$621.8 million.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and
display of comprehensive income and its components in a full set of
comparative general-purpose financial statements. SFAS 130 became effective
for the Partnership on January 1, 1998. The Partnership does not currently
have items of comprehensive income.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with the 1998 presentation.
NOTE 2 - PARTNERSHIP MATTERS
The Amended and Restated Agreement of Limited Partnership of
FCLP ("FCLP Partnership Agreement") provides that profits and losses will be
allocated, and distributions will be made, in proportion to the partners'
percentage interests. FHGLP is the managing general partner and a limited
partner and owns a 54% interest in FCLP, and TCI is a general partner and
owns a 46% interest. The partners' percentage interests are based on the
relative net fair market values of the assets contributed to FCLP under the
Contribution Agreement, as estimated at the closing. The percentage interests
were subsequently adjusted to reflect the December 1998
F-11
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
redemption of a small part of FHGLP's partnership interest. To the extent the
relative net fair market values of the assets contributed to FCLP under the
Contribution Agreement, as finally determined, are different from the
estimates used to calculate the partners' percentage interests, one or the
other of the partners will be required to make an additional cash capital
contribution to FCLP so as to cause the partners' capital contributions to be
in proportion to their percentage interests. Any such additional cash
contribution is required to be made only to the extent of distributions by
FCLP to the contributing partner. Any such additional cash contribution must
be accompanied by interest at 9% per year from the date of closing or, in
certain cases, from the date on which FCLP incurred any liability that
affected the net fair market value of the parties' capital contributions.
At any time after September 30, 2005, either TCI or FHGLP can
offer to sell to the other partner the offering partner's entire partnership
interest in FCLP for a negotiated price. The partner receiving such an offer
may accept or reject the offer. If the partner receiving such an offer
rejects it, the offering partner may elect to cause FCLP to be liquidated and
dissolved in accordance with the FCLP Partnership Agreement.
The Partnership expires on July 1, 2013. The Partnership will
be dissolved prior to its expiration date under certain circumstances,
including the withdrawal of FHGLP as the managing general partner (unless the
partners vote to continue the Partnership), the sale of substantially all of
the Partnership's assets, and at the election by TCI in the event of changes
in FCLP's key management.
The FCLP Partnership Agreement provides for an Advisory
Committee consisting of six individual representatives, three of whom are
appointed by FHGLP, two of whom are appointed by TCI and one of whom is
appointed by joint designation of FHGLP and TCI. The FCLP Partnership
Agreement prohibits FCLP from taking certain actions without the affirmative
vote of a majority of the members of the Advisory Committee, including, but
not limited to, the following: (1) the acquisition or disposition of assets
under certain circumstances; and (2) conducting or entering into any line of
business other than the ownership and operation of cable television systems
and related and ancillary businesses.
The FCLP Partnership Agreement further prohibits the
Partnership from taking certain actions without the affirmative approval of
TCI, including, but not limited to, the following: (1) any merger,
consolidation, recapitalization or other reorganization, with certain
permitted exceptions; (2) the acquisition or disposition of assets under
certain circumstances; (3) any sale or disposition of assets that would
result in the allocation of taxable income or gain to TCI; (4) incurring
indebtedness if, after giving effect to such indebtedness, FCLP's Operating
Cash Flow Ratio, as defined, would exceed 8.0:1 through April 15, 2000 and
7.5:1 thereafter; (5) the issuance or redemption of any partnership interest
or convertible interest, with certain permitted exceptions; (6) any
transaction with FHGLP or any affiliate of FHGLP, with certain permitted
exceptions; (7) the adoption or amendment of any management incentive plan;
(8) the incurring of Net Overhead Expenses, as defined, that exceed 4.5% of
the gross revenues of FCLP and its subsidiaries in any fiscal year; or (9)
the liquidation or dissolution of FCLP, except in accordance with the
provisions of the FCLP Partnership Agreement.
TCI may elect to purchase all of FHGLP's interests in the
Partnership in certain circumstances if a court finds that FHGLP has engaged
in conduct while acting as Managing General Partner that has resulted in
material harm to the Partnership or TCI.
F-12
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 2 - PARTNERSHIP MATTERS (CONTINUED)
Prior to the closing of the TCI Transaction, the FHGLP
Partnership Agreement gave certain partners of FHGLP certain rights and
priorities with respect to other partners. Among these rights were stated
obligations of the Partnership to redeem certain partners' partnership
interests at fair value or, in some cases, at stated value. These rights and
priorities were eliminated upon the closing of the TCI Transaction. At the
closing of the TCI Transaction, a portion of the partnership interests held
by certain FHGLP limited partners, having an agreed value of $154.7 million,
were redeemed for cash.
Under the amended FHGLP partnership agreement, the
non-management limited partners of FHGLP may elect at certain times either to
require the incorporation of FHGLP or to require that FHGLP elect to
incorporate FCLP. Neither of these elections may be made prior to March 30,
2006. If the non-management limited partners of FHGLP make either of these
elections, then, at any time more than six months after the election and
prior to the date on which the incorporation is completed, the non-management
limited partners of FHGLP may elect to require that FCLP (or, if FHGLP has
purchased all of TCI's interest in FCLP, FHGLP) purchase all of the
non-management partners' partnership interests in FHGLP. Under certain
circumstances, a non-management limited partner of FHGLP may elect to exclude
its partnership interest in FHGLP from the purchase and sale and, upon such
election, all put and call rights with respect to such partner's partnership
interest in FHGLP will terminate.
The put and call rights with respect to the partnership
interests of the non-management partners will terminate automatically if
either FHGLP or FCLP is incorporated, if the corporation that succeeds to the
assets of FHGLP or FCLP concurrently effects an initial public offering, and
if the aggregate price to the public (before underwriting discounts or
commissions, registration fees, and other expenses) of all stock sold in the
public offering (including stock sold by any selling shareholders, but
excluding stock of a different class from that acquired by the non-management
partners in the incorporation) is at least $150 million.
At any time on or after April 1, 2006, FCLP (or, if FHGLP has
purchased all of TCI's interest in FCLP, FHGLP) may require that each of the
non-management limited partners of FHGLP sell its entire interest in FHGLP to
FCLP or FHGLP, as applicable. In the case of either a put or a call of the
non-management limited partners' interests in FHGLP, the purchase price will
equal the amount that would be distributed to each partner in dissolution and
liquidation of FHGLP, assuming the sale of FCLP's assets at fair market
value, as determined by three appraisers.
The estimated redemption values at December 31, 1997 and
December 31, 1998 were $171.4 million and $133 million, respectively, and
are reflected in the consolidated financial statements as redeemable
partners' equity. Such amounts were determined based on management's estimate
of the relative fair value of such interests under current market conditions.
Management of the Partnership will continue to adjust the recorded redemption
values based on its estimate of the relative fair value of the interests
subject to redemption. The actual redemption value of any partnership
interests will generally be determined through the third-party appraisal
mechanisms described in the partnership agreements, and the appraisers will
not be bound by management's estimates. Accordingly, such appraised
valuations may be greater than or less than management's estimates and any
such variations could be significant.
While the Partnership has assumed the obligations of FHGLP
under the 1993 Incentive Performance Plan (the "Incentive Performance Plan"),
FHGLP has agreed to contribute cash to the Partnership in an amount equal to
any payments made by the Partnership under the Incentive Performance Plan.
F-13
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 3 - ACQUISITIONS AND SALES
The Partnership acquired the cable television systems of FCSC
on July 12, 1996 through a newly-formed subsidiary operating partnership for
a purchase price of $253 million including transaction costs. The acquisition
of FCSC was accounted for by the purchase method of accounting, whereby the
purchase price of the FCSC assets was allocated based on an appraisal. The
excess of purchase price over the fair value of net assets acquired, or $18.2
million, has been recorded as goodwill and is being amortized using the
straight-line method over 20 years.
In March and July 1998, FHGLP acquired the Falcon Classic
Systems for an aggregate purchase price of $83.4 million. Falcon Classic had
revenue of approximately $20.3 million for the year ended December 31, 1997.
As discussed in Note 1, on September 30, 1998 the Partnership
acquired the TCI Systems and the Falcon Video Systems in accordance with the
Contribution Agreement.
The acquisitions of the TCI Systems, the Falcon Video Systems
and the Falcon Classic Systems were accounted for by the purchase method of
accounting, whereby the purchase prices were allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the dates of
acquisition, as follows:
<TABLE>
<CAPTION>
Falcon Video Falcon Classic
TCI Systems Systems Systems
---------------- ----------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
PURCHASE PRICE:
General partnership interests issued $ 234,457 $ 43,073 $ -
Debt assumed 275,000 112,196 -
Debt incurred - - 83,391
Other liabilities assumed 955 3,315 2,804
Transaction costs 2,879 - -
---------------- ----------------- --------------
513,291 158,584 86,195
---------------- ----------------- --------------
FAIR MARKET VALUE OF NET ASSETS ACQUIRED:
Property, plant and equipment 77,992 41,889 33,539
Franchise costs 170,799 36,374 7,847
Customer lists and other intangible assets 217,443 53,602 34,992
Other assets 4,165 2,381 3,164
---------------- ----------------- --------------
470,399 134,246 79,542
---------------- ----------------- --------------
Excess of purchase price over fair value of
assets acquired and liabilities assumed $ 42,829 $ 24,338 $ 6,653
---------------- ----------------- --------------
---------------- ----------------- --------------
</TABLE>
The excess of purchase price over the fair value of net assets
acquired has been recorded as goodwill and is being amortized using the
straight-line method over 20 years. The allocation of the purchase price may be
subject to possible adjustment pursuant to the Contribution Agreement.
F-14
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 3 - ACQUISITIONS AND SALES (CONTINUED)
The general partnership interests issued in the TCI Transaction
were valued in proportion to the estimated fair value of the TCI Systems and
the Falcon Video Systems as compared to the estimated fair value of the
Partnership's assets, which was agreed upon in the Contribution Agreement by
all holders of Partnership interests.
Sources and uses of funds for each of the transactions were as
follows:
<TABLE>
<CAPTION>
Falcon Video Falcon Classic
TCI Systems Systems Systems
------------------ ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
SOURCES OF FUNDS:
Cash on hand $ 11,429 $ 59,038 $ 6,591
Advance under bank credit facilities 429,739 56,467 76,800
------------------ ----------------- -----------------
Total sources of funds $ 441,168 $ 115,505 $ 83,391
------------------ ----------------- -----------------
------------------ ----------------- -----------------
USES OF FUNDS:
Repay debt assumed from TCI and existing debt of Falcon
Video, including accrued interest $ 429,739 $ 115,505 $ -
Purchase price of assets - - 83,391
Payment of assumed obligations at closing 6,495 - -
Transaction fees and expenses 2,879 - -
Available funds 2,055 - -
------------------ ----------------- -----------------
Total uses of funds $ 441,168 $ 115,505 $ 83,391
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
The following unaudited condensed consolidated statements of
operations present the consolidated results of operations of the Partnership as
if the acquisitions referred to above had occurred at the beginning of the
periods presented and are not necessarily indicative of what would have occurred
had the acquisitions been made as of such dates or of results which may occur in
the future.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Revenues $ 399,449 $ 424,994 $ 426,827
Expenses (429,891) (438,623) (444,886)
--------------- --------------- ---------------
Operating loss (30,442) (13,629) (18,059)
Interest and other expenses (126,904) (115,507) (130,632)
--------------- --------------- ---------------
Loss before extraordinary item $ (157,346) $ (129,136) $ (148,691)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-15
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
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 11% Senior Subordinated
Notes, 8.375% Senior Debentures and 9.285% Senior Discount Debentures is
based on quoted market prices for those issues of debt. The fair value of the
Partnership's other subordinated notes is based on quoted market prices for
similar issues of debt with similar 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 agreements.
F-16
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table depicts the fair value of each class of
financial instruments for which it is practicable to estimate that value as of
December 31:
<TABLE>
<CAPTION>
1997 1998
---------------------- -----------------------------
Carrying Carrying
Value Fair Value Value Fair Value
----------- ---------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,917 $ 13,917 $ 14,284 $ 14 284
Notes payable (Note 6):
11% Senior Subordinated Notes 282,193 299,125 - -
8.375% Senior Debentures - - 375,000 382,500
9.285% Senior Discount Debentures - - 294,982 289,275
Bank credit facilities 606,000 606,000 926,000 926,000
Other Subordinated Notes 15,000 16,202 15,000 16,426
Capitalized lease obligations 10 10 1 1
Other 8,018 8,018 370 370
<CAPTION>
------------------------------------------------------
Notional Notional
Amount Fair Value Amount Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Hedging Agreements
(Note 6):
Interest rate swaps $585,000 $(371) $1,534,713 $(22,013)
Interest rate caps 25,000 (148) - -
</TABLE>
The carrying value of interest rate swaps and caps was an asset
of $402,000 at December 31, 1997 and a net obligation of $20.3 million at
December 31, 1998. See Note 6(g). The amount of debt on which current
interest expense has been affected is $520 million and $960 million for swaps
at December 31, 1997 and 1998 and $25 million for caps at December 31, 1997.
The balance of the contract totals presented above reflects contracts entered
into as of December 31 which do not become effective until existing contracts
expire.
F-17
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -------------
(Dollars in Thousands)
<S> <C> <C>
Cable television systems $ 555,253 $ 765,641
Furniture and equipment 19,067 25,576
Vehicles 12,067 18,381
Land, buildings and improvements 10,723 16,505
----------- ------------
597,110 826,103
Less accumulated depreciation and amortization (272,551) (320,209)
----------- ------------
$ 324,559 $ 505,894
----------- ------------
----------- ------------
</TABLE>
NOTE 6 - NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
----------- ------------
(Dollars in Thousands)
<S> <C> <C>
FCLP (formerly FHGLP) Only:
11% Senior Subordinated Notes(a) $ 282,193 $ -
8.375% Senior Debentures (b) - 375,000
9.285% Senior Discount Debentures, less
unamortized discount (b) - 294,982
Capitalized lease obligations 10 1
Owned Subsidiaries:
Amended and Restated Credit Agreement(c) 606,000 -
New Credit Facility (d) - 926,000
Other subordinated notes(e) 15,000 15,000
Other(f) 8,018 370
----------- ------------
$ 911,221 $ 1,611,353
----------- ------------
----------- ------------
</TABLE>
F-18
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6 - NOTES PAYABLE (CONTINUED)
(a) 11% SENIOR SUBORDINATED NOTES
On March 29, 1993, FHGLP issued $175 million aggregate principal
amount of 11% Senior Subordinated Notes due 2003 (the "Notes"). Interest payment
dates were semi-annual on each March 15 and September 15 commencing September
15, 1993. Through September 15, 2000 FHGLP, at its option, could 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 elected to issue $107.2 million additional notes as payment-in-kind
for interest. The Partnership elected to pay the interest payment due March 15,
1998 in cash and, under the terms of the Notes, was required to continue to make
cash payments.
On May 19, 1998, FHGLP repurchased approximately $247.8 million
aggregate principal amount of the Notes for an aggregate purchase price of
$270.3 million pursuant to a fixed spread tender offer for all outstanding
Notes. The Notes tendered represented approximately 88% of the Notes previously
outstanding. The approximate $34.4 million of Notes not repurchased in the
tender offer were redeemed on September 15, 1998 in accordance with their terms.
(b) 8.375% SENIOR DEBENTURES AND 9.285% SENIOR DISCOUNT
DEBENTURES
On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon
Funding Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold
$375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010
(the "Senior Debentures") and $435,250,000 aggregate principal amount at
maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount
Debentures" and, collectively with the Senior Debentures, the "Debentures") in a
private placement. The Debentures were exchanged for debentures with the same
form and terms, but registered under the Securities Act of 1933, as amended, in
August 1998.
In connection with consummation of the TCI Transaction, the
Partnership was substituted for FHGLP as an obligor under the Debentures and
thereupon FHGLP was released and discharged from any further obligation with
respect to the Debentures and the related Indenture. FFC remains as an obligor
under the Debentures and is now a wholly owned subsidiary of the Partnership.
FFC was incorporated solely for the purpose of serving as a co-issuer of the
Debentures and does not have any material operations or assets and will not have
any revenues.
The Senior Discount Debentures were issued at a price of 63.329%
per $1,000 aggregate principal amount at maturity, for total gross proceeds of
approximately $275.6 million, and will accrete to stated value at an annual rate
of 9.285% until April 15, 2003. The unamortized discount amounted to $140.3
million at December 31, 1998. After giving effect to offering discounts,
commissions and estimated expenses of the offering, the sale of the Debentures
(representing aggregate indebtedness of approximately $650.6 million as of the
date of issuance) generated net proceeds of approximately $631 million. The
Partnership used substantially all the net proceeds from the sale of the
Debentures to repay outstanding bank indebtedness.
F-19
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6 - NOTES PAYABLE (CONTINUED)
(c) AMENDED AND RESTATED CREDIT AGREEMENT
The Partnership had a $775 million senior secured Amended and
Restated Credit Agreement that was scheduled to mature on July 11, 2005. The
Amended and Restated Credit Agreement required the Partnership to make annual
reductions of $1 million on the term loan portion commencing December 31,
1997. Maximum available borrowings under the Amended and Restated Credit
Agreement were $774 million at December 31, 1997. The Amended and Restated
Credit Agreement required interest on the amount outstanding under the reducing
revolver portion to be tied to the ratio of consolidated total debt (as defined)
to consolidated annualized cash flow (as defined). Interest rates were based on
LIBOR or prime rates at the option of the Partnership. The LIBOR margin under
the reducing revolver ranged from 0.75% to 1.625%, while interest on the term
loan was at 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 was also required to pay a commitment fee per annum on the unused
portion.
(d) NEW CREDIT FACILITY
On June 30, 1998, the Partnership entered into a new $1.5 billion
senior credit facility (the "New Credit Facility") which replaced the Amended
and Restated Credit Agreement and provided funds for the closing of the TCI
Transaction. See Note 1. The borrowers under the New Credit Facility were the
operating subsidiaries prior to consummation of the TCI Transaction and,
following the TCI Transaction, the borrower is Falcon LLC. The restricted
companies, as defined under the New Credit Facility, are Falcon LLC and each of
its subsidiaries (excluding certain subsidiaries designated as excluded
companies from time to time) and each restricted company (other than Falcon LLC)
is also a guarantor of the New Credit Facility.
The New Credit Facility consists of three committed facilities
(one revolver and two term loans) and one uncommitted $350 million supplemental
credit facility (the terms of which will be negotiated at the time the
Partnership makes a request to draw on such facility). Facility A is a $650
million revolving credit facility maturing December 29, 2006; Facility B is a
$200 million term loan maturing June 29, 2007; and Facility C is a $300 million
term loan maturing December 31, 2007. All of Facility C and approximately $126
million of Facility B were funded on June 30, 1998, and the debt outstanding
under the Amended and Restated Credit Agreement of approximately $329 million
was repaid. As a result, from June 30, 1998 until September 29, 1998, FHGLP had
an excess cash balance of approximately $90 million. Immediately prior to
closing the TCI Transaction, approximately $39 million was borrowed under
Facility A to discharge certain indebtedness of Falcon Video. In connection with
consummation of the TCI Transaction, Falcon LLC assumed the approximately $433
million of indebtedness outstanding under the New Credit Facility. In addition
to utilizing cash on hand of approximately $63 million, Falcon LLC borrowed the
approximately $74 million remaining under Facility B and approximately $366
million under Facility A to discharge approximately $73 million of Falcon Video
indebtedness and to retire approximately $430 million of TCI indebtedness
assumed as part of the contribution of the TCI Systems. As a result of these
borrowings, the amount outstanding under the New Credit Facility at December 31,
1998 was $926 million. Subject to covenant limitations, the Partnership had
available to it additional borrowing capacity thereunder of $224 million at
December 31, 1998. However, limitations
F-20
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6 - NOTES PAYABLE (CONTINUED)
imposed by the Partnership's partnership agreement as amended would limit
available borrowings at December 31, 1998 to $23.1 million.
(e) 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 New Credit Facility, which is
described in (d) above. At December 31, 1998, management believes that the
Partnership was in compliance with such covenants.
(f) OTHER
Other notes payable as of December 31, 1997 consisted of $7.5
million owed by Enstar Finance Company, LLC ("EFC"). FHGLP's interest in EFC was
not contributed to FCLP on September 30, 1998. Consequently, EFC's obligations
are excluded from those of the Partnership as of December 31, 1998.
(g) 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 New Credit Facility 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 plus any additional borrowings of the Partnership, including the
Debentures, for a two year period. As of December 31, 1998, borrowings under the
New Credit Facility bore interest at an average rate of 7.55% (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, 1998 of $1.485 billion, including contracts of $160 million assumed
from Falcon Video in connection with the TCI Transaction. Agreements in effect
at December 31, 1998 totaled $910 million, with the remaining $575 million to
become effective as certain of the existing contracts mature during 1999 through
October of 2004. These agreements expire at various times through October, 2006.
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.
The hedging agreements resulted in additional interest expense of
$1 million, $350,000 and $1.2 million for the years ended December 31, 1996,
1997 and 1998, respectively. The Partnership does not believe that it has any
significant risk of exposure to non-performance by any of its counterparties.
F-21
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6 - NOTES PAYABLE (CONTINUED)
(h) DEBT MATURITIES
The Partnership's notes payable outstanding at December 31, 1998
mature as follows:
<TABLE>
<CAPTION>
Other
8.375% Senior 9.285% Senior Notes to Subordinated
Year Debentures Debentures Banks Notes Other Total
- ---------------- ----------------- ----------------- ------------ ------------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1999 $ - $ - $ 5,000 $ - $ 371 $ 5,371
2000 - - 5,000 - - 5,000
2001 - - 5,000 15,000 - 20,000
2002 - - 5,000 - - 5,000
2003 - - 5,000 - - 5,000
Thereafter 375,000 435,250 901,000 - - 1,711,250
</TABLE>
(i) EXTRAORDINARY ITEM
Fees and expenses incurred in connection with the repurchase of
the Notes on May 19, 1998 and the retirement of the remaining Notes on September
15, 1998 were $19.7 million in the aggregate. In addition, the unamortized
portion of deferred loan costs related to the Notes and the Amended and Restated
Credit Agreement, which amounted to $10.9 million in the aggregate, were written
off as an extraordinary charge upon the extinguishment of the related debt.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Partnership leases land, office space and equipment under
operating leases expiring at various dates through the year 2039. See Note 9.
Future minimum rentals for operating leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Year Total
--------------- ----------
(Dollars in Thousands)
<S> <C>
1999 $ 2,758
2000 2,545
2001 2,264
2002 1,919
2003 1,119
Thereafter 4,449
--------
$ 15,054
--------
--------
</TABLE>
F-22
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $2.1 million in 1996, $2.4 million in 1997 and $3.1 million in 1998.
In addition, the Partnership rents line space on utility poles in
some of the franchise areas it serves. These rentals amounted to $2.8 million
for 1996, $3.1 million for 1997 and $3.9 million for 1998. Generally, such pole
rental agreements are short-term; however, the Partnership anticipates such
rentals will continue in the future.
Beginning in August 1997, the Partnership elected to self-insure
its 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. In October
1998, the Partnership reinstated third party insurance coverage against damage
to its cable distribution plant and subscriber connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible and is intended to limit the Partnership's
exposure to catastrophic losses, if any, in future periods. 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. The Partnership continues
to purchase insurance coverage in amounts management views as appropriate for
all other property, liability, automobile, workers' compensation and other types
of insurable risks.
The Partnership is required under various franchise agreements at
December 31, 1998 to rebuild certain existing cable systems at a cost of
approximately $83 million.
The Partnership is regulated by various federal, state and local
government entities. The Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), provides for among other things, federal and
local regulation of rates charged for basic cable service, cable programming
service tiers ("CPSTs") and equipment and installation services. Regulations
issued in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Partnership's cable services. The Partnership believes that compliance with the
1992 Cable Act has had a negative impact on its operations and cash flow. It
also presently believes that any potential future liabilities for refund claims
or other related actions would not be material. The Telecommunications Act of
1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it
pertains to cable television, the 1996 Telecom Act, among other things, (i) ends
the regulation of certain CPSTs in 1999; (ii) expands the definition of
effective competition, the existence of which displaces rate regulation; (iii)
eliminates the restriction against the ownership and operation of cable systems
by telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. The Partnership's programming
contracts are generally for a fixed period of
F-23
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
Effective December 1, 1998, the Partnership elected to obtain
certain of its programming services through an affiliate of TCI. This election
resulted in a reduction in the Partnership's programming costs, the majority of
which will be passed on to its customers in the form of reduced rates in
compliance with FCC rules. The Partnership has elected to continue to acquire
its remaining programming services under its existing programming contracts, but
may elect to acquire additional programming services through the TCI affiliate
in the future. The Partnership, in the normal course of business, purchases
cable programming services from certain program suppliers owned in whole or in
part by an affiliate of TCI.
The Partnership is periodically a party to various legal
proceedings. Such legal proceedings are ordinary and routine litigation
proceedings that are incidental to the Partnership's business, and management
presently believes that the outcome of all pending legal proceedings will not,
in the aggregate, have a material adverse effect on the financial condition of
the Partnership.
The Partnership, certain of its affiliates, and certain third
parties have been named as defendants in an action entitled FRANK O'SHEA I.R.A.
ET AL. v. FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386, pending in
the Superior Court of the State of California, County of Los Angeles (the
"Action"). Plaintiffs in the Action are certain former unitholders of FCSC
purporting to represent a class consisting of former unitholders of FCSC other
than those affiliated with FCSC and/or its controlling persons. The complaint in
the Action alleges, among other things, that defendants breached their fiduciary
and contractual duties to unitholders, and acted negligently, with respect to
the purchase from former unitholders of their interests in FCSC in 1996. A
settlement of the action has been agreed to and will be presented to the court
for approval on April 22, 1999. The terms of the settlement, if approved, are
not expected to have a material adverse effect on the financial condition of the
Partnership. Net of insurance proceeds, the settlement's cost to the Partnership
would amount to approximately $2.7 million, all of which had been reserved as of
December 31, 1998. The Partnership recognized expenses related to the settlement
of $52,000, $145,000 and $2.5 million in 1996, 1997 and 1998, respectively.
NOTE 8 - 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
F-24
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS
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 1996, 1997 or 1998.
On September 30 1998, the Partnership assumed the obligations of
FHGLP 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, FHGLP agreed to fund any benefits payable under the Incentive
Plan through additional capital contributions to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its partnership units to the Partnership.
The benefits which are payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in
certain of the partnerships that are the general partners of the Partnership's
operating subsidiaries. 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, FHGLP is required to cause the units to be contributed to the
Partnership to fund such distributions. The participants in the Incentive Plan
are present and former employees of the Partnership, FHGLP and its operating
affiliates, all of whom are 100% vested. Prior to the closing of the TCI
Transaction, FHGLP amended the Incentive Plan to provide for payments by FHGLP
at the closing of the TCI Transaction to participants in an aggregate amount of
approximately $6.5 million and to reduce by such amount FHGLP's obligations to
make future payments to participants under the Incentive Plan.
In 1999, the Partnership adopted a Restricted Unit Plan (the "New
FCLP Incentive Plan" or "Plan") for the benefit of certain employees. Grants of
restricted units are provided at the discretion of the Advisory Committee. The
value of the units in the New FCLP Incentive Plan is tied to the equity value of
FCLP above a base equity as determined initially in 1999 by the partners, and
for grants in subsequent years by an appraisal. Benefits are payable under the
New FCLP Incentive Plan only when distributions would otherwise be payable to
equity holders of FCLP. An initial grant of 100,000 units representing 2.75% of
the equity of FCLP in excess of the equity base was approved and will be
allocated to the participants in the Plan. There is a five-year vesting
requirement for all participants.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Partnership is a separate, stand-alone holding company which
employs all of the management personnel. The Partnership is financially
dependent on the receipt of permitted payments from its operating subsidiaries,
management and consulting fees from domestic cable ventures, and the
reimbursement of specified expenses by certain of the Affiliated Partnerships 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 and, subsequently, the New Credit Facility,
permitted the subsidiaries of the Partnership to remit to the Partnership no
more than 4.25% of their net cable revenues, as defined, in any year, effective
July 12, 1996. Beginning on January 1, 1999, this limitation was increased to
4.5% of net cable revenues in any year. As a result of the 1998 acquisition by
the Partnership of the Falcon Classic and Falcon Video Systems, the Partnership
will no longer receive management fees and reimbursed expenses from Falcon
Classic or receive management fees from Falcon
F-25
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)
Video. Commencing on October 1, 1998, FHGLP retains 20% of the management fees
paid by the Enstar partnerships. The management fees earned from the Enstar
partnerships were $1.9 million, $2 million and $1.9 million for the years
ended December 31, 1996, 1997 and 1998, respectively.
The management and consulting fees and expense reimbursements
earned from the Affiliated Partnerships amounted to approximately $6.3 million
and $3.7 million, $5.2 million and $2.1 million and $3.7 million and $1.5
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
fees and expense reimbursements of $6.3 million and $3.7 million earned in 1996
included $1.5 million and $1 million earned from FCSC from January 1, 1996
through July 11, 1996. The fees and expense reimbursements of $3.7 million and
$1.5 million earned in 1998 included $191,000 and $128,000 earned from Falcon
Classic from January 1, 1998 through July 16, 1998, and $1.2 million in
management fees from Falcon Video from January 1, 1998 through September 30,
1998. Subsequent to these acquisitions, the amounts payable to the Partnership
in respect of its management of the former FCSC, Falcon Classic and Falcon Video
Systems became subject to the limitations contained in the Amended and Restated
Credit Agreement and, subsequently, the New Credit Facility.
Receivables from the Affiliated Partnerships for services and
reimbursements described above amounted to approximately $11.3 million and $2.3
million (which, in 1997, included $7.5 million of notes receivable from the
Enstar partnerships) at December 31, 1997 and 1998.
Included in Commitments and Contingencies (Note 7) 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 a
subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That
subsidiary acquired the property in February 1999 for $282,500, a price
determined by two independent appraisals. During the years ended December 31,
1996, 1997 and 1998 rent expense on the first facility amounted to $397,000,
$383,000 and $416,000, 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 each of 1997 and 1998 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 $118,300, $163,000 and $212,000 for the years ended December 31,
1996, 1997 and 1998, respectively. These costs were net of amounts reimbursed to
the Partnership by the Chief Executive Officer amounting to $75,000, $55,000 and
$72,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
F-26
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
NOTE 10 - OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1997 1998
------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Gain on sale of Available-for-Sale Securities $ 2,264 $ - $ -
Gain on insured casualty losses - 3,476 314
Write down of investment (1,000) - -
Gain (loss) on sale of investment - (1,360) 174
Net lawsuit settlement costs - (1,030) (2,614)
Other, net (450) (201) (791)
------------- ------------- -------------
$ 814 $ 885 $ (2,917)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 11 - SUBSEQUENT EVENTS
In March 1999, AT&T and Tele-Communications, Inc. completed a
merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T
Broadband & Internet Services. The unit will continue to be headquartered in the
Denver area. Leo J. Hindery, Jr., who had been president of Tele-Communications,
Inc. since January 1997, was named President and Chief Executive Officer of AT&T
Broadband & Internet Services, which became the owner of TCI Falcon Holdings,
LLC as a result of the merger.
The Partnership entered into a letter of intent with AT&T to form
a joint venture. This joint venture would provide local or any-distance
communications services, other than mobile wireless services, video
entertainment services and high speed Internet access services, to residential
and certain small business customers under the AT&T brand name over the
Partnership's infrastructure. Formation of the joint venture is subject to
certain conditions. The Partnership is unable to predict if or when such
conditions will be met.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
OPERATING ACTIVITIES
During the years ended December 31, 1996, 1997 and 1998, the
Partnership paid cash interest amounting to approximately $39.7 million, $48.1
million and $84.9 million, respectively.
INVESTING ACTIVITIES
See Note 3 regarding the non-cash investing activities related to
the acquisitions of the cable systems of the TCI Systems, the Falcon Video
Systems, the Falcon Classic Systems and FCSC.
FINANCING ACTIVITIES
See Note 3 regarding the non-cash financing activities relating to
the acquisitions of the cable systems of the TCI Systems, the Falcon Video
Systems, the Falcon Classic Systems and FCSC. See Note 2 regarding the
reclassification to redeemable partners' equity.
F-27
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
NOTE 13 - FCLP (PARENT COMPANY ONLY)
The following parent-only condensed financial information presents
Falcon Communications, L.P.'s balance sheets and related statements of
operations and cash flows by accounting for the investments in its subsidiaries
on the equity method of accounting. The condensed balance sheet information for
1997 and condensed statement of operations information through September 30,
1998 is for FHGLP (parent only). The accompanying condensed financial
information should be read in conjunction with the consolidated financial
statements and notes thereto.
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 8,177 $ 1,605
Receivables:
Intercompany notes and accrued interest receivable 226,437 655,128
Due from affiliates and other entities, of which $23,374,000 was
contractually restricted or otherwise deferred at December 31,
1997 (see Note 9) 25,340 2,129
Prepaid expenses and other 711 236
Investments in affiliated partnerships 12,827 -
Other investments 1,519 -
Property, plant and equipment, less accumulated depreciation and amortization 1,323 3,599
Deferred loan costs, less accumulated amortization 4,846 20,044
------------ ------------
$ 281,180 $ 682,741
------------ ------------
------------ ------------
LIABILITIES:
Notes payable $ 10 $ -
Senior notes payable 282,193 669,982
Notes payable to affiliates - 70,805
Accounts payable 179 135
Accrued expenses 14,025 14,000
Equity in net losses of subsidiaries in excess
of investment 230,155 198,492
------------ ------------
TOTAL LIABILITIES 526,562 953,414
REDEEMABLE PARTNERS' EQUITY 171,373 133,023
PARTNERS' DEFICIT (416,755) (403,696)
------------ ------------
$ 281,180 $ 682,741
------------ ------------
------------ ------------
</TABLE>
F-28
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 15 - FCLP (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
REVENUES:
Management fees:
Affiliated Partnerships $ 3,962 $ 2,873 $ 2,120
Subsidiaries 12,020 13,979 14,010
International and other 413 281 33
----------- ----------- ------------
Total revenues 16,395 17,133 16,163
----------- ----------- ------------
EXPENSES:
General and administrative expenses 9,096 11,328 21,134
Depreciation and amortization 375 274 559
----------- ----------- ------------
Total expenses 9,471 11,602 21,693
----------- ----------- ------------
Operating income (loss) 6,924 5,531 (5,530)
OTHER INCOME (EXPENSE):
Interest income 19,884 22,997 50,562
Interest expense (27,469) (30,485) (59,629)
Equity in net losses of subsidiaries (50,351) (56,422) (105,659)
Equity in net losses of investee partnerships (73) (4) (31)
Other, net 1,100 (2,455) -
----------- ----------- ------------
Net loss before extraordinary item (49,985) (60,838) (120,287)
Extraordinary item, retirement of debt - - (24,196)
----------- ----------- ------------
NET LOSS $ (49,985) $ (60,838) $ (144,483)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-29
<PAGE>
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 15 - FCLP (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
-------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Net cash provided by (used in)
Operating activities $ (8,969) $ 1,478 $ (418,226)
-------------- ------------- --------------
Cash flows from investing activities:
Distributions from affiliated partnerships 773 - 1,820
Capital expenditures (242) (417) (2,836)
Investments in affiliated partnerships and other investments (9,000) (254) (2,998)
Proceeds from sale of investments and other assets 3 702 1,694
Proceeds from sale of available-for-sale securities 9,502 - -
Assets retained by Falcon Holding Group, L.P. - - (2,893)
-------------- ------------- --------------
Net cash provided by (used in) investing activities 1,036 31 (5,213)
-------------- ------------- --------------
Cash flows from financing activities:
Repayment of debt (120) (131) (282,203)
Borrowings from notes payable - - 650,639
Borrowings from subsidiaries - - 70,805
Capital contributions 5,000 93 -
Redemption of partners' equity - - (1,170)
Deferred loan costs - - (21,204)
-------------- ------------- --------------
Net cash provided by (used in) financing activities 4,880 (38) 416,867
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (3,053) 1,471 (6,572)
Cash and cash equivalents, at beginning of year 9,759 6,706 8,177
-------------- ------------- --------------
Cash and cash equivalents, at end of year $ 6,706 $ 8,177 $ 1,605
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
F-30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholder
Falcon Funding Corporation
We have audited the accompanying balance sheets of Falcon Funding Corporation
as of March 27, 1998 and December 31, 1998, and the related statement of cash
flows for the period from March 27, 1998 to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Falcon Funding Corporation
as of March 27, 1998 and December 31, 1998 and its cash flows in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 5, 1999
F-31
<PAGE>
FALCON FUNDING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 27, December 31,
1998 1998
----------------- -----------------
<S> <C> <C>
Assets - Cash $ 1,000 $ 1,000
----------------- -----------------
----------------- -----------------
Shareholder's Equity
Common stock, par value $0.01; 1,000 shares authorized, 100
shares issued and outstanding 1 1
Additional paid-in capital 999 999
----------------- -----------------
$ 1,000 $ 1,000
----------------- -----------------
----------------- -----------------
</TABLE>
F-32
<PAGE>
FALCON FUNDING CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 27, 1998
to
December 31,
1998
-----------------
<S> <C>
Cash flows from financing activities:
Common stock $ 1
Additional paid-in capital 999
-----------------
Net cash provided by financing activities 1,000
-----------------
Increase in cash and cash equivalents 1,000
Cash at beginning of period -
-----------------
Cash at end of period $ 1,000
-----------------
-----------------
</TABLE>
F-33
<PAGE>
FALCON FUNDING CORPORATION
NOTE TO FINANCIAL STATEMENTS
NOTE 1 - FORM OF PRESENTATION
Falcon Funding Corporation ("FFC"), a California corporation, is a
wholly-owned subsidiary of Falcon Communications, L.P. FFC was organized on
March 16, 1998 solely for the purpose of acting as co-issuer with Falcon Holding
Group, L.P., of $649.6 million (gross proceeds) of senior debentures and senior
discount debentures due 2010. FFC had no operations from inception through
December 31, 1998 and is not expected to have material operations or assets in
the future. FFC is not expected to participate in servicing the principal,
interest, premium, if any, or any payment obligations on the debentures. Falcon
Holding Group, L.P. contributed its ownership in Falcon Funding Corporation to
Falcon Communications, L.P. on September 30, 1998.
F-34
<PAGE>
FALCON COMMUNICATIONS, L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to
Beginning of costs and Balance at End of
Description period expenses Deductions(a) Other(b) Period
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on
receivables
Year ended December 31,
1996 $830 $2,817 $(2,740) - $907
1997 $907 $5,714 $(5,796) - $825
1998 $825 $4,775 $(5,299) $369 $670
</TABLE>
(a) Write-off uncollectible accounts.
(b) Allowance for losses on receivables acquired in connection with the
acquisition of Falcon Classic, Falcon Video and the TCI systems.
F-35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
2.1 Contribution and Purchase Agreement, dated December 30, 1997, by and
among Falcon Holding Group, L.P., Falcon Communications, L.P., Falcon
Holding Group, Inc., TCI Falcon Holdings, LLC, Belo Ventures, Inc.,
and the other parties executing the Agreement. (7)
2.2 First Amendment to the Contribution and Purchase Agreement, dated
March 17, 1998. (8)
2.3 Second Amendment to the Contribution and Purchase Agreement, dated
March 23, 1998. (8)
2.4 Third Amendment to the Contribution and Purchase Agreement, dated
May 12, 1998. (8)
2.5 Amendment, dated as of September 29, 1998, to Contribution and
Purchase Agreement. (10)
2.6 Amendment, dated as of September 30, 1998, to Contribution and
Purchase Agreement. (10)
3.1 Amended and Restated Agreement of Limited Partnership of Falcon
Communications, L.P. (9)
3.2 Articles of Incorporation of Falcon Funding Corporation (9)
3.3 Bylaws of Falcon Funding Corporation (9)
4.1 Indenture for the Debentures, dated as of April 3, 1998, by and among
Falcon Holding Group, L.P., Falcon Funding Corporation and United
States Trust Company of New York, as trustee(9)
4.2 Form of Debentures (included in Exhibit No. 4.1)(9)
4.3 First Supplemental Indenture, dated as of September 30, 1998, by and
among Falcon Holding Group, L.P., Falcon Funding Corporation, Falcon
Communications, L.P. and United States Trust Company of New York, as
trustee(10)
10.1 Lease, dated December 1989, between Raymond Business Center and
Falcon(1)
10.2 Lease, dated as of June 25, 1992, by and between Sumitomo Life Realty
(N.Y.), Inc. and Falcon(1)
10.3 Cash or Deferred Profit Sharing Plan of Falcon(1)
10.4 Money Purchase Pension Plan of Falcon(1)
10.5 Combined Incentive Performance Plan of FHGLP.(1)
10.6 Falcon Holding Group 401(k) Plan.(1)
10.7 First Amendment to and Extension of office Lease between Raymond
Business Center and Falcon Holding Group, L.P.(2)
10.8 Asset purchase agreement by and among subsidiaries of Falcon Holding
Group, L.P. and Teleview, Inc.(2)
10.9 Restricted Subordination Agreement dated as of March 26, 1993 as
restated as of December 28, 1995 between Falcon Holding Group, L.P.,
Falcon Holding Group, Inc. and AUSA Life Insurance Company, Inc. and
MONY Life Insurance Company of America.(2)
10.10 System Appraisal of Falcon Cable Systems Company, as of December 31,
1995, by Malarkey-Taylor Associates, Inc., dated April 29, 1996
(filed as Exhibit 1 to the June 13 Falcon Cable Systems Company
Report file no. 19332 and incorporated by reference).(3)
</TABLE>
E-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.11 System Appraisal of Falcon Cable Systems Company, as of December 31,
1995, by Kane-Reece Associates, Inc., dated April 29, 1996 (filed as
Exhibit 2 to the June 13 Falcon Cable Systems Company Report file no.
19332 and incorporated by reference).(3)
10.12 System Appraisal of Falcon Cable Systems Company, as of December 31,
1995, by Waller Capital Corporation (filed as Exhibit 3 to the June
13 Falcon Cable Systems Company Report file no. 19332 and
incorporated by reference).(3)
10.13 Asset Purchase Agreement by and between the Partnership and New
Falcon, dated as of June 13, 1996 (filed as Exhibit 4 to the June 13
Falcon Cable Systems Company Report file no. 19332 and incorporated
by reference).(3)
10.14 Limited Partnership Interest Purchase Agreement dated July 15, 1996,
by and among Falcon Holding Group, L.P., Marc B. Nathanson, Trustee
of the Falcon Cable Trust and Advance TV of California, Inc.(4)
10.15 Partnership Option Agreement dated July 15, 1996, by and among Marc
B. Nathanson, Trustee of the Falcon Cable Trust and Falcon Holding
Group, L.P.(4)
10.16 Partnership Option Agreement dated July 15, 1996, between Advance TV
of California, Inc. and Falcon Holding Group, L.P.(4)
10.17 Fourth Amendment to Note Purchase and Exchange Agreement dated July
12, 1996, between Falcon Telecable, AUSA Life Insurance Company, Inc.
and MONY Life Insurance Company of America.(4)
10.18 Second Restated Subordination Agreement between Registrant and AUSA
Life Insurance Company, Inc. and MONY Life Insurance Company of
America dated July 12, 1996.(4)
10.19 Second Restated Guaranty Agreement, dated July 12, 1996, by Falcon
Cablevision, Falcon Cable Media, Falcon Community Cable, L.P., Falcon
Community Ventures I Limited Partnership, Falcon Investors Group,
LTD., Falcon Telecable Investors Group, Falcon Media Investors Group,
Falcon Community Investors, L.P., Falcon Telecom, L.P., Falcon Cable
Systems Company II, L.P., and Falcon First, Inc. in favor of each of
AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of
America with respect to the Notes.(4)
10.20 Certificate, dated (July 12, 1996), of Falcon Holding Group, Inc.
with respect to the common ownership of certain partnership
guarantors.(4)
10.21 Fair Market Valuation Report for Falcon Classic Cable Income
Properties, L.P., as of December 31, 1996, dated February 20, 1997,
prepared by Arthur Andersen LLP.(5)
10.22 Valuation Analysis for Falcon Classic Cable Income Properties, L.P.,
as of December 31, 1996, dated March 3, 1997, prepared by
Communications Equity Associates.(5)
10.23 Fair Market Valuation Report for Falcon Classic Cable Income
Properties, L.P., as of December 31, 1996, dated March 10, 1997,
prepared by Kane Reece Associates, Inc.(5)
10.24 Asset Purchase Agreement, dated as of June 27, 1997, by and among
Falcon Community Cable, L.P., Falcon Cable Media, Falcon Cable
Systems Company II, L.P. and Falcon Classic Cable Income Properties,
L.P.(6)
10.25 Second Amendment to the 1993 Incentive Performance Plan of FHGLP.(6)
10.26 Third Amendment to the 1993 Incentive Performance Plan of FHGLP.(6)
</TABLE>
E-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
10.27 Fourth Amendment to the 1993 Incentive Performance Plan of FHGLP.(6)
10.28 Waiver Letter, dated as of March 27, 1998, among Falcon Holding
Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC
relating to the Amended and Restated Agreement of Limited Partnership
of Falcon Communications, L.P., dated as of December 30, 1997. (8)
10.29 Credit Agreement, dated as of June 30, 1998, by and among BankBoston,
N.A., The Chase Manhattan Bank, NationsBank, N.A., Toronto Dominion
(Texas) Inc., Bank of America, N.T. & S.A. and other lenders
signatory thereto. (9)
10.30 Form of Amendment No. 1, dated as of September 25, 1998, to the
Credit Agreement dated as of June 30, 1998. (10)
10.31 Note Purchase and Exchange Agreement Consent and Amendment Agreement,
dated June 30, 1998, among Falcon Telecable, AUSA Life Insurance
Company, Inc., by AUER & Co., its nominee, and MONY Life Insurance
Company of America, by J. ROMEO & Co., its nominee.
10.32 Note Purchase and Exchange Agreement Amendment Agreement, dated
September 30, 1998, among Falcon Telecable and AUER & Co. and J.
ROMEO & Co.
10.33 Joinder Agreement to Second Restated Subordination Agreement and to
Second Restated Guaranty Agreement, dated September 30, 1998, among
Falcon Video Communications, L.P., Falcon Video Communications
Investors, L.P., Falcon Communications, L.P., Falcon Cable
Communications, LLC and AUER & Co. and J. ROMEO & Co.
10.34 Third Amendment to Second Restated Subordination Agreement, dated
September 30, 1998, among Falcon Holding Group, L.P., Falcon Holding
Group Inc. and AUER & Co. and J. ROMEO & Co.
10.35 Adoption and Assumption Agreement of the Amended and Restated 1993
Incentive Performance Plan, dated September 30, 1998, between Falcon
Communications, L.P. and Falcon Holding Group, L.P.
21.1 Subsidiaries of Falcon Communications, L.P.
27.1 Financial Data Schedule
</TABLE>
E-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
FOOTNOTE
(1) Incorporated by reference to the exhibits to the FHGLP's Registration
Statement on Form S-4, Registration No. 33-60776.
(2) Incorporated by reference to the exhibit to the FHGLP's Quarterly Report on
Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1996.
(3) Incorporated by reference to the exhibits to the FHGLP's Quarterly Report
on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1996.
(4) Incorporated by reference to the exhibits to the FHGLP's Quarterly Report
on Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1996.
(5) Incorporated by reference to the exhibits to the FHGLP's Annual Report on
Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1996.
(6) Incorporated by reference to the exhibits to the FHGLP's Quarterly Report
on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1997.
(7) Incorporated by reference to the exhibit to the FHGLP's Current Report on
Form 8-K, File No. 33-60776, dated December 30, 1997.
(8) Incorporated by reference to the exhibits to the FHGLP's Quarterly Report
on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1998.
(9) Incorporated by reference to the exhibits to the Registrant's registration
statement on Form S-4, File No. 333-55755.
(10) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K, File No. 33-60776, dated September 30, 1998.
</TABLE>
E-4
<PAGE>
EXHIBIT 10.31
NOTE PURCHASE AND EXCHANGE AGREEMENT
CONSENT AND AMENDMENT AGREEMENT
This Consent and Amendment Agreement (this "Amendment") is dated as of
June 30, 1998 among Falcon Telecable, a California Limited Partnership (the
"Company"), AUSA Life Insurance Company, Inc., by AUER & Co. its nominee, and
MONY Life Insurance Company of America, by J. ROMEO & Co., its nominee (the
"Purchasers").
The Company and the Purchasers agree as follows:
1. Reference to Note Purchase and Exchange Agreement. Reference is
made to a Note Purchase and Exchange Agreement dated as of October 21, 1991 as
heretofore amended and modified (the "Note Purchase Agreement"). Reference is
also made to a Second Restated Subordination Agreement dated as of July 12, 1996
among the Purchasers, Falcon Holding Group, L.P. ("Holding, L.P."), Falcon
Holding Group, Inc. ("Holding, Inc.") and certain subsidiaries of Holding, L.P.
and Holding, Inc. listed as signatories thereto, as heretofore amended and
modified (the "Subordination Agreement"). Reference is also made to a Second
Restated Guaranty Agreement dated as of July 12, 1996 among the Purchasers and
certain subsidiaries of Holding, L.P. and Holding Inc. listed as signatories
thereto, as heretofore amended and modified (the "Guaranty Agreement"). The Note
Purchase Agreement, the Subordination Agreement and the Guaranty Agreement are
collectively referred to as the "Telecable Agreements." Capitalized terms
defined in the Telecable Agreements that are not defined herein shall have the
meanings ascribed to them in the Telecable Agreements as applicable.
2. Consent. Reference is also made to the Bank Credit Agreement as in
effect before giving effect to the New Bank Credit Agreement (the "Existing Bank
Credit Agreement"). The Company and other borrowers under the Existing Bank
Credit Agreement anticipate entering into a Credit Agreement on June 30, 1998
(the "New Bank Credit Agreement") with BankBoston, N.A., as Documentation Agent,
borrowings under which will be used, among other things, to discharge all
outstanding obligations under the Existing Bank Credit Agreement. The Purchasers
hereby consent to the Company's and its affiliates' execution, delivery and
performance of the New Bank Credit Agreement, such New Bank Credit Agreement to
be substantially in the form attached hereto as Exhibit A.
3. Amendments to Telecable Agreements.
3.1. Section 7.19 of the Note Purchase Agreement is amended to
read as follows:
"7.19 Compliance with Bank Credit Agreement. The Company shall comply,
and shall cause the Restricted Companies to comply, with each of the
covenants contained in Section 7 of the Bank Credit Agreement (other
than Sections 7.5.2 and 7.15) as in effect
<PAGE>
on the Amendment Closing Date (except as such covenants may be amended
pursuant to Section 7.20 below, other than those set forth in the
immediately following paragraph), a copy of which is attached hereto as
Exhibit E. All references therein to Lenders, Agents and similar
persons shall be deemed, for purposes of this Agreement, to be holders
of the Notes."
For purposes of this Agreement, the incorporated provisions of
Sections 7.5.1, 7.5.3 and 7.5.4 of the Bank Credit Agreement (as
defined in Section 11.1 of this Agreement) are amended to read as
follows and shall not be subject to amendment or modification without
the consent of the holders of the Notes:
Consolidated Total Debt to Consolidated Annualized Operating
Cash Flow." Consolidated Total Debt shall not on any date exceed the
percentage indicated in the table below of Consolidated Annualized
Operating Cash Flow for the period of three consecutive months then
most recently ended for which financial statements have been (or are
required to have been) furnished in accordance with Section 8:
<TABLE>
<CAPTION>
DATE PERCENTAGE
<S> <C>
Amendment Closing 650%
Date through June 29, 1999
June 30, 1999 through 600%
December 30, 1999
December 31, 1999 550%
through June 29, 2000
June 30, 2000 through 500%
December 30, 2000
December 31, 2000 and 450%
thereafter
</TABLE>
Consolidated Annualized Operating Cash Flow to Consolidated Pro
Forma Debt Service." As of the last day of each month, Consolidated
Annualized Operating Cash Flow for the period of three consecutive
months ended on such date shall exceed 100% of Consolidated Pro Forma
Debt Service for the period of twelve consecutive months beginning
immediately after such date.
Consolidated Operating Cash Flow Plus Cash and Cash Equivalents to
Consolidated Total Fixed Charges." As of the last day of each month
commencing December 31, 2000, the sum of (a) Consolidated Operating
Cash Flow for the period of twelve consecutive months ended on such
date plus (b) the lesser of (i) cash and Cash Equivalents owned by the
Restricted Companies as of such date determined in accordance with GAAP
on a Consolidated Basis or (ii) $2,000,000 shall exceed 95% of
Consolidated Total Fixed Charges for such period."
-2-
<PAGE>
3.2 Section 9.1(c) of the Note Purchase Agreement is amended to
read as follows:
"(c) the Company fails to perform or observe any covenant or condition
contained in Section 2.2, Section 7.20 or Section 7.21 of this
Agreement, or, to the extent resulting from a failure to comply with
Section 7.5 through Section 7.12, inclusive, Section 7.14, Section
7.15, Section 7.17 through Section 7.19, inclusive, of the Bank Credit
Agreement (as and to the extent modified and incorporated herein);"
3.3 Section 11.1 of the Note Purchase Agreement is amended to
read as follows:
"Each of the definitions set forth in Section 1 of the Bank Credit
Agreement (as defined in this Section 11.1 below) as in effect on the
Amendment Closing Date (as defined in this Section 11.1 below) (except
as such definitions are amended pursuant to section 7.20 of the
Agreement) are hereby incorporated herein to the extent such
definitions are referred to in, or are necessary to construe or further
define, the provisions and terms of the Bank Credit Agreement
incorporated herein, provided, that, all references therein to Lenders,
Agents, and similar Persons shall be deemed, for purposes of this
Agreement, to be the holders of the Notes. To the extent that any
definition so incorporated by reference from the Bank Credit Agreement
shall conflict with, or be inconsistent with, any existing definition
in the Agreement, the definition so incorporated by reference shall
prevail. In addition, the following definitions are added or
substituted for existing definitions:
"Amendment" means this Amendment.
"Amendment Closing Date" means the date described in Section
4.3 of this Amendment.
"Bank Credit Agreement" means the Credit Agreement dated as of
June 30, 1998, among the Company and other borrowers and guarantors
thereunder, the banks signatory thereto as lenders and BankBoston,
N.A., as Documentation Agent, a copy of which is attached hereto as
Exhibit E, as amended, supplemented or otherwise modified from time to
time, including any amendment, supplement or modification to reflect
the refunding or refinancing of the indebtedness outstanding
thereunder.
"Bank Pledge Agreement" means the Pledge and Subordination
Agreement dated as of June 30, 1998, among Holding, L.P., Holding,
Inc., the Company, the other Restricted Companies, and BankBoston, N.A.
as Documentation Agent, as amended, supplemented or otherwise modified
from time to time, including any amendment, supplement or modification
to reflect the refunding or refinancing of the indebtedness outstanding
under the Bank Credit Agreement.
-3-
<PAGE>
There is hereby added to the Agreement a revised Exhibit E
which shall be in the form of Exhibit A to this Amendment. The Bank
Credit Agreement as in effect on the date hereof is set forth in
Exhibit A to this Amendment."
4. Additional Agreements.
4.1. The Purchasers acknowledge that New Falcon II will become
the "Borrower" under the New Bank Credit Agreement substantially
contemporaneously with the TCI Closing (as defined in the New Bank Credit
Agreement) and agree that, even after New Falcon II becomes the "Borrower" under
the New Bank Credit Agreement, the Notes and all other obligations of the
Company under the Note Purchase Agreement (and all obligations of the
"Guarantors" under the Guaranty Agreement) shall remain subordinated to the
indebtedness and other obligations of the Company and the other "Borrowers" and
"Guarantors" under the New Bank Credit Agreement on the same terms as currently
subordinated. Pursuant to Section 7.21 of the Note Purchase Agreement, subject
to the Company and its affiliates entering into the New Bank Credit Agreement,
the Company will cause New Falcon II to become a "Guarantor" under the Guaranty
Agreement and a party to the Subordination Agreement contemporaneously with
becoming a "Borrower" under the New Bank Credit Agreement.
4.2 Pursuant to Section 7.21 of the Note Purchase Agreement,
subject to the Company and its affiliates entering into the New Bank Credit
Agreement, the Company will cause Falcon Video Communications, L.P. and Falcon
Video Communications Investors, L.P. to become "Guarantors" under the Guaranty
Agreement and parties to the Subordination Agreement contemporaneously with
their becoming a "Guarantor" under the New Bank Credit Agreement (i.e., upon the
TCI Closing and the discharge of the Falcon Video Financing Debt as contemplated
in Section 5.3.1 of the New Bank Credit Agreement, and not upon the earlier
making of the Falcon Video Revolving Loan under Section 2.1.4 of the New Bank
Credit Agreement).
4.3 The following are conditions precedent to the
effectiveness of this Amendment. The date on which all such conditions are met
(or waived by the Purchasers) shall be referred to in this Amendment as the
"Amendment Closing Date."
4.3.1. The transactions contemplated by the New Bank Credit
Agreement to be completed on the Initial Closing Date (as defined in the New
Bank Credit Agreement) shall be completed and all conditions theretofore shall
have been fulfilled and the New Bank Credit Agreement shall be in full force and
effect.
4.3.2. All representations and warranties set forth in
Section 8 of the New Bank Credit Agreement shall be true and correct as of the
Amendment Closing Date, and by signing below each of the Restricted Companies
(under the New Bank Credit Agreement) confirms that such representations and
warranties are true and correct as of the date hereof and that each Purchaser
may rely on such representations and warranties as though the same were made to
such Purchaser and acknowledging that each Purchaser is relying on the truth and
accuracy of such representations and warranties in entering into this Amendment
and consummating the transactions contemplated herein.
-4-
<PAGE>
4.3.3. All proceedings taken in connection with this
Amendment and all documents and papers relating thereto shall be satisfactory to
the Purchasers and their special counsel. The Purchasers and their special
counsel shall have received copies of such documents and papers as they may
reasonably request in connection therewith, all in form and substance
satisfactory to the Purchasers and their special counsel.
4.4. Except as amended hereby, the Telecable Agreements remain unchanged and,
as amended hereby, the Telecable Agreements remain in full force and effect. The
Company hereby reaffirms all of its obligations and undertakings under the
Telecable Agreements as amended hereby, and the Notes (as such term is defined
in the Note Purchase Agreement), as amended hereby. All references to the Note
Purchase Agreement, the 11.56% Series A Subordinated Notes (as defined in the
Note Purchase Agreement) and the 11.56% Series B Subordinated Notes (as defined
in the Note Purchase Agreement) shall mean the Note Purchase Agreement and such
Notes as amended to date and by this Amendment.
4.5. This Amendment may be executed in multiple counterparts, each of which
shall be deemed an original and all of which shall constitute an agreement,
notwithstanding that all of the parties are not signatories on the same date or
the same counterpart. A signature page may be detached from one counterpart when
executed and attached to another counterpart.
[REMAINDER OF PAGE INTENTIONAL BLANK;
NEXT PAGE IS SIGNATURE PAGE]
-5-
<PAGE>
Each of the undersigned has caused this Consent Agreement to be
executed and delivered by its duly authorized officer as of the date first above
written.
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
By: FALCON TELECABLE INVESTORS
GROUP, LTD., a California limited
partnership, its managing general
partner
By: FALCON HOLDING GROUP, INC.,
a California corporation, its managing
general partner
By: /s/ Frank J. Intiso
-------------------------
Title: EVP - Finance
AUSA LIFE INSURANCE COMPANY, INC.
By: AUER & Co.
By:
------------------------
Title:
J. ROMEO & CO.
By:
------------------------
Title:
ACKNOWLEDGED AND CONFIRMED
FOR PURPOSES OF SECTION 4.3.2 HEREOF
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II,
L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
-6-
<PAGE>
Each of the undersigned has caused this Consent Agreement to be
executed and delivered by its duly authorized officer as of the date first above
written.
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
By: FALCON TELECABLE INVESTORS GROUP, LTD.,
a California limited partnership, its
managing general partner
By: FALCON HOLDING GROUP, INC., a California
corporation, its managing general
partner
By: /s/ Frank J. Intiso
------------------------
Title: EVP
AUSA LIFE INSURANCE COMPANY, INC.
By: AUER & Co., ITS NOMINEE
By:
------------------------
Title:
MONY LIFE INSURANCE COMPANY OF AMERICA
By: J. ROMEO & Co., its nominee
By:
------------------------
Title:
ACKNOWLEDGED AND CONFIRMED
FOR PURPOSES OF SECTION 4.3.2 HEREOF
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II,
L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY CABLE, L.P.
-7-
<PAGE>
FALCON COMMUNITY VENTURES I
LIMITED PARTNERSHIP
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY INVESTORS, L.P.
FALCON INVESTORS GROUP, LTD., A
CALIFORNIA LIMITED PARTNERSHIP
FALCON MEDIA INVESTORS GROUP, A
CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECABLE INVESTORS GROUP,
A CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECOM, L.P.
By: FALCON HOLDING GROUP, INC.,
as general partner, or general partner of the
general partner of each of the foregoing
companies
By: /s/ Frank J. Intiso
------------------------
Title: EVP
FALCON FIRST, INC.
FALCON FIRST CABLE OF THE SOUTHEAST, INC.
FALCON FIRST HOLDINGS, INC.
FF CABLE HOLDING, INC.
FALCON FIRST CABLE OF NEW YORK, INC.
PLATTSBURG CABLEVISION, INC.
AUSABLE CABLE TV, INC.
CEDAR BLUFF CABLEVISION, INC.
EASTERN MISSISSIPPI CABLEVISION, INC.
SCOTTSBORO TV CABLE, INC.
LAUDERDALE CABLEVISION, INC.
SCOTTSBORO CABLEVISION, INC.
ATHENS CABLEVISION, INC.
DALTON CABLEVISION, INC.
MULTIVISION OF COMMERCE, INC.
MULTIVISION NORTHEAST, INC.
By: /s/ Frank J. Intiso
------------------------
Title: EVP
-8-
<PAGE>
EXHIBIT 10.32
NOTE PURCHASE AND EXCHANGE AGREEMENT
AMENDMENT AGREEMENT
This Amendment Agreement (this "Amendment") is dated as of September
30, 1998 among Falcon Telecable, a California Limited Partnership (the
"Company") and AUER & Co. and J. ROMEO & Co., (the "Purchasers").
The Company and the Purchasers agree as follows:
1. Reference to Note Purchase and Exchange Agreement. Reference is
made to a Note Purchase and Exchange Agreement dated as of October 21, 1991 as
heretofore amended and modified, including pursuant to the Consent and Amendment
Agreement dated as of June 30, 1998 (the "Note Purchase Agreement").
Capitalized terms defined in the Note Purchase Agreement that are not defined
herein shall have the meanings ascribed to them in the Note Purchase Agreement.
2. Amendments to Note Purchase Agreement. Section 7.19 of the Note
Purchase Agreement is hereby amended by deleting Section 7.19 in its present
form in its entirety and substituting in its place a new Section 7.19, which
reads in its entirety as follows:
"7.19 Compliance with Bank Credit Agreement. The Company shall comply,
and shall cause the Restricted Companies to comply, with each of the
covenants contained in Section 7 of the Bank Credit Agreement (other
than Section 7.15) as in effect on the Amendment Effective Date (except
as such covenants may be amended pursuant to Section 7.20 below, other
than those set forth in the immediately following paragraph), a copy of
which is attached hereto as Exhibit E. All references therein to
Lenders, Agents and similar persons shall be deemed, for purposes of
this Agreement, to be holders of the Notes.
For purposes of this Agreement, the incorporated provisions of
Sections 7.5.1, 7.5.2, 7.5.3 and 7.5.4 of the Bank Credit Agreement
(as defined in Section 11.1 of this Agreement) are amended to read as
follows and shall not be subject to amendment or modification without
the consent of the holders of the Notes:
7.5.1. Consolidated Total Debt to Consolidated Annualized
Operating Cash Flow. Consolidated Total Debt shall not as of the end of
any fiscal quarter exceed the percentage indicated in the table below
of Consolidated Annualized Operating Cash Flow for such fiscal quarter:
<PAGE>
<TABLE>
<CAPTION>
Percentage in Percentage in
Effect Prior to Effect After
Date TCI Closing TCI Closing
-------------------------- ------------------- ---------------
<S> <C> <C>
September 30, 1998 650% 700%
through March 31, 2001
</TABLE>
7.5.2 Consolidated Annualized Operating Cash Flow to
Consolidated Cash Interest Expense. On the last day of each fiscal
quarter of the Restricted Companies, Consolidated Annualized Operating
Cash Flow for the three-month period then ending shall exceed the
percentage indicated below of Consolidated Cash Interest Expense for
such three-month period: (a) from September 30, 1998 through December
31, 2000, 120%, and (b) from January 1, 2001 through March 31, 2001,
130%.
7.5.3. Consolidated Annualized Operating Cash Flow to
Consolidated Pro Forma Debt Service. On the last day of each fiscal
quarter of the Restricted Companies, Consolidated Annualized Operating
Cash Flow for the three-month period then ending shall exceed 100% of
Consolidated Pro Forma Debt Service for the 12-month period beginning
immediately after such date."
7.5.4 Capital Expenditures. During each year indicated below,
Capital Expenditures of the Restricted Companies shall not exceed the
total of:
(a) the applicable amount set forth opposite such year
in the table below plus
(b) for each year after 1998, the amount by which actual
Capital Expenditures in the preceding year are less
than the applicable amount set forth for such
preceding year in such table.
<TABLE>
<CAPTION>
Amount if the TCI Amount if TCI
Closing Occurs Closing Does Not
During Such Occur During Such
Calendar Year Calendar Year Calendar Year
---------------------- -------------------- --------------------
<S> <C> <C>
1998 $150,000,000 $120,000,000
1999 $170,000,000 $120,000,000
2000 $185,000,000 $130,000,000
2001 $130,000,000 $ 85,000,000
</TABLE>
-2-
<PAGE>
3. Additional Agreements.
3.1 The following are conditions precedent to the
effectiveness of this Amendment. The date on which all such conditions are met
(or waived by the Purchasers) shall be referred to in this Section 3 as the
"Amendment Effective Date."
3.1.1. All representations and warranties set forth in
Section 8 of the Bank Credit Agreement shall be true and correct as of the
Amendment Effective Date, and by signing below each of the Restricted Companies
(under the Bank Credit Agreement) confirms that such representations and
warranties are true and correct as of the date hereof and that each Purchaser
may rely on such representations and warranties as though the same were made to
such Purchaser and acknowledging that each Purchaser is relying on the truth and
accuracy of such representations and warranties in entering into this Amendment
and consummating the transactions contemplated herein.
3.1.2. All proceedings taken in connection with this
Amendment and all documents and papers relating thereto shall be satisfactory to
the Purchasers and their special counsel. The Purchasers and their special
counsel shall have received copies of such documents and papers as they may
reasonably request in connection therewith, all in form and substance
satisfactory to the Purchasers and their special counsel.
3.2. Except as amended hereby, the Note Purchase Agreement
remains unchanged and, as amended hereby, the Note Purchase Agreement remains in
full force and effect. The Company hereby reaffirms all of is obligations and
undertakings under the Note Purchase Agreement as amended hereby, and the Notes,
as amended hereby. All references to the Note Purchase Agreement, the 11.56%
Series A Subordinated Notes and the 11.56% Series B Subordinated Notes shall
mean the Note Purchase Agreement and such Notes as amended to date and by this
Amendment.
3.3. This Amendment may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute an
agreement, notwithstanding that all of the parties are not signatories on the
same date or the same counterpart. A signature page may be detached from one
counterpart when executed and attached to another counterpart.
[REMAINDER OF PAGE INTENTIONAL BLANK;
NEXT PAGE IS SIGNATURE PAGE]
-3-
<PAGE>
Each of the undersigned has caused this Amendment Agreement to be
executed and delivered by its duly authorized officer as of the date first above
written.
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
By: FALCON TELECABLE INVESTORS GROUP, LTD.,
a California limited partnership, its
managing general partner
By: FALCON HOLDING GROUP, INC., a California
corporation, its managing general
partner
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
AUER & Co.
By:
----------------------
Title:
J. ROMEO & CO.
By:
----------------------
Title:
ACKNOWLEDGED AND CONFIRMED
FOR PURPOSES OF SECTION 3.1.1 HEREOF
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II,
L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY CABLE, L.P.
-4-
<PAGE>
FALCON COMMUNITY VENTURES I
LIMITED PARTNERSHIP
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY INVESTORS, L.P.
FALCON INVESTORS GROUP, LTD., A
CALIFORNIA LIMITED PARTNERSHIP
FALCON MEDIA INVESTORS GROUP, A
CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECABLE INVESTORS GROUP,
A CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECOM, L.P.
By: FALCON HOLDING GROUP, INC.,
as general partner, or general partner of the
general partner of each of the foregoing
companies
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
FALCON FIRST, INC.
FALCON FIRST CABLE OF THE SOUTHEAST, INC.
FALCON FIRST HOLDINGS, INC.
FF CABLE HOLDING, INC.
FALCON FIRST CABLE OF NEW YORK, INC.
PLATTSBURG CABLEVISION, INC.
AUSABLE CABLE TV, INC.
CEDAR BLUFF CABLEVISION, INC.
EASTERN MISSISSIPPI CABLEVISION, INC.
SCOTTSBORO TV CABLE, INC.
LAUDERDALE CABLEVISION, INC.
SCOTTSBORO CABLEVISION, INC.
ATHENS CABLEVISION, INC.
DALTON CABLEVISION, INC.
MULTIVISION OF COMMERCE, INC.
MULTIVISION NORTHEAST, INC.
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
-5-
<PAGE>
EXHIBIT 10.33
JOINDER AGREEMENT
TO SECOND RESTATED SUBORDINATION AGREEMENT AND
TO SECOND RESTATED GUARANTY AGREEMENT
This Joinder Agreement (this "Agreement") is dated as of September 30,
1998 among Falcon Video Communications, L.P., a Delaware limited partnership
("Falcon Video"), Falcon Video Communications Investors, L.P., a California
limited partnership ("Falcon Video Investors"), Falcon Communications, L.P., a
California limited partnership ("NewFalcon"), Falcon Cable Communications, LLC,
a Delaware limited liability company ("NewFalcon II"), and AUER & Co. and J.
ROMEO & Co. (the "Purchasers").
The parties agree as follows:
1. Reference to Note Purchase and Exchange Agreement. Reference is
made to a Note Purchase and Exchange Agreement dated as of October 21, 1991 as
heretofore amended and modified (the "Note Purchase Agreement"), including
pursuant to the Consent and Amendment Agreement dated as of June 30, 1998 (the
"June 1998 Amendment"). Reference is also made to a Second Restated
Subordination Agreement dated as of July 12, 1996 among the Purchasers, Falcon
Holding Group, L.P. ("Holding, L.P."), Falcon Holding Group, Inc. ("Holding,
Inc.") and certain subsidiaries of Holding, L.P. and Holding, Inc. listed as
signatories thereto, as heretofore amended and modified (the "Subordination
Agreement"). Reference is also made to a Second Restated Guaranty Agreement
dated as of July 12, 1996 among the Purchasers and certain subsidiaries of
Holding, L.P. and Holding, Inc. listed as signatories thereto, as heretofore
amended and modified (the "Guaranty Agreement"). Capitalized terms defined in
the Note Purchase Agreement that are not defined herein shall have the meanings
ascribed to them in the Note Purchase Agreement.
2. Joinder. Pursuant to Section 7.21 of the Note Purchase Agreement
and Sections 4.1 and 4.2 of the June 1998 Amendment:
2.1 Joinder of Falcon Video. Falcon Video shall join in and
become party to the Subordination Agreement as an Obligor thereunder and shall
join in and become a party to the Guaranty Agreement as a Guarantor thereunder.
2.2 Joinder of Falcon Video Investors. Falcon Video Investors
shall join in and become party to the Subordination Agreement as an Obligor
thereunder and shall join in and become party to the Guaranty Agreement as a
Guarantor thereunder.
2.3 Joinder of NewFalcon. NewFalcon shall join in and become
party to the Subordination Agreement as a Parent Company and a Holder of
Subordinated Indebtedness thereunder.
<PAGE>
2.4 Joinder of NewFalcon II. NewFalcon II shall join in and
become party to the Subordination Agreement as an Obligor thereunder and shall
join in and become party to the Guaranty Agreement as a Guarantor thereunder.
3. Additional Agreements.
3.1 The effectiveness of the joinders described in Section 2
above shall be subject to the satisfaction of the following conditions. The date
on which and the time at which all such conditions are met shall be referred to
in this Section 3 as the "Joinder Effective Date" and the "Joinder Effective
Time" respectively.
3.1.1 In the case of the joinders described in Sections 2.1
above, the TCI Closing shall have occurred, the Financing Debt of Falcon Video
shall have been discharged as contemplated in Section 5.3.1 of the Bank Credit
Agreement, and Falcon Video shall have become a Guarantor under the Bank Credit
Agreement.
3.1.2 In the case of the joinders described in Sections 2.2
above, the TCI Closing shall have occurred, the Financing Debt of Falcon Video
shall have been discharged as contemplated in Section 5.3.1 of the Bank Credit
Agreement, and Falcon Video Investors shall have become a Guarantor under the
Bank Credit Agreement.
3.1.3 In the case of the joinders described in Sections 2.3
above, the TCI Closing shall have occurred.
3.1.4 In the case of the joinders described in Sections 2.4
above, the TCI Closing shall have occurred and NewFalcon II shall have become a
Borrower under the Bank Credit Agreement.
3.1.5. All representations and warranties set forth in
Section 8 of the Bank Credit Agreement shall be true and correct as of the
Joinder Effective Date and the Joinder Effective Time, and by signing below each
of Falcon Video, Falcon Video Investors, NewFalcon and NewFalcon II confirms
that such representations and warranties are true and correct as of the date
hereof and that each Purchaser may rely on such representations and warranties
as though the same were made to such Purchaser and acknowledging that each
Purchaser is relying on the truth and accuracy of such representations and
warranties in entering into this Agreement and consummating the transactions
contemplated herein.
3.1.6. All proceedings taken in connection with this
Agreement and all documents and papers relating thereto shall be satisfactory to
the Purchasers and their special counsel. The Purchasers and their special
counsel shall have received copies of such documents and papers as they may
reasonably request in connection therewith, all in form and substance
satisfactory to the Purchasers and their special counsel.
3.2. Except as supplemented hereby, the Note Purchase Agreement,
the Subordination Agreement, and the Guaranty Agreement remain unchanged and, as
supplemented hereby, each such Agreement remains in full force and effect.
-2-
<PAGE>
3.3. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute an
agreement, notwithstanding that all of the parties are not signatories on the
same date or the same counterpart. A signature page may be detached from one
counterpart when executed and attached to another counterpart.
[REMAINDER OF PAGE INTENTIONAL BLANK;
NEXT PAGE IS SIGNATURE PAGE]
-3-
<PAGE>
Each of the undersigned has caused this Joinder Agreement to be
executed and delivered by its duly authorized officer as of the date first above
written.
FALCON VIDEO COMMUNICATIONS, L.P.
By: FALCON VIDEO COMMUNICATIONS
INVESTORS, L.P., its managing general
partner
By: FALCON HOLDING GROUP, L.P., its
general partner
By: FALCON HOLDING GROUP, INC., its
general partner
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
FALCON VIDEO COMMUNICATIONS INVESTORS, L.P.
By: FALCON HOLDING GROUP, L.P., its
general partner
By: FALCON HOLDING GROUP, INC., its
general partner
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
FALCON COMMUNICATIONS, L.P.
By: FALCON HOLDING GROUP, L.P., its
managing partner
By: FALCON HOLDING GROUP, INC., its
general partner
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
-4-
<PAGE>
FALCON CABLE COMMUNICATIONS, LLC
By: FALCON COMMUNICATIONS, L.P., its sole
member
By: FALCON HOLDING GROUP, L.P., its
managing general partner
By: FALCON HOLDING GROUP, INC., its
general partner
By: /s/ Michael K. Menerey
----------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
AUER & Co.
By:
----------------------
Title:
J. ROMEO & CO.
By:
----------------------
Title:
-5-
<PAGE>
EXHIBIT 10.34
THIRD AMENDMENT TO
SECOND RESTATED SUBORDINATION AGREEMENT
This Third Amendment to the Second Restated Subordination Agreement
(this "Amendment") is dated as of September 30, 1998 among Falcon Holding Group,
L.P. ("Holding LP"), a Delaware limited partnership, Falcon Holding Group, Inc.
("Holding Inc."), a California corporation, and certain subsidiaries of Holding
LP and Holding Inc. set forth on the signature pages hereto and AUER & Co. and
J. ROMEO & Co. (the "Purchasers").
The parties agree as follows:
1. Reference to Second Restated Subordination Agreement. Reference
is made to the Second Restated Subordination Agreement dated as of July 12, 1996
among the parties hereto, as heretofore amended and modified (the "Subordination
Agreement"). Capitalized terms defined in the Subordination Agreement that are
not defined herein shall have the meanings ascribed to them in the Subordination
Agreement.
2. Amendments to Subordination Agreement.
2.1 Amendment to Section 4.5. Section 4.5 of the Subordination
Agreement is hereby amended by deleting the portion of Section 4.5 that precedes
clause (a) thereof and substituting in its place the following:
"4.5 Restrictions on Financing Debt. Neither Parent Company
shall create, incur, assume or otherwise become or remain liable with respect to
any Financing Debt (other than notes evidencing PIK Interest Payments, Holding,
L.P. Senior Subordinated Notes, Holding L.P. Debentures, intercompany loans from
the Obligors, and Financing Debt outstanding on the date hereof and reflected on
the balance sheet referred to in Section 3.2 above), unless:"
2.2 Amendment to Section 4.6. The reference to "Section
7.10.3(a)" in Section 4.6 is hereby deleted and replaced with a reference to
"Section 7.10.3(a), (b) and (c)."
3. Additional Agreements.
3.1 The following are conditions precedent to the
effectiveness of this Amendment. The date on which all such conditions are met
(or waived by the Purchasers) shall be referred to in this Section 3 as the
"Amendment Effective Date." Upon becoming effective, this Amendment shall be
deemed effective retroactively to June 30, 1998 at the time the Bank Credit
Agreement became effective.
3.1.1. All representations and warranties set forth in
Section 8 of the Bank Credit Agreement shall be true and correct as of the
Amendment Effective Date, and by signing below each of the Restricted Companies
(under the Bank Credit Agreement) confirms that such
<PAGE>
representations and warranties are true and correct as of the date hereof and
that each Purchaser may rely on such representations and warranties as though
the same were made to such Purchaser and acknowledging that each Purchaser is
relying on the truth and accuracy of such representations and warranties in
entering into this Amendment and consummating the transactions contemplated
herein.
3.1.2. All proceedings taken in connection with this
Amendment and all documents and papers relating thereto shall be satisfactory to
the Purchasers and their special counsel. The Purchasers and their special
counsel shall have received copies of such documents and papers as they may
reasonably request in connection therewith, all in form and substance
satisfactory to the Purchasers and their special counsel.
3.2. Except as amended hereby, the Subordination Agreement
remains unchanged and, as amended hereby, the Subordination Agreement remains in
full force and effect.
3.3. This Amendment may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute an
agreement, notwithstanding that all of the parties are not signatories on the
same date or the same counterpart. A signature page may be detached from one
counterpart when executed and attached to another counterpart.
[REMAINDER OF PAGE INTENTIONAL BLANK;
NEXT PAGE IS SIGNATURE PAGE]
-2-
<PAGE>
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as of the date first above written.
FALCON HOLDING GROUP, L.P.
By: FALCON HOLDING GROUP, INC., a
California corporation, its managing
general partner
By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
FALCON HOLDING GROUP, INC.
By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
AUER & Co.
By: ----------------------------
Title:
J. ROMEO & CO.
By: ---------------------------
Title:
ACKNOWLEDGED AND CONFIRMED
FOR PURPOSES OF SECTION 3.1.1 HEREOF
FALCON CABLE MEDIA, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON CABLE SYSTEMS COMPANY II,
L.P.
FALCON CABLEVISION, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY CABLE, L.P.
FALCON COMMUNITY VENTURES I
LIMITED PARTNERSHIP
-3-
<PAGE>
FALCON TELECABLE, A CALIFORNIA
LIMITED PARTNERSHIP
FALCON COMMUNITY INVESTORS, L.P.
FALCON INVESTORS GROUP, LTD., A
CALIFORNIA LIMITED PARTNERSHIP
FALCON MEDIA INVESTORS GROUP, A
CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECABLE INVESTORS GROUP,
A CALIFORNIA LIMITED PARTNERSHIP
FALCON TELECOM, L.P.
By: FALCON HOLDING GROUP, INC.,
as general partner, or general partner of the
general partner of each of the foregoing
companies
By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
FALCON FIRST, INC.
FALCON FIRST CABLE OF THE SOUTHEAST, INC.
FALCON FIRST HOLDINGS, INC.
FF CABLE HOLDING, INC.
FALCON FIRST CABLE OF NEW YORK, INC.
PLATTSBURG CABLEVISION, INC.
AUSABLE CABLE TV, INC.
CEDAR BLUFF CABLEVISION, INC.
EASTERN MISSISSIPPI CABLEVISION, INC.
SCOTTSBORO TV CABLE, INC.
LAUDERDALE CABLEVISION, INC.
SCOTTSBORO CABLEVISION, INC.
ATHENS CABLEVISION, INC.
DALTON CABLEVISION, INC.
MULTIVISION OF COMMERCE, INC.
MULTIVISION NORTHEAST, INC.
By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Executive Vice
President and Chief Financial Officer
-4-
<PAGE>
EXHIBIT 10.35
ADOPTION AND ASSUMPTION AGREEMENT
OF THE AMENDED AND RESTATED
1993 INCENTIVE PERFORMANCE PLAN
This Agreement dated as of September 30, 1998, is made by and between
FALCON COMMUNICATIONS, L.P., a California limited partnership ("FCLP"), and
FALCON HOLDING GROUP, L.P., a Delaware limited partnership ("FHGLP").
WHEREAS, FHGLP maintains an employee benefit plan (the "Plan") for the
benefit of persons designated to participate in such Plan pursuant to which
FHGLP allocates to the Plan for the benefit of such participants a portion of
any distributions that Falcon Holding Group, Inc. ("FHGI") would otherwise
receive with respect to its partnership interest in FHGLP; and
WHEREAS, FHGLP has contributed substantially all of its operating
assets to FCLP in connection with the capitalization of FCLP on the date hereof,
and FCLP has become the successor employer of all the former employees of FHGLP
who are participants in the Plan; and
WHEREAS, FCLP, as employer of all Plan participants, desires to provide
incentives to such employees; and
WHEREAS, the assumption of the obligations of FHGLP under the Plan
would serve to directly benefit the employees FCLP; and
WHEREAS, FHGLP will derive benefit from such assumption in its status
as general partner of FCLP and in such status it desires to fund to FCLP any and
all amounts which FCLP subsequently distributes to the participants with respect
to such Plan.
NOW, THEREFORE, the parties agree as follows:
1. FCLP hereby adopts the Amended and Restated 1993 Incentive
Performance Plan and assumes all obligations of FHGLP under such Plan to the
Participants of the Plan.
2. FHGLP hereby agrees to provide FCLP all amounts necessary to pay for
benefits under the Plan by way of (i) additional capital contributions; (ii)
waiver of its rights to receive all or part of certain distributions from FCLP;
(iii) contribution of a portion of its partnership interest in FCLP to FCLP; or
(iv) any combination of the above. FCLP agrees to report all such payments under
the Plan as supplemental compensation to the Plan participants.
3. FHGLP agrees to cause to be to contributed to FCLP on or before
January 5, 2003, all partnership interests which are to be distributed to the
participants of the Plan pursuant to the provisions of the Plan.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
FALCON COMMUNICATIONS, L.P.
By: FALCON HOLDING GROUP, L.P.,
its general partner
By: FALCON HOLDING GROUP, INC.,
its general partner
By: /s/ Stanley Itskowitch
-------------------------
Stanley Itskowitch
Executive Vice President
FALCON HOLDING GROUP, L.P.,
By: FALCON HOLDING GROUP, INC.,
its General Partner
By: /s/ Stanley Itskowitch
-------------------------
Stanley Itskowitch
Executive Vice President
<PAGE>
Exhibit 21.1
A table of the subsidiaries of Falcon Communications, L.P. as of
December 31, 1998, is set forth below, indicating as to each the state of
jurisdiction of incorporation or oganization and the names under which such
subsidiaries do business (trade names). This exhibit omits five holding
companies and seven subisdiaries through which Falcon Cable Communications,
LLC conducts its cable operations.
<TABLE>
<CAPTION>
State of
Incorporation
Subsidiary or Organization Trade Names
- ---------- --------------- -----------
<S> <C> <C>
Falcon Cable Communications, LLC DE
Falcon Funding Corporation CA
Falcon Equipment Company, LLC DE
Falcon Telecom, LP CA
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000900346
<NAME> FALCON COMMUNICATIONS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,284
<SECURITIES> 0
<RECEIVABLES> 18,752
<ALLOWANCES> 670
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 826,103
<DEPRECIATION> 320,209
<TOTAL-ASSETS> 1,445,422
<CURRENT-LIABILITIES> 95,675
<BONDS> 1,611,353
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,445,422
<SALES> 0
<TOTAL-REVENUES> 307,558
<CGS> 0
<TOTAL-COSTS> 313,818
<OTHER-EXPENSES> 3,093
<LOSS-PROVISION> 4,775
<INTEREST-EXPENSE> 102,591
<INCOME-PRETAX> (111,944)
<INCOME-TAX> 1,897
<INCOME-CONTINUING> (113,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 30,642
<CHANGES> 0
<NET-INCOME> (144,483)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
